© Copyright 2006 Rogers Publishing Ltd. The following article first appeared in the May 2006 edition of BENEFITS CANADA magazine.
The Law: Out of pocket
An Ontario court’s surprising decision in Kerry means many employers may no longer be able to pay administrative expenses from a pension fund.
By Louise Greig

ON MARCH 15, 2006, THE ONTARIO DIVISIONAL COURT released its decision in Kerry(Canada)Inc. v. Superintendent of Financial Services. Kerry was an appeal from two Financial Services Tribunal(FST)decisions dealing with two issues. The first is the right to charge administrative expenses to a pension fund. The second issue is the use of surplus in a defined benefit(DB)component of a pension plan to fund employer contributions to the defined contribution(DC)component of that same plan.

The facts of this case and the FST decision on the expenses issue were addressed in the February 2006 issue of BENEFITS CANADA. Basically, the original plan documents stated that the employer would pay the expenses of administering the plan and fund. The employer later sought to amend these terms to provide that such expenses could instead be paid by the fund.

The Court(in part)overturned the FST decision and held that no administrative expenses can be paid from the plan based on the wording of the original plan documents. It further stated that subsequent plan amendments permitting the payment of expenses from the fund were a revocation of trust.

The Court’s reasoning is based on the assumption that the approach undertaken by the courts to determine ownership of surplus should be used to decide whether administrative expenses can be charged to a plan. Yet this was not the approach of the Ontario Court of Appeal in Markle v. City of Toronto, another plan expenses case. In Markle, the Court of Appeal struck down a plan amendment requiring plan trustees to pay certain expenses from the fund because it “fettered their discretion.” But it approved earlier(non-mandatory)amendments that permitted other expenses to be paid from the fund. The Court in Kerry entirely ignored this aspect of Markle decision.

The Kerry decision also fails to take into account the “classic trust” principle recognized in Ontario trust and pension legislation that trustees are entitled to recover their out-of-pocket expenses in administering a trust. The Court did not refer to the relevant provisions of either statute.

The second issue in Kerry was the validity of contribution holidays taken by the company, including
contribution holidays taken in relation to the DC component added to the plan in 2000. With little analysis of the facts or the applicable legal principles, the Court held that the legal effect of adding the DC component was to create two separate plans. Therefore, Kerry’s use of DB surplus to fund contributions to a separate DC “plan” was a partial revocation of the DB trust.

It is difficult to understand the legal basis for this conclusion. There is no statutory provision or common law principle that prevents an employer from creating separate classes of members with different benefit structures within the same pension plan (or trust)and funding all of the benefits through one fund.

The decision also ignores the fact that in most cases, the members of the DC plan were originally members of the DB plan. The DB assets used to fund the employer’s contribution obligations under the DC plan were in fact still being used for the “exclusive benefit” of the members of the original plan, albeit under a different benefit formula.

If the decision stands, plan sponsors will need to carefully review their plan structure to determine if it is permissible to use DB surplus to fund DC obligations under the same plan. Also, many employers may find their ability to pay even routine administrative expenses from the plan severely curtailed because of restrictive wording in the original plan documents.

Kerry is applying for leave to appeal the decision to the Ontario Court of Appeal. One hopes that the Court will produce a decision that is easier to reconcile with established legal principles.

Louise Greig is an associate with Osler, Hoskin & Harcourt LLP in Toronto. lgreig@osler.com