The first voices of what is sure to be a torrent of discussion on the Supreme Court of Canada’s ruling on Elaine Nolan et al. v. Kerry (Canada) Inc. et al—better known as the Kerry case—suggest that the decision is a good one for plan sponsors in that it justifies the actions many have taken in order to keep their pension plans running during tough economic times.
In a 5-2 ruling, the court held that Kerry Canada’s use of an actuarial surplus in its defined benefit (DB) plan to fund the defined contribution (DC) plan it created in 2000 did not violate a 54-year-old trust document.
According to Kathryn Bush, a partner with Blake, Cassels & Graydon LLP in Toronto, which acted as interveners in the case on behalf of the Association of Canadian Pension Management, the decision will likely come as a relief to many plan sponsors as it would have cost a lot of money if companies had to pay back the money they took out of the DB funds. The fact that the court awarded costs is also heartening, she explains, as courts in the past have been reluctant to hold employees responsible for costs.
“An interesting point in this case is that there are legislation issues and court issues,” she says. “And the majority disagreed with the minority that it wasn’t their job to balance employer incentives and pensioner protection, which was a legislature job. [The court’s] job was to figure out what the plan documents say. I think that is a helpful clarification.”
Ron Walker, a partner with Fasken Martineau and counsel to Kerry Canada Inc., believes that the court has provided the direction that plan sponsors have been looking for.
“So many plans have done exactly what Kerry has done, and until we got some clear guidance, there could have been a huge impact on millions of people across the country in terms of what would have had to be done.”
The decision, he explains, gives plan sponsors solid legal ground on which to operate.
“Provided you’re not offside the original wording of the documents, if you’ve been taking expenses and it wasn’t precluded by your plan documents, then you’re fine to do so.”
Walker agrees with Bush’s contention that costs were an important aspect in the case, pointing out that the court acknowledged that while it might be appropriate for the pension plan in question to cover legal costs with some types of situations, this wasn’t one of those situations.
“Where plan members are bringing action for the benefit of certain parts of the plan and not all of them, they’re not to be insulated from the consequences of that action,” he says. “On the one hand, you don’t want to discourage people from bringing appropriate actions when it’s on behalf of everybody. But if you’re not acting on behalf of everybody, you need to think twice about what you’re doing.”
Another important point is that the court allowed a retroactive amendment to clean up the DC documentation, Bush points out.
“I think plan sponsors would be well advised to look at their own documentation to see if it needs to be amended, as the court has given them authority to do so.”
Walker says that as long as plan sponsors are careful to be sure they’re operating in accordance with the underlying documentation of the plan, they can structure things as they like—including having DB and DC aspects of the same plan.
“That was the big difference between the dissent here,” he says. “My perspective is that with the Supreme Court saying that you can do that, it has vindicated a lot of pension structure and planning that’s gone on here over the past eight or 10 years.”
To comment on this story, contact us.