Kerry Quite Contrary

In Elaine Nolan et al. v. Kerry (Canada) Inc. et al., the Supreme Court of Canada reviewed several issues—most significantly, the level of deference to be afforded to decisions of the Financial Services Tribunal (FST) in Ontario, the law applicable to the charging of expenses to a defined benefit (DB) pension plan and the law concerning the use of DB plan surpluses to pay for employer contributions to defined contribution (DC) accounts. Plan sponsors will need to consider the following details for each issue.

Respecting the tribunal
The willingness of a court to overturn a tribunal’s decision depends on the level of deference it extends to the tribunal generally.

In the Kerry case, the Supreme Court confirmed that, when interpreting the Pension Benefits Act (PBA), courts are just as able to interpret statutes as tribunals. When interpreting pension plans, however, the Supreme Court took a more deferential perspective, holding that courts should interfere with an FST decision only if it did not meet a “reasonableness” standard.

Paying up
Generally, there is no prohibition under the PBA or the common law against charging expenses to the plan trust. However, this depends, in each case, on the specific language of the plan, the trust agreement and any other relevant documents.

In the Kerry case, the Supreme Court reviewed a requirement that the company pay “all expenses incurred by it or by any trustee in the execution of this trust.” It concluded that the trust and plan were different and that this requirement did not extend to expenses regarding the administration of the plan. As a result, the court concluded that plan expenses were properly charged to the trust fund.

Applying a surplus
The Supreme Court’s most controversial ruling concerned the employer’s ability to use a DB surplus to fund contributions to a DC component. Kerry had amended its plan to introduce a DC component, but two separate funding vehicles were used for each part. The plan was registered as a single entity at the provincial and federal levels.

The FST held that the way in which Kerry initially proposed to use DB surpluses was improper. The FST suggested that the DB and DC members had to be beneficiaries of the same trust for DB surpluses to be used to make DC contributions. The company made a retroactive amendment to the trust agreement to stipulate that the DC members were also beneficiaries of the pension trust.

The question of whether DB and DC plan members were properly members of the same trust divided the court. The majority held that:

• no government regulation prevented the retroactive amendment, a single plan and trust, and the DC contribution holidays;
• nothing in trust law prevents a trust from having many accounts or classes of beneficiaries;
• a single plan whose members were beneficiaries of the same trust could have both DB and DC parts such that DB surpluses could be used to offset an employer’s DC contributions; and
• Kerry had created a single trust with two different sets of members with two different sets of entitlements.

The minority found that Kerry had:

• adopted a trust agreement that created a DB plan without contemplating a DC component;
• improperly added DC members to the DB trust fund to use the DB surplus for its own benefit;
• breached its trust obligations; and
• created a second trust, such that surplus withdrawals from the first trust (DB) to fund contributions to the second (DC) were not permitted.

The Kerry decision will no doubt have a significant influence on the development of pension trust law. The increased deference it suggests toward the FST will discourage future appeals to the rulings of that administrative body. Its reiteration of the assumption that reasonable expenses can be charged to a trust fund will focus future disputes on the specific language and commitments made by employers in regard to plan expenses. The majority’s view of trust law—emphasizing that trusts are subject only to specific statutory and legal limits—will also have an important impact on future pension litigation.

Murray Gold is a partner with Koskie Minsky LLP in Toronto.
mgold@kmlaw.ca

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