The Ontario Court of Appeal’s decision to overturn the Divisional Court’s decision in Nolan v. Superintendent of Financial Services(otherwise known as Kerry)earlier this week resolves some key questions for defined benefit(DB)plan sponsors.
Paul Timmins, a senior consultant with Watson Wyatt in Toronto says it’s now clear that in many or most circumstances if you have a hybrid plan—which has both DB and defined contribution(DC)parts to it or provisions in it—the employer can use the surplus from the DB side of things to cover employer contributions to DC accounts.
“Because it’s all within one plan, anybody who you legitimately make as a member of that plan can benefit from the assets in the fund,” he explains.
However, Timmins does not expect that the Court of Appeal decision will compel many companies to make the switch from DB to DC.
“They’ve been making that decision even though they weren’t certain if they could use DB surplus this way,” he says. “Sometimes the other reasons about cost and volatility were even more compelling than the ability to use surplus so I don’t think this will lead to a huge switch by itself because those that felt the need to get out of DB have already been doing that.”
The other major issue the court dealt with was the question of payment of expenses, says Kathryn Bush, a partner in Blake, Cassels & Graydon’s Toronto office.
“I think they’ve created some clarity around the issue of when a plan can be amended to provide for the payment of expenses,” she says. “And that’s a tough area because pension plans are old and when they were originally drafted, many of them were simply silent.”
The court found that silence did not force the company to pay expenses, and without that obligation, an amendment to state that proposition, was not a “true” amendment and it did not violate the amendment clause.
The plaintiffs in the case have 60 days from the June 5th Court of Appeal decision date to decide whether or not they will appeal.
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