Markle: Trust Law applied to Expense Payments
Markle v. Toronto, a case involving the City of Toronto pension plan, was decided around the same time as Transamerica and addressed the issue of whether or not administrative expenses can be paid out of a pension trust fund. It also turned on the application of trust law.
In 1956, Metropolitan Toronto Council established a defined benefit pension plan for its employees. The plan was administered by a three-member board of trustees, assisted by a retirement committee. The Metro plan originally provided that the employer was to bear all of the expenses incurred by the trustees and the retirement committee. In 1981 and again in 1992, the plan was amended to permit certain expenses to be paid from the fund, but the trustees had to approve any such payments.
By the end of the 1990s, the plan had a substantial surplus. In 2001, Toronto City Council, the successor to Metro, amended the plan in two ways: first, the amendment allowed the city to recover out of the pension fund the cost of its internal staff who were providing administrative services to the plan, and second, the concept of the trustees having the discretion to approve expense payments was removed from the plan. The trustees were concerned about the validity of the amendment, so they sought the advice and direction of the court to determine whether the by-law was valid.
The Ontario Court of Appeal found that a trust was created when the plan was established. When analyzing whether the amendment constituted a breach of trust, the Court of Appeal focused on the issue of control of the trust assets. What the Court of Appeal said was that once trust assets are received by the trustee and are held for the benefit of the beneficiaries, the person who established the trust loses all rights to control the property.
The court did not object to the amendments in 1981 and 1992 that permitted some expenses to be paid out of the fund, because the trustees retained the discretion to make the ultimate decision whether any particular expense should be paid. What the Court of Appeal found objectionable about the 2001 amendment was that it permitted the employer to exercise control over the trust assets, taking the decision-making power away from the trustees.
So once again, the historical terms of the trust restricted what the employer felt was the reasonable and practical use of surplus funds, in this case to pay the pension plan’s administrative expenses. To put it in context, the annual expenses allocated to the plan were approximately $180,000, at a time when the plan had a surplus of almost $300 million.
Kerry: Trust Law applied to Plan Expenses, “Cross-Subsidization”
Next came the Nolan v. Kerry (Canada) Inc. case, which also dealt with pension plan expenses, as well as the issue of using surplus from the defined benefit (DB) component of a pension plan to fund contributions to a new defined contribution (DC) component of the plan. The Kerry case involved a DB plan established in the 1950s and funded through a trust. The plan was amended in the 1970s to permit plan expenses to be paid from the fund, and again in 2000 to introduce a DC component.
In 1985, the employer began taking contribution holidays from plan surplus, and after the DC component was added, surplus from the DB component was used to take employer contribution holidays under the DC component. The plan members complained about the payment of expenses from the trust and also the taking of contribution holidays. On appeal from the Financial Services Tribunal, the case made its way to the Ontario Divisional Court.
The Divisional Court made some rather startling findings, again on the basis that the pension trust was a classic trust established generally for the benefit of the plan members. What was perhaps most worrying to plan sponsors in the judgment was what the court said about the use of DB surplus to take contribution holidays under the DC component of the plan. The court held that in creating a new DC component in the plan, what the sponsor did was in fact create two pension plans, with two pension funds and two classes of members. It also held that because the historical trust language in the DB component said that funds must be used for the “exclusive benefit” of members, the employer could not use it for any other groups, including the members in the DC component.
So once again, the interpretation of a pension plan as a classic trust led to a somewhat perverse result. What would seem a common-sense proposition, that is adding a new DC component to a pension plan and treating the pension fund as a single fund, was rejected by the court on the basis that only the originally defined group of beneficiaries could benefit from the fund.
