Recent court decisions on pension surplus ownership have turned to plan documentation, but there are still no final answers.

Rulings of the Ontario Court of Appeal in cases such as Kerry Canada Inc. v. DCA Employee Pension Committee (Kerry) and Burke v. Hudson’s Bay Company (Burke) have led some to express hope that courts are using more common sense in their application of trust law principles and that the direction of the courts is becoming more employer-friendly.

Before accepting this view, it is important to remember that many saw the pro-employee decision of the Supreme Court in Schmidt v. Air Products Canada Inc. (Schmidt) as the final word on pension surplus. But as the last 14 years of pension litigation have borne out, we are nowhere near a resolution.

In the Kerry case, the Supreme Court of Canada has granted leave to appeal the decision of the Ontario Court of Appeal. A members’ committee brought an action before the Financial Services Tribunal (FST), alleging that expenses had been wrongly paid from the fund; that the plan sponsor had taken contribution holidays without proper authority under the terms of the trust agreement; and that after the conversion of the defined benefit plan to a defined contribution (DC) plan, the assets associated with the prior plan had been improperly used to subsidize the operations of the DC plan.

The FST found in favour of the plan sponsor. On appeal, the Ontario Divisional Court ruled in favour of the members’ committee, but the Ontario Court of Appeal reinstated the decision of the FST.

The decision of the Court of Appeal in Kerry does not change the law or the direction of the law. Instead, it is a re-articulation of certain administrative law and trust law principles. In particular, the Court of Appeal makes it clear that the starting point for any pension case is the documentation (the trust agreements and plan texts) that underlies the pension plan. Once those documents are understood, the court then determines the rights of the respective parties on the basis of applicable trust law and contract law principles. But in applying these principles to Kerry, the court did not apply either a pro-employer or a pro-member perspective. Instead, it based its determination solely on the wording of the plan documents.

In Burke, the assets of the northern stores division of the Bay had been sold to an arm’slength purchaser, which offered employment to the employees who worked in that division. The purchaser also established a pension plan that replicated the benefits offered under the terms of the Bay plan. Assets and liabilities were transferred from the Bay plan to the purchaser’s plan.

The Bay plan had a surplus at the time of transfer, but surplus assets were not transferred to the purchaser’s plan. Prior to the transfer date, the company had also taken contribution holidays and had charged certain plan expenses to the Bay plan.

The transferred employees brought an action claiming that contribution holidays had been unlawful, expenses had been wrongly charged to the plan, and a proportionate share of surplus should have been transferred to the purchaser’s plan. At trial, the court held that a share of the surplus should have been transferred. However, it found that the contribution holidays were lawful and that the expenses charged to the plan were permitted.

In its decision, the Court of Appeal agreed with the trial judge on the issues of plan expenses and contribution holidays. On the issue of surplus transfer, however, it reversed the decision of the trial judge. The court based this decision on the wording of the plan text and trust agreement. On the basis of applicable trust law principles, it found that the members’ claim for a proportionate share of surplus had no basis in law.

The decisions of the Ontario Court of Appeal in Kerry and Burke are consistent with the reasoning of the Supreme Court of Canada in Schmidt. The starting point is always the wording of the applicable trust agreements and plan texts. In Kerry and Burke, the wording supported the plan sponsor’s position. However, neither case should be viewed as supporting a general trend in the law, let alone a final judgment on the matters at issue.

The wording of the documents in a case, as well as the applicable facts, could lead to a different result. Plan sponsors hoping for the final sympathetic word on distribution of pension surplus will have to keep on waiting.

Hugh O’Reilly heads the pension and benefits practice group at Cavalluzzo Hayes Shilton McIntyre & Cornish in Toronto.

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© Copyright 2008 Rogers Publishing Ltd. This article first appeared in the September 2008 edition of BENEFITS CANADA magazine.


Copyright © 2020 Transcontinental Media G.P. This article first appeared in Benefits Canada.

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