Supreme Court Issues Precedent-Setting Pension Decision

In Nolan v. Kerry (Canada) Inc., the Supreme Court of Canada confirmed that employers may charge the administrative expenses of a pension plan to the pension fund itself, and that a surplus in one component of the plan may be used to fund a “contribution holiday” for the employer in respect of another component of the plan.

The employer administered a pension plan using a trust. At one time, the employer had paid for the plan’s administrative expenses, but the plan was later amended such that the trust fund itself would be used to pay those expenses. While the pension plan was originally a defined benefit (“DB”) plan, eventually a defined contribution (“DC”) component was introduced, and the DB plan was closed to new employees. Since the DB plan had an actuarial surplus, the employer decided to take a break from making contributions into the DC component, and use the DB surplus to subsidize that portion of the plan instead.

The plaintiffs, a committee of former employees, took issue with the company’s use of the trust fund to pay for the pension plan’s administrative expenses, and the company’s use of the DB surplus to subsidize the DC portion of the plan. The Financial Services Tribunal found that the employer was permitted to use the plan to pay for administrative expenses, and that it could retroactively amend the plan to designate the DC members as beneficiaries of the trust fund, thereby allowing the employer to fund its DC contributions from the DB surplus. While the Divisional Court disagreed, the Ontario Court of Appeal allowed the employer’s appeal and restored the Tribunal’s findings.

In a 5-2 decision, the Supreme Court of Canada upheld the Ontario Court of Appeal’s decision and found that the employer had not violated its obligations as administrator of the pension plan.

On the issue of the payment of administrative expenses, both the majority and the dissenting judges found that the text of the plan, which stated that the trust fund was to be used only for the “exclusive benefit” of the employees, did not prevent the employer from using the fund to pay for the plan’s administrative expenses. As Justice Rothstein stated for the majority:

Here the existence of the Plan is a benefit to the employees. The payment of Plan expenses is necessary to ensure the Plan’s continued integrity and existence. It is therefore to the exclusive benefit of the employees, within the meaning of [the Plan], that expenses for the continued existence of the Plan are paid out of the Fund.

On the issue of using DB surplus funds to make contributions to the DC portion of the plan, the majority of the Court found that the DB and DC arrangements were merely two components of a single plan, and that use of one to fund the other therefore did not run afoul of the employer’s obligation to ensure that plan funds were used for the “exclusive benefit” of plan members. The majority also found that there was no legislation prohibiting the retroactive creation of a single fund and, further, that “it is not the role of the courts to find the appropriate balance between the interest of employers and employees. That is a task for the legislature.”

Also of interest was the Supreme Court’s decision to award costs against the plaintiffs. While courts have been hesitant to hold employees responsible for costs in the past, the Court in Nolan stated:

Where litigation involves issues…of a dispute between a settlor of a trust fund and some or all of its beneficiaries, the ordering of costs payable from the fund to the unsuccessful party may ultimately have to be paid by the successful party [in this case, the employer]. In these types of cases, a court will be more likely to approach costs as in an ordinary lawsuit, i.e., payable by the unsuccessful party to the successful party.

The Nolan decision is the final word from the Supreme Court of Canada on the issue of whether employers may use pension funds to subsidize both the payment of the administrative costs of a pension plan, and the contribution requirements in respect of other components of the same plan. While the decision is a positive one for employers, it is important to note that the Court found that the uses to which pension plan funds may be put will always depend upon the particular wording and context of the plan at issue.