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Supreme Court of Canada Provides Guidance on Pension Plan Issues
August 14, 2009

In a much anticipated decision, the Supreme Court of Canada has provided guidance to employers on a number of complex pension issues, including the extent of an employer’s obligation to pay pension plan administration expenses, and an employer’s right to fund a contribution holiday for the defined contribution (DC) portion of a plan out of surpluses from the defined benefit (DB) portion of the same plan.

In Nolan v. Kerry (Canada) Inc. the company’s original pension plan, established in 1954, was a DB plan funded through a trust. The trust agreement specified that the company had to pay the trustee’s fees and costs associated with the operation of the trust. The pension plan document was initially silent regarding the payment of the costs of plan administration, but was amended in 1975 to allow for payment of these expenses from the fund. Despite the initial silence and later amendment, the company paid the costs of plan administration from the inception of the plan through to 1985.

In 1985, the company began to pay plan administration costs out of the trust fund. Also in 1985, the company began to take contribution holidays based on the surplus in the DB plan. In 2000, the pension plan was amended to add a DC component. All newly hired employees were added to the DC component of the plan, and existing members of the DB plan were given the option to transfer to the DC part of the plan. The company continued to take contribution holidays, using surplus from the trust fund to make its DC contributions.

The amendment of the plan to include the DC component led certain retired employees to challenge the company’s actions in paying plan administration expenses out of the pension fund, and in taking contribution holidays since 1985.

In its ruling, the Supreme Court confirmed that, unless expressly or implicitly provided in the governing legislation or plan documents, there is no presumption that it is the employer’s obligation to pay plan expenses. In the case at hand, the Court found that the funds in the pension plan trust could be used to pay reasonable pension plan administration expenses, and that this was consistent with a provision in the trust agreement requiring that trust funds be applied for the “exclusive benefit” of plan members.

On the use of surplus pension funds from a DB plan to satisfy the employer’s contribution requirements in a DC component of the same plan, the Court majority held that where an actuarial surplus exists, and the legislation and the plan permit such a practice, the employer may take such a contribution holiday.

This decision provides useful guidance to employers on the costs of administering a pension plan, particularly the conclusion against a presumption that the employer must pay, and the extent of the right to use surplus funds toward a contribution holiday. The extent to which the decision assists individual employers will depend on the provisions of their plan and trust documents, and the statutory framework applicable to that plan.