In what is being hailed as a pro-employer ruling, administrators of pension plans can take “contribution holidays” as long as the plan’s surplus still allows it to meet its obligations, says the Supreme Court of Canada.
“The Company’s contributions are determined by actuarial calculations,” wrote Justice Marshall Rothstein for the majority. “Clause 14(b) of the Plan, as amended in 1965, provides for contributions that will cover the members’ future retirement benefits and requires the exercise of actuarial discretion as it does not fix annual contributions.
“The clause therefore does not prevent the Company from taking a contribution holiday where the actuary certifies that no contributions are necessary to provide the required retirement income to members.”
Fasken Martineau DuMoulin LLP partner Peggy McCallum, who acted on behalf of respondent Kerry (Canada) Inc., says the ruling will provide comfort to employers.
“It is a very reassuring judgment for employers,” she says. “They can take a great deal of comfort in terms of the way many or most of them have been administering their plans and have been funding their plans.”
McCallum says the other issue dealt with by the top court was whether plan expenses could be dealt with out of plan surpluses.
In this, the court ruled unless it is specifically not allowed in the plan documents, plan expenses can be paid for out of plan surpluses. However, says McCallum, the court has drawn the line on certain expenses including consulting fees used to design a conversion to another type of plan.
At issue in the case was Kerry’s use of a $1.5 million surplus from its defined benefit plan to satisfy its contribution obligations in respect of both defined benefit and defined contribution components of a pension plan.
Kerry established the defined-benefit plan in 1954. At that time the company was known as the Canadian Doughnut Co. Ltd.
Defined-benefit plans provide workers with regular payouts upon retirement. Under defined-contribution plans, workers contribute to their own fund with no set payouts.
Kerry’s defined-contribution pension plan was established in 2000 and the company began taking “contribution holidays” by using the surplus from the defined-benefit plan to fund both plans. In 2001 a group of plan beneficiaries challenged the practice.
They asked Ontario’s Superintendent of Financial Services to investigate the company’s payment of plan expenses from the fund and its contribution holidays.
According to the Supreme Court’s ruling, the Financial Services Tribunal “did recognize that the plan documents as amended in 2000 did not permit DC contribution holidays. However, it held the company could retroactively amend the plan provisions to designate the DC members as beneficiaries of the fund, thereby allowing the Company to fund its DC contributions from the DB surplus."
In the dissenting opinion, Justice Louis LeBel wrote the outcome of the case would affect millions of Canadians. He disagreed the plans would be mutually inclusive, saying the defined-contribution plan members had no right to the surplus from the defined-benefit plan.
He further wrote that an amendment created to approve the funding, and approved by the Financial Services Tribunal, should not have been allowed.
“The employees in the DC plan, DC members are not beneficiaries of the DB trust and any amendment that would purport to designate them as such would contravene these same provisions and principles. As a result, the decision of the Financial Services Tribunal (the “Tribunal”) that approved such an amendment was unreasonable and must be quashed,” wrote LeBel.
Appellant lawyer Ari Kaplan, a partner with Koskie Minsky LLP, says the decision will “accelerate the shift from defined-benefit to defined-contribution pension plans.” He characterized defined-contribution plans as basically RRSPs with no risk to employers.
While he says companies may see the shift as a way to control the bottom line, they may do so at the risk of employee loyalty, and could hamper recruitment efforts.
He says with increased numbers of younger employees concerned about their retirement savings, the practice that he characterizes as “raiding pension plans” could prove detrimental.
“That is not the kind of message you want to send when attracting employees,” he says.
Jeff Galway, a partner with Blake Cassels & Graydon LLP, acted on behalf of the Association of Canadian Pension Management, which had intervener status in the case. He says the ruling reinforces practices that are already occurring.
“Many companies have been adding DC components and have been taking contribution holidays in connection with the surpluses that is in its fund and this is a big issue for many of its members,” he says.
“And so what this decision does is confirm that employers can add a DC component and take contribution holidays with respect to defined-contribution members’ obligations so this is quite an important ruling on that point.”
Jordan Fremont, a partner with the employment law firm Hicks Morley Hamilton Stewart Storie LLP, agrees the ruling is important for employers, mainly because it didn’t go the other way, forcing them to reverse ”contribution holiday” practices.
“Most employers and other sponsors of pension plans let out a sigh of relief today,” he says. “The decision upholds what I feel is a sensible and practical, pragmatic decision from the Ontario Court of Appeal. So I think it’s particularly of interest and helpful to businesses in this current economic time.”