Court clarifies surplus assets

Company allowed to pay expenses from pension fund

In Kerry (Canada) v. Ontario (Super-intendent of Financial Services), Ontario’s Court of Appeal has made several major rulings on pensions.

Kerry, a food supply company based in Woodstock, Ont., set up a defined benefit (DB) pension plan in 1954 that has been in a surplus position for years and members have always received full pension benefits.

In 1985, the employer took contribution holidays and by 2001 had taken holidays of about $1.5 million. Initially the employer paid all plan expenses but, in 1985, third-party plan expenses were paid from the fund. These were primarily the cost of actuarial, investment management and audit services provided to the plan and added up to about $850,000 from 1985 to 2002.

In 2000, a defined contribution (DC) component was introduced and existing plan members could remain in the DB component or convert while new employees were required to participate in the DC component.

The amendments have been the focus of an appeal and on June 5, the court ruled on them. It said it is acceptable for most pension plan expenses to be paid from the pension fund as “neither the trust agreement nor the plan text placed an obligation on the company to pay plan expenses” and the Pensions Benefits Act contains no provisions that govern the payment of these expenses.

In addition, Kerry was under no obligation to pay the expenses since they could have been paid from the fund from the outset. The company was allowed to pay expenses from the fund as long as they were consistent with the proper administration of the pension fund.

The court also said Kerry was entitled to take a contribution holiday, as plan documentation did not provide otherwise and DB beneficiaries “do not have any claim to any notional surplus that exists while the plan is ongoing.”

In addition, pension benefits regulations provide that after a plan conversion, surplus can be used to fund employer contributions. Though Kerry introduced a DC component, “an employer is entitled to use the actuarial surplus to fund contributions where a defined benefit arrangement is not maintained.”

Though overall plan membership grew through inclusion of a new category of member, this did not alter Kerry’s right to take contribution holidays, said the ruling.

For more information, see Kerry (Canada) Inc. v Ontario (Superintendent of Financial Services), 2007 CarswellOnt 3493, 2007 ONCA 416 (Ont. C.A. Jun 05, 2007).

Sarah Dobson is editor of Canadian Compensation & Benefits Reporter, a sister publication to Canadian HR Reporter. For more information, visit www.hrreporter.com/ccbr.

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