Kerry wins right to transfer surplus DB funds to DC
In a decision being hailed as a victory for employers, the Supreme Court of Canada has ruled in favour of a company that transferred surplus money from a defined benefit (DB) pension plan to a defined contribution (DC) plan.
The case began in 2000 after Kerry Canada, an Ontario-based food products company, closed the DB plan to new employees and created the DC option. A group of employees asked the Ontario Superintendent of Financial Services to investigate the company’s use of surplus funds from the DB plan for DC contributions.
Ontario’s Financial Services Tribunal ruled in favour of the company in 2004. That ruling was appealed and the Ontario Divisional Court sided with the employees. Kerry appealed that ruling and the Ontario Court of Appeal ruled in its favour. Employees appealed that decision and, on Aug. 7 — nearly 10 years after the initial complaint was filed — the Supreme Court ruled in favour of Kerry Canada.
In doing so, it clarified several major issues in pension plan management, said Kathryn Bush, a Toronto-based partner at Blake, Cassels & Graydon. There were huge dollars at stake and the notion of taking surplus funds out of a DB plan — which many believed was fine — had never been tested in the Canadian courts, she said.
“It should be easier for employers to charge expenses, it should be much easier for them to properly structure a DC component of a DB plan and use the surplus in the plan to fund both DB and DC,” said Bush.
Had the court ruled against Kerry, many plan sponsors would be faced with the prospect of paying back money from previous contribution holidays, she said,
“We would have had great numbers of plans in the country that would have been taking contribution holidays for many years and all of those contribution holidays would then have to be repaid,” she said.
“Huge sums of money would have to be paid into the funds at a time when everybody knows businesses are struggling and pension plans aren’t all that well funded anyways.”
Employers that do not yet offer a DC plan may be more inclined to create one because of the decision, said Bush.
“The ruling is saying you don’t have to worry about using the surplus to fund those DC contributions,” she said.
In addition to allowing for the transfer of funds between plans, the court’s decision also leaves room for sponsors to pay administration expenses from the pension fund.
While there will always be “open issues” when dealing with expenses, amendments to plan language are acceptable if they are for the exclusive benefit of the members, said Bush.
“The payment of plan expenses is necessary to ensure the plan’s continued integrity and existence, and the existence of the plan is a benefit to the employees,” wrote Justice Marshall Rothstein on behalf of the court.
The ruling may be a relief for plan sponsors managing contribution payments but labour advocates have decried the decision. The court has created an opportunity for plan sponsors to try and run “roughshod” over workers and their retirement security, said Ken Georgetti, president of the Canadian Labour Congress.
“We’re disappointed that a majority of the judges did not agree with us, but we are pleased that some members of the court felt Kerry’s diversion of the surplus, built up by the workers themselves, constituted a breach of trust,” he said.
Another concern for employees arose from the ruling that the committee that drove the litigation is responsible for Kerry’s legal costs.
“That may cause a bit of a chill. Employees may be less willing to take these cases if they don’t think they are going to get their own fees funded and in fact they may have to pay the other side’s fees,” said Bush.
Now that the courts have provided set guidelines for plan funds, sponsors should make sure to review plan language to ensure they have done all that is necessary to take a contribution holiday, said Bush.
“Labour is saying this is going to be the end of DB but I don’t think that’s the case at all,” said Bush.
“I think this is just helpful to keeping people in a pension plan at all.”
