Law Times

Law Times • November 16, 2009 FOCUS Kerry signals employer-friendly approach BY JULIUS MELNITZER For Law Times Inc., plaintiff s and union lawyers regularly used trust principles to intervene in how companies dealt with pension plans. In doing so, they were able B to aff ect everything from merg- er decisions, conversions from defi ned-benefi t to defi ned- contribution plans, and pay- ment of plan expenses. But Kerry has given pension- plan sponsors and employers some leeway, particularly re- garding conversions from de- fi ned-benefi t plans, a trend that has emerged in the last decade. "Th e decision evidences a much more employer-friendly approach than the Supreme Court has exhibited in past pen- sion cases," says Andrew Har- rison of Borden Ladner Gervais LLP. "Th e court is telling pen- sion-plan sponsors that it won't second-guess them if they want to convert from a defi ned-ben- efi t plan to a defi ned-contribu- tion plan so long as they do their homework and check the plan documents carefully to see what powers are available to them." In 1954, Kerry's predeces- sor company established a defi ned-benefi t pension plan that it funded in the usual way through a trust. Th e company amended the plan in the 1970s to allow for the payment of plan expenses from the fund and changed it again in 2000 to introduce a defi ned-contri- bution component. Beginning in 1985, the com- pany began taking contribution holidays from plan surplus. Later, it used extra funds from the defi ned-benefi t component to take contribution holidays under the defi ned-contribution component. Plan members objected, ar- guing that the payment of plan expenses and the contribution holidays amounted to a breach of trust. Th e Ontario super- intendent of fi nancial services investigated and decided that Kerry should repay the expens- es but had properly taken the contribution holidays. A hearing followed before the Financial Services Tribunal, which held that the plan should pay almost all of the expenses. Th e tribunal also ruled that Kerry could take contribution holidays from its defi ned-con- tribution obligations as long as the plan members were desig- nated fund benefi ciaries. Th e plan members then appealed to the Divisional Court, which overturned the tribunal. A further case at the Court of Appeal produced three im- portant rulings from a unani- mous bench: • Payment of pension plan ex- penses from the fund was ap- propriate because the amend- ments enabling such payments were not inconsistent with earlier plan documents. • As nothing in the plan docu- efore the Supreme Court of Canada's recent decision in Nolan v. Kerry (Canada) ment prohibited contribution holidays, the employer could take them with respect to the defi ned-benefi t component. Th e employer could also use surplus to fund the defi ned- contribution obligations pro- vided that it properly struc- tured the plan to make the members benefi ciaries of the defi ned-benefi t scheme. • Converting a plan from a defi ned-benefi t to a defi ned- contribution plan was an "adverse amendment" under the Pension Benefi ts Act that therefore required notice. Th e decision, which con- tinued the appeal court's re- cent trend to a less restrictive analysis of pension plans, was upheld at the top court. "Th e Divisional Court made the blanket assertion that [defi ned-benefi t] and [defi ned- contribution] plans couldn't co-exist and couldn't be cross- subsidized," says Evan Howard of Osler Hoskin & Harcourt LLP. "Th e Court of Appeal and now the Supreme Court of Canada have said that they could. It means that there's currently a great deal more fl exibility for sponsors who want to amend plans." While the high court affi rmed the necessity of analyzing the terms of a plan, it also seemed to recognize that pension schemes develop over time and that their evolution must be a factor when interpreting plan documents. "Kerry certainly doesn't mean that trust agreements are no longer relevant in the analy- sis but it does indicate that trust law principles only go so far," Howard says. At the same time, while some people may question Kerry's im- pact in an economy where pen- sion surpluses are rare, they are likely taking a narrow view. "Th ere are no limitation pe- riods with respect to attacking changes to pension plans, so Ker- ry may aff ect many changes that have taken place in the past," says Peggy McCallum of Fasken Martineau DuMoulin LLP. Generally speaking, then, observers have viewed Kerry as a positive decision for employ- ers and sponsors. "It's good news for employ- ers and sponsors because the court is now taking a prag- matic approach as opposed to the legalistic one it took in the past," Howard says. But caution remains the or- der of the day. Th e top court made it clear that plan docu- ments remained the key deter- minant when deciding whether employers can pay administra- tion expenses from the fund and whether they can take contri- bution holidays. Accordingly, lawyers are advising sponsors to review historic documentation to ensure that their practices are consistent with the plan terms. "Th e Supreme Court's rul- ing certainly doesn't stand for the proposition that sponsors can pay plan expenses across the board," McCallum says. Sponsors should also be aware of the high court's affi rmation that companies can only charge expenses they incur as adminis- trators of the plan as opposed to their role as employers. Indeed, the court found that Kerry couldn't use the funds to pay for advice about the plan's conversion because it sought that counsel in its capacity as employer. Th e court did, how- ever, allow it to use fund mon- ies to pay expenses to imple- ment the conversion, costs it incurred as administrator. Finally, the decision has im- portant implications for spon- sors seeking to amend the ex- pense provisions in plans. It means that where a pension scheme is silent, a change to pay third-party expenses from the trust fund will be neither a violation of the amendment clause nor a revocation of the trust. Even where a company has undertaken to pay the plan ex- penses, it may be able to alter that obligation if the documentation permits such a change. LT PAGE 11 For years, the Canadian Labour Law Library (CLLL) has been trusted as the definitive online research service for labour arbitration issues. In 2009, the new generation of online labour law research begins, as the Canadian Labour Law Library becomes Labour Spectrum. Labour Spectrum is designed with both labour law and labour arbitration practices in mind, so you can choose the content that fits your research needs. The Essential Edition gives you the same great content that you currently enjoy (Brown and Beatty, L.A.C., C.L.A.S., images of decisions in PDF format), plus labour legislation from all Canadian jurisdictions and labour law decisions from the courts. The Classic Edition gives you all the content on the Essential Edition, as well as more commentary (Canadian Labour Law, Second Edition and Willis & Winkler on Leading Labour Cases (formerly Labour Arbitration: The Year in Review), a collection of labour relations board decisions and a case citator. Labour Spectrum is your one-stop labour law research tool, combining expert commentary, case law and legislation with functionality that is practical and easy to use. Briefcase CD-ROM Edition Available Contact your Account Manager at 1.800.263.2037 to arrange for a free product demonstration or for pricing information Canada Law Book is a Division of The Cartwright Group Ltd. www.lawtimesnews.com LT0809

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