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Benefits and Pensions MonitorCourt Of Appeal Decision In Kerry Not A Panacea The Kerry case does not stand for the proposition that any plan-related expenses may be charged to the pension fund. The determination of whether expenses can be validly charged to the pension fund will turn on what the employer committed to paying when the plan was established (at least for plans funded through trusts). Not All Expenses Can Be Charged To The Fund Even where plan language permits the payment of expenses from the plan fund, there still may be certain kinds of expenses that are not allowed. The Court of Appeal’s reasoning suggests that only those expenses incurred by the sponsor in its role as administrator (as opposed to its role as employer) can be charged to the plan fund. Thus, plan sponsors seeking to have expenses paid from the plan or assessing potential risks in relation to past expenses should be reviewing plan expenses to determine whether such expenses were incurred by the plan sponsor as employer or as administrator. This is not always an easy task, given the ‘two hats’ that plan sponsors wear in respect of pension plans. For example, in Kerry, it was found that the consulting fees incurred by the plan sponsor in considering whether to implement the plan conversion (the costs incurred by the employer in determining whether to change the plan design) were incurred as employer; thus, such costs could not be paid from the fund. On the other hand, the implementation of those conversion changes were incurred as administrator and could be paid from the fund. Doubt Cast On Whether Internal Expenses Can Be Charged To The Fund The Court of Appeal decision also suggests that the payment of a plan sponsor’s internal expenses could amount to a “revocation of trust,” depending on the historical plan and trust language. The Court of Appeal noted that “revocation” means “the return of (some or all) the trust funds to the person who placed the funds in trust.” The court held that on the facts of the Kerry case there was no revocation of trust in respect of the expense charges because the employer was only asking that third-party expenses be paid from the fund, not internal expenses. However, the clear implication of the decision is that charging internal expenses to a pension fund could amount to a revocation of trust in certain circumstances. This is a troubling aspect of the Court of Appeal’s decision because it appears to create an incentive for employers to minimize the internal resources devoted to plan administration and to outsource administrative tasks to third parties. It is hard to believe that the Court of Appeal intended this result. The Court of Appeal’s holding also brings into question whether an employer can obtain reimbursement from the pension fund for third-party expenses even where such third-party expenses would properly be chargeable to the pension fund if they were paid by the fund directly, as such reimbursement arguably involves the return of trust funds to the employer. Perhaps, however, it is possible to argue that in such circumstances the employer is simply acting as paying agent for the fund, not in its capacity as employer. This would appear to be the right result from a policy perspective. Cross-subsidization – Use Of DB Surplus To Fund DC Contribution Obligations Upheld One of the most controversial aspects of the lower court decision in Kerry was the holding that a partial plan conversion results in the creation of two separate plans and that the use of DB surplus to fund DC contribution obligations, therefore, amounts to illegal ‘cross-subsidization.’ The Court of Appeal has restored what many practitioners believe to be the correct legal analysis:
The Court of Appeal held that the flaw in Kerry was that the amendment implementing the partial plan conversion did not expressly make the members of the DC component beneficiaries of the DB fund. However, the Court of Appeal agreed with the FST that this deficiency could be remedied through a plan amendment and a restructuring of the funding arrangements for the plan. Interestingly, the Court of Appeal indicated that if the DC members are made beneficiaries of the DB fund, they would have a claim to surplus on plan termination. This result seems logical, but it raises a question as to whether the converse would be true – that is, in an insolvency situation, would DC members have their benefits reduced if a plan is wound up with a DB deficiency? Given the nature of DC benefits, this would be a surprising result. Communications With Plan Members The Court of Appeal was highly critical of the communications provided to plan members about the plan conversion. In the court’s view, the communications did not properly describe the legal effects of the conversion. In particular, the Court of Appeal held that the statement that a member who elected to transfer to the DC component would “have no further rights and entitlements under the Defined Benefit plan” was misleading because it suggested that the conversion extinguished all rights, including the member’s rights to surplus, which the court found to be incorrect in law. The Court of Appeal has set a high standard for communications with plan members, placing an onus on plan sponsors to communicate clearly and accurately with plan beneficiaries. Communications that do not meet this standard could impair the effectiveness of changes to a pension plan or otherwise expose the plan sponsor to risks associated with miscommunicating the terms of a pension plan or benefits thereunder. Such risks could be even greater where members are being asked to consent to a change in, or make an election affecting, their benefits or rights under the plan. Practical Implications Of The Kerry Decision A key ‘take-away’ from the Kerry decision is that an employer’s ability to charge even routine expenses to a pension fund is dependent on the historical plan documentation. Employers and administrators cannot rely on favourable language in the current plan documents as authorization to pay expenses from a pension fund. Employers, therefore, need to ensure that proper advice is received when determining what expenses can be properly charged to the pension fund. As well, in our experience, the validity of charging expenses to the plan fund is frequently raised as a collateral issue in disputes between employers and members over surplus entitlement. Employers must, therefore, factor in potential claims concerning expenses when making strategic decisions regarding surplus. A second lesson to be learned from Kerry is that when changes are made to a plan, how those changes are structured and documented will have a direct impact on whether the changes will achieve the intended result from a legal perspective. Not only does this apply to plan conversions, but it would also apply to other events such as plan mergers and asset transfers. Third, employers need to ensure that communications to members are fully reviewed and vetted to ensure that they are consistent with pension legislation and the plan documents, and that they properly describe the legal effect of any changes or rights concerning the pension plan. This is true for all member communications, but particularly critical if the change is potentially disadvantageous to members. So far, the member committee has not yet filed an application for leave to appeal the Court of Appeal’s decision to the Supreme Court of Canada, but it has until September to do so.
Ian McSweeney and Louise Greig are with the pensions and benefits practice at Osler, Hoskin & Harcourt LLP. |
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