The Supreme Court of Canada has come down firmly on the side of pension plan administrators with its long-awaited ruling in Nolan v. Kerry (Canada) Inc.

The decision is likely to please employers and plan administrators: the court confirmed their right to make a variety of changes to corporate pension plans, if such changes are not prohibited by the plan’s founding documents. They include: moving surplus funds between the defined-benefit and defined-contribution sections of one plan, taking contribution holidays and paying pension administration expenses out of plan funds.

Ronald Walker, a senior partner in the commercial litigation section of law firm Fasken Martineau DuMoulin LLP in Toronto, acted for Kerry. He said that the key take-aways from the decision are:
– expenses that relate to the administration of a company pension plan can be paid out of plan funds because they are “really for the benefit of the members” and, as Justice Marshall Rothstein noted, are essential for the “continued existence and integrity” of the plan;
– a defined-contribution component can be added to a plan that was originally a defined-benefit plan, “if it is done appropriately,” Walker said. Crucially, it remains one plan, and therefore surplus funds can be moved from the DB section of the plan to the DC section. Plan administrators were “holding their breath” about the outcome on that point, Walker noted, as a lower court had concluded that a plan could not be structured this way. (Two of the seven judges dissented from the majority, agreeing with the lower court’s decision.)

The issue is a significant one for the corporate sector as a large number of company pension plans have been converted in this way over the past decade. If the decision had gone in favour of the committee of DB plan members who initiated the dispute in 2000, plans configured in this way would have had to be unwound and reconfigured to create two separate plans: “It would have been a nightmare in many cases,” Walker said. But the Supreme Court concluded that, if the two-part plan has been properly structured, “there is nothing wrong in having these types of DB/DC plans,” Walker said.

Doing it right remains important, however, as many of these DB plans were founded 50 or 60 years ago (Kerry’s plan was founded in 1954). Many existing plans use language similar to the Kerry plan. That plan was amended in the mid-1980s to allow for plan expenses to be paid from the fund and for contribution holidays by the company when the plan had a surplus. The DC portion of the plan was added in 2000.

That year, a group of employees who were DB plan members asked the Ontario Superintendent of Financial Services to investigate payment of plan expenses out of the pension fund, as well as contribution holidays taken by Kerry when the plan was in a surplus position. DB plan members also sought a partial winding up of the DB portion of the plan, with surpluses returned to the DB side of the plan to be paid out to DB plan members.

Critics of the position taken by the Supreme Court have argued that the ruling will give carte blanche to employers to do as they wish with pension plans, to the detriment of plan members. Jeff Galway, of Blake, Cassels & Graydon LLP in Toronto, acted for the intervener, the Association of Canadian Pension Management: he noted that plan administrators are likely to be “very happy” with the decision but, he said, worries about wide-open doors for employers, to the detriment of employees, have “no merit.” He noted that the area is regulated by pension-benefits legislation, as well as pension-fund documents, and that there is “no basis” for the contention that employers will “suddenly start chipping away at members’ rights.”

Galway also noted that the Supreme Court made a significant ruling on the question of costs of the litigation. In ruling that the employee group must bear its own costs, the court concluded that the usual rules of “loser pays” were appropriate in this situation, since only members of the DB section of the plan would have benefited from a win. DC plan members would have seen no benefit. (The alternative might have been to have legal costs paid out of the pension fund.)

@page_break@“For parties looking to initiate litigation, they are going to have to pause and think about potential cost consequences of losing,” Galway said, adding that in future, potential litigants may give more consideration to the merits of their position. “That’s the legal system we are in; it’s a loser pay rule, always subject to the court’s discretion.”

The decision arrives in the midst of widespread debate about the reform of pension plans generally. Many Canadians are facing retirement without adequate pension-plan benefits or no pensions at all. However, Walker said, he does not see this decision having any direct effect on that discussion. “That debate is really the broader policy level and the court in this case was expressly trying not to deal with the broader policy issues.”

The court, for example, did not want to venture into a discussion that dealt with the risks that pass to plan members, in terms of returns, under DC pension plans.