International Law

Nolan v. Kerry And Its Place In Pension Deliberation

By Simon Archer

The Court recently upheld the judgement of the Court of Appeal for Ontario in Nolan v. Kerry (Canada) Inc., 2009 SCC 39. The case involved the treatment of surplus in a pension plan. A usually obscure area of labour and administrative law, pension plans and pensions generally were weekly news during 2008 and 2009, and are shaping up to be a future election issue. This is because most (about two-thirds) Canadians do not have private, employer-sponsored pension plans, and those plans that do exist have had a very difficult few years.

The Kerry decision actually belongs to a previous era - the era of pension plan surpluses that broadly speaking began in the late 1980s and lasted until about 2001, when declining asset prices (primarily equities) led to more widespread plan deficits. The issues in Kerry emerged during the era of surplus, and revolve around the role of trust law in pension plans.

In a nutshell, the question during this era was: to what extent can “exclusive benefits” language in a pension trust document preclude the use of trust assets for any other use but the exclusive benefit of beneficiairies? Several cases since 1987 have sketched out answers; Kerry is the most recent in this line of cases. The specific issues in Kerry were whether assets in the trust fund could be used to pay for expenses of the administration of the trust, whether they could be used to pay for employer contributions to a related pension plan, and whether the costs of bringing claims on both these issues should be paid out of the fund.

Expenses

The Court upheld Gillese J.A. (a pension expert) of the Ontario Court in concluding that expenses of pension plan administration may be paid out of the pension fund itself, even where employers have previously paid such expenses, unless there is an express provision requiring expenses be paid by the company. The Court found that this was consistent with using trust fund assets for the exclusive use of beneficiairies - as the administration was for their benefit. This seems a reasonable position, although labour unions, such as CUPE, have long argued that pension funds run by employers employ the same advisors as the employers use when they are in bargaining or other adversarial processes - that it, the pension fund with a fiduciary duty to members employs the same advisors as the employer with an adversarial relationship to employers. Labour groups argue this puts certain advisors in a conflict of interest that works against the best interests of the beneficiairies. Although this conflict was outside the question put before the Supreme Court, it is the conflict that gives rise to it. By contrast, pension schemes in the U.K. are required to be fully arms’ length from the employer and have independent advisors.

Cross-subsidization

The Court also held that in a hybrid plan providing both defined benefit (DB) and defined contribution (DC) benefits, surplus arising in the DB portion of the plan may be used to pay employer contributions under the DC portion of the plan, even where the DB portion is subject to a trust requiring the exclusive use of pension fund property for members. Again, the majority of the SCC agreed with Rothstein J. that this is consistent with exclusive benefits language and perhaps industry practice. In a related discussion, the SCC noted that contribution holidays will only be prohibited where the trust or plan text expressly states they are prohibited, and that otherwise, they are presumed to be permitted. Fish and Lebel JJ. dissented on this point, and found cross-subsidization to be a breach of trust.

There are two core issues involved here: the ownership and control of surplus arising in pension funds, and the use of surplus for contribution holidays in particular. Some of the reception of this decision in trade press predicted that it would facilitate and perhaps encourage the development of hybrid plans by helping ease sponsor costs and expand sponsor control over surplus assets. Some argued that permitting administrative costs and contribution costs to be paid from a fund and fund’s surplus will preserve DB plans or even encourage DB plan provision. However, recent research does not support this conclusion. For example, even in jurisdictions where employers have 100% ownership of surplus, employer-sponsored DB plans have been declining. It is a very rare event for a new DB plan to be established for anyone but very senior employees. This year, there is growing recognition that the long-term decline in employer-sponsored pension plans will require a large-scale coordinated policy response. Leading industry analysts such as Keith Ambachtsheer have proposed a “CPP II” to make up the gap that declining employer-centric plans are leaving.

This ruling is consistent with prior decisions about the use of contribution holidays, firmly established by Schmidt v. Air Products Canada, [1994] 2 S.C.R. 611. Contribution holidays are permitted, notwithstanding “exclusive use” language. Again, if we look behind the application of this reasoning as a matter of trust law, there is an underlying economic problem that continues to give rise to the issue. Contribution holidays permit plan sponsors to run pension plans as “profit centres,” using speculative investments to reduce their contributions to the plan. A study by Gil Yaron of federal pension plans in 2005 found that, but for the contribution holidays taken in prior years, the sample’s pension plans would be fully funded. The rules driving contribution holidays are in the Income Tax Act, and there has been widespread call for their revision (i.e., an increase in the amount of surplus that can accumulate in a pension plan fund, and a corresponding limitation on the application of surplus to contribution holidays).

Costs of claims

The Supreme Court held that the costs of claims brought against the fund need not be paid from the fund. It discusses different types of claims, and more or less found that costs of bringing claims that aid in the clarification of administration of the fund may be paid from the fund, but adversarial claims need not. The plaintiffs, who took the case on contingency, argued that this ruling will deter or prevent some meritous claims being brought by employees, particularly non-union and retiree claims, who face significant financial limits in their ability to bring claims at all. It is always difficult to measure these sort of “incentive effect” arguments, and it is not clear that such claims would be discouraged as a result. However, the Arthurs Report did suggest that there be adequate retiree access to a dispute resolution process that would at least facilitate legitimate retiree claims.

Impact on other cases

Because Kerry comes in a line of related cases, there is some speculation that the Supreme Court is “rolling back” some earlier decisions that were thought to have expended the use of trust law in pension litigation. It is not clear that the original cases (from Dominion Stores through Schmidt to Monsanto Canada v. Ontario, 2004 SCC 54) were an “expansion” of either the ambit of trust law or retiree and employee rights. Equally plausible is that an area of compensation not often examined became, as a matter of balance sheets of employers and bargaining for unions, very important to examine in more detail, and as a result, positions were expressed legally, often using trust law. Other factors intensified this focus, including a movement to mark-to-market accounting, rapid boom-bust financial cycles and maturing demographics which present signficant challenges to employer-sponsored pension schemes. I note too that that the Court did not expressly over-rule (and distinguished) other case law that supports employee and retiree claims based on “exclusive use” language in trust documents, including Markle v. Toronto, (2003) 63 O.R. (3d) 321 and Aegon v. ING, (2003) 179 O.A.C. 196.

However, overall, there is a sense in which the Court has limited the extent to which exclusive beenfits language can be used to support employee or retiree claims, and other pension surplus cases now in process in lower courts now face an adverse new precedent.

Implications for labour movement in particular

Although I argue above that this decision (and any of the Kerry “line” of jurisprudence) will not create or erode pension plan provision in Canada, they do perhaps have the effect of putting employees and retirees on “notice” about the governance of pension plans and funds. These cases draw attention to the standards that will be used in managing these (very large) financial assets. In particular, they place an emphasis on unions to bargain greater voice in monitoring and managing pension plans and funds. Traditionally, most unionized workers and all non-union workers did not actively participate in pension fund governance. Pension plans, especially DB plans, are now effectively only provided in unionized workplaces: non-union workers are far less likely to have a plan.

Full post as published by The Court on August 22, 2009 (boomark / email).