Court Rules Canadian Firm Can Use Pension Surplus to Fund Defined-Contribution Plan

In a closely watched case, the Supreme Court of Canada has ruled that an employer had the right to use a surplus in a defined benefit pension plan to fund a new defined contribution plan.

Canada’s Supreme Court ruled 5-2 on Friday, August 7, in favor of Kerry (Canada) Inc.’s move in 2000, upholding a July 2007 ruling by the Ontario Court of Appeal that the Woodstock, Ontario-based food products company was allowed to pay defined-contribution plan expenses from its defined-benefit pension fund after taking into account the fund’s surplus.

According to court documents, Kerry closed its defined-benefit plan in 2000 and shifted to a defined-contribution plan. The defined-benefit plan had an actuarial surplus, or the pension fund was overfunded.

Kerry then took an allowable “pension contribution holiday,” according to the court decision, and stopped paying into the defined-benefit plan while using the surplus funds to pay $850,000 in plan expenses and starting a defined-contribution plan.

Defined-benefit plan and DCA Employees Pension Committee members sued and sought to prevent the funds from being converted. However, the Ontario Court of Appeal ruled that an employer could stop paying pension plan expenses and take money from the plan, providing the plan allows that.

“In this case, [Kerry] was successful [and] it does not have to pay into the defined-benefit fund to cover expenses at issue and may take contribution holidays,” Justice Marshall Rothstein wrote in the court’s majority opinion. “There is no reason to penalize it by reducing the defined-benefit fund surplus and thereby reducing its opportunity for contribution holidays.”

In a dissent, Justice Louis LeBel argued that allowing the surplus to fund the defined-contribution plan “disrupts this careful” balance between providing employers incentives to create pension plans and furthering the need to protect pensioners’ rights.

“The use of fund surplus to provide contribution holidays with respect to the defined-contribution plan violates the exclusive benefit provisions in the plan documentation as it benefits all but the defined-benefit members,” Justice LeBel wrote in his dissent.

Filed by Jeff Casale of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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