HR Professional - December 2007/January 2008 - (Page 20)

C OM P E N S AT ION B Y PA U L T I M M I N S IMPACT OF THE KERRY DECISION ON EXPENSES, CONTRIBUTIONS AND SURPLUS O ‘‘ n June 5, 2007 the Ontario Court of Appeal released its decision in Kerry (Canada) Inc. v. DCA Employees Pension Committee (Kerry). Kerry’s employees challenged the company’s payment of expenses from the pension fund and use of surplus from the defined benefit (DB) component of a plan to make contributions to the plan’s defined contribution (DC) component. fund. The court reasoned that neither the Ontario Pension Benefits Act nor basic trust law principles require the employer to pay pension plan expenses. Use of DB Surplus for DC Contributions The court ruled that the employer was able to amend the plan to use the DB surplus to cover the employer’s obligation to the DC plan. It also found that the introduction of a DC provision was an expansion of the existing plan and did not create a second pension plan. The facts When food supplier Kerry (Canada) Inc., bought a business from the Canada Doughnut Company in 1994, it assumed an existing pension plan. Unfortunately, according to the original trust agreement, contributions were only to be used for The employer can, in most cases, validly amend the plan to authorize the payment of legitimate plan expenses from the pension fund. the “exclusive benefit” of plan members, retirees and other beneficiaries. Kerry revised the plan to include that third party expenses, such as audit services, could be paid from the pension fund. In 2000, Kerry made another amendment to introduce a DC component. All new employees were required to join the DC component, while existing plan members had the option of remaining in the DB portion or switching to the DC. This amendment also provided that surplus in the DB component could be transferred to the DC component and used to satisfy the employer obligation to contribute to member’s DC accounts. ’’ The decision Payment of Plan Expenses Implications The employer can, in most cases, validly amend the plan to authorize the payment of legitimate plan expenses from the pension fund. The court determined that the fund could be used to pay third party service providers but not assets to the employer itself. The employer must still consider the nature of each expense and determine whether it can be properly paid from the fund. In Kerry, expenses related to the administration of the registered pension plan such as investment manager fees were properly paid but the employer was required to repay fees for a study of the possible addition of a DC component to the plan. Use of DB surplus to make DC contributions may be permitted if the plan is structured to make the DC members of the same plan. The court stressed that the DB and DC components were both part of the same plan, which is a necessary condition to be able to use surplus in this fashion. This use of DB surplus would not be possible if an employer establishes a separate DC plan, a group RRSP or a DPSP. This decision does not alter an employer’s obligation to fund the DB liabilities under a pension plan, nor does it change the benefits that a member accrues. But by permitting an employer to use fund assets to pay appropriate expenses, it may decrease the likelihood that surplus assets will accumulate under the DB provisions. Paul Timmins, LLB (paul.timmins@watsonwyatt.com) is a senior consultant with Watson Wyatt Worldwide. HR P R OF E S S I ON A L The appeal court concluded that the plan expenses (with a few exceptions) were validly paid from the 20 D e c e m b e r 2 0 0 7 / J a n u a r y 2 0 0 8

Table of Contents Feed for the Digital Edition of HR Professional - December 2007/January 2008

HR Professional - December 2007/January 2008 Contents Editor's Letter Contributors Leadership Matters Website Did You Know By the Numbers Technology Study News: Ontario Regulatory Enforcement Compensation News: Postponing Retirement Legal Compensation On Message Public Image Ltd. Building Brand Equity Research Strategy HR 101 Interview with Marshall Goldsmith Off the Shelf The Last Word

HR Professional - December 2007/January 2008

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