OTTAWA A ruling by the Ontario Court of Appeal might make it easier for employers to convert their defined benefit plans to defined contribution funds.
The courts June 5 decision in Kerry (Canada) Inc. vs. DCA Employees Pension Committee, Justice Eileen Gillese ruled that in DB-to-DC conversions, surpluses from the defined benefit plan can be used to cover employer contributions to the DC plan. The ruling also paves the way to a smoother transition for employers that have a defined contribution component to their defined benefit plans and also for employers that pay expenses from the pension fund.
Its a correction, said Peggy McCallum, a lawyer specializing in pension and benefits at Fasken Martineau DuMoulin LLP in Toronto, the law firm that represented Kerry. It brings the law back to where employers thought it was before (this case). Its an important case from the perspective of employers and plan sponsors because it clarifies their rights in converting and maintaining a converted plan.
But Ari N. Kaplan, partner at the Toronto offices of Koskie Minsky LLP who represent the DCA employees, said the ruling is a very bad decision for employees and pensioners because it reduces the security of DB plans. It gives employers more incentive to switch from DB plans to DC plans.
Kerry, a multinational food manufacturer based in Tralee, Ireland, acquired the food processing business of the Woodstock, Ontario-based Canadian Doughnut Co. Ltd. known as DCA in 1994. In 2000, Kerry added a defined contribution component to the plan for new employees and for existing employees who chose to move into the DC plan. Because the defined benefit plan was overfunded, Kerry did not make contributions to the fund. It also used plan surplus assets to fund the DC contributions and to pay administrative expenses.
Former DCA employees filed suit over the use of the surplus assets and won in March 2006 in the Divisional Court of Ontario.
In overturning the divisional court ruling, Ms. Gillese wrote that because the surplus of the defined benefit plan went toward funding the defined contribution plan for the same group of employees, the use of the assets was valid.
Plan expenses and the contribution holidays were the two important developments in the case. And theyre the ones that will have lasting benefit for employers, said Ms. McCallum.
Malcolm Hamilton, a principal at Mercer Human Resource Consulting in Toronto, said the ruling is an important one.
It (ruling) confirms that there is a relatively convenient way to gradually transition from a defined benefit plan to a defined contribution plan without burning your bridges to a surplus that the defined benefit component might subsequently generate, said Mr. Hamilton. It (ruling) pretty much guarantees that there is going to be a case in the not-so-distant future about whether, in a partial windup, DC members get allocated some of the surplus.
Mr. Hamilton maintains that the decision also confirms the path that many private-sector companies already find themselves on the slow but steady transition to DC plans.
Mr. Kaplan said its too early in the process to determine what the DCA Employees Pension Committee will do next, but hes not ruling out a hearing in the Supreme Court of Canada.