Court Approves Use of DB Surplus to Fund DC Plan

According to Business Insurance, the court’s 5-2 ruling in favor of Kerry (Canada) Inc.’s move in 2000, upholds a July 2007 ruling by the Ontario Court of Appeal that the company was allowed to pay defined contribution plan expenses from its defined benefit pension fund after taking into account the fund’s surplus. The appellate court said an employer could stop paying pension plan expenses and take money from the plan, if the plan allows.

“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, according to Business Insurance. “There is no reason to penalize it by reducing the defined benefit fund surplus and thereby reducing its opportunity for contribution holidays.”

However, 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, Business Insurance reports.

Kerry closed its defined benefit plan in 2000 and shifted to a defined contribution plan. The defined benefit plan had an actuarial surplus, so Kerry took an allowable break from paying into the defined benefit plan and used surplus funds to pay $850,000 in plan expenses and to start a defined contribution plan. Defined benefit plan and DCA Employees Pension Committee members sued and sought to prevent the funds from being used for the DC plan (see  Former Canadian Employees Appeal Plan Expenses Decision ).

The opinion is available  here .