Nolan v. Kerry (Canada) Inc. What Does the Supreme Court of Canada’s Decision Mean for Plan Sponsors? Moderator: Evan Howard Presenters: Douglas Rienzo Chris Brown August 13, 2009

Background In 1954, employer establishes DB plan In 1985, plan amended to permit plan expenses to be paid directly from fund and employer begins taking contribution holidays In 2000, plan amended to add DC component and employer uses surplus in DB component to meet DC contribution obligations Plan members object, arguing payment of plan expenses and contribution holidays are breach of trust

Background In 2007, after series of appeals, Ontario Court of Appeal finds that subject to terms of historical plan documents and certain other requirements, plan administration expenses could generally be paid from plan fund, and employer could use surplus to take contribution holidays with respect to both DB and DC components Plan members appeal to the Supreme Court of Canada

Plan Expenses No statutory or common law authority obliging employer to pay pension plan expenses – employer obligations determined by plan text and trust documents Silence of original plan documents does not create obligation requiring employer to pay plan expenses Provided plan documents do not require employer to pay plan expenses, “legitimate” expenses may be paid from plan fund

Plan Expenses “Exclusive Benefit” language does not prohibit others (including employer) from receiving “incidental benefits” from plan Appropriateness of expenses must be considered on a case-by-case basis No difference in principle between “internal” and “external” expenses (i.e., whether services are provided by third parties or by the plan sponsor itself is immaterial provided that such expenses are bona fide expenses necessary to administer plan)

Plan Expenses Ontario Court of Appeal’s analysis in Markle was not rejected What constitutes a “revocation” of trust remains unclear Not clear how to eliminate employer obligation to pay plan expenses

Contribution Holidays - General Historic wording of plan and trust documents is key factor Surplus may be used by employer to take contribution holidays under DB portion of plan as long as employer’s contribution formula provides for “actuarial discretion” – but no need to explicitly mention “actuary” Absent legislation stating otherwise, DB members have no right to require surplus funding to increase their security

Contribution Holidays – Cross Subsidization Single pension plan can: have DB and DC components whose members are beneficiaries of same trust with DB and DC funds held by different custodians provided plan documents and/or legislation do not prohibit it Plan was established for and intended to apply to “all employees” of employer – not inconsistent to designate DC members as beneficiaries of existing trust

Contribution Holidays – Cross Subsidization Contribution holidays can be taken in DC component applying DB surplus, subject to any prohibitions in (i) legislation or (ii) plan documents (determined by reference to contractual and trust law) Absence of statutory provision not indicative of prohibition Only part of plan had been closed to new employees – therefore no plan termination DB members had no vested interest in actuarial surplus of ongoing plan

Contribution Holidays – Cross Subsidization No legislative restrictions exist on either point Legislation permits retroactive amendment to add DC members to trust, and no conflict with trust law General prohibition on contribution holidays in stand-alone DC plans (Schmidt) does not apply Use of funds in trust to benefit either DB or DC component is allowed Employer was entitled to apply surplus in DB component to its DC contribution obligations once retroactive amendments were made

Questions?