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© Copyright 2000 Rogers Media. The following article first appeared in the February 2001 edition of
BENEFITS CANADA magazine.
The indexing issue
A Manitoba court has ruled that certain retirees have a vested right to future pension
increases.What are the implications for your pension plan?
By Paul Litner
Plan sponsors often ask about their legal obligation to provide increases to pensions being paid out. It is
a practice referred to as indexing since increases are usually linked to a rise in the cost of living
gauged by measurements such as the Consumer Price Index (CPI).
Indexing for retirees is currently not mandated as a minimum standard under pension legislation. However, a
recent decision of the Manitoba Court of Queen's Bench has affirmed the importance of the pension promise
(as contained in the plan terms) in resolving this issue. It has indicated that, much like rights to
surplus, rights to future pension increases can vest in retirees and--once vested--cannot be removed by the
employer through future plan amendments.
ENTITLEMENT MENTALITY
In Dinney vs. Great-West Life Assurance Co., a group of former employees of Great-West Life brought
an action against the insurer and the trustees of the pension plan. They claimed that they were entitled to
annual increments on their annuities based on the investment performance of the pension fund, under the
terms of the pension plan in effect when they retired.
Great-West Life had maintained a pension plan for its employees since 1943. In 1973, it amended the plan to
provide that increments in annuity payments would be granted annually in an amount determined by the
company and related to the investment performance of the pension fund.
In 1990, the insurance company changed these indexing provisions, giving itself the right to exercise
complete control over the calculation of pension increments. Three years later, it amended the plan again.
The revised document stated that the maximum amount of allowable pension increments was now limited to a
percentage of the CPI, in accordance with the Income Tax Act regulations.
The court ruled that the plan language put in place in 1973 created a vested right to a retirement annuity,
increased in the manner specified in the plan, for all members who retired while it was in effect. The
court also stated that this vested right could not be removed by the plan sponsor through future plan
amendments, even though the plan contained broad powers of amendment.
In this regard, the ruling is similar to the Supreme Court of Canada's decision in Dayco, which
declared that non-pension post-retirement benefits vest indefeasibly at retirement. The Manitoba court did,
however, acknowledge that such vested rights may have to be limited by tax laws in appropriate
circumstances.
PROBLEM PREVENTION
While this case is clearly limited to the language of the pension plan in question, it does contain a
number of important legal principles, including:
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Recognition that there is no inherent legal right to indexing. It must be a feature of the pension
plan.
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Historical plan documents are relevant in determining whether there is a legal right to future pension
increases. The fact that indexing is ad hoc or purely discretionary under the current plan documents is
not determinative of the rights of members retiring before such documents were brought into effect.
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Future pension improvements can be a right which vests in plan members at retirement. Once vested, they
cannot be removed by future amendments if the plan does provide for annual or other periodic pension
improvements that are not clearly in the plan sponsor's discretion.
This case is not cause for alarm. But in the wake of the decision, wary plan sponsors should carefully
review their plan documents and employee communications with respect to pension increases.
They need to ensure that their indexing practices are consistent with the pension promise, or are spelled
out in their pension plan documents.
Paul Litner is a partner in the pension and benefits department at Osler, Hoskin & Harcourt LLP in
Toronto.
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