Pension Options

Today's volatile market may be nothing more than a combination of a return to the mean after the heady days of the pre-21st century bubble and a run-of-the-mill recession. But in this environment it is likely that more employees will find reasons to launch more lawsuits against their employers for something akin to breach of fiduciary duty.

The class action lawsuit launched in New Jersey over the summer against Lucent Technologies is a case in point. As you undoubtedly know, Lucent was a high-flying telecom stock that began its long financial descent early this year, along with Nortel Networks and all the other high flyers. In the lawsuit, employees allege that Lucent encouraged them to buy company stock to put in their pension plans and, that at a certain point, executive officers knew that the stock was "an inappropriate retirement investment."

The employees also say that Lucent's quarterly and annual financial reports were not sufficient to warn them against investing in the stock. They want their employer to give them enough money to make them 'whole.' In other words, their pensions should suffer no monetary loss as a result of holding Lucent stock.

Such a suit has not yet been launched in Canada (the Nortel suit has a different focus). But it's coming. Not just because the market has declined, but because so many defined benefit (DB) plans have been replaced with defined contribution (DC) plans. Sixty-two per cent of federally regulated plans are DC--although that represents only 2% of the total assets in federally regulated plans, according to the Pension Benefits Standards Act 2000 Annual Report. Still, 2% of $80 billion is a hefty $1.6 billion.

More ominous still is that three million Canadians have $60 billion in over 40,000 DC plans, which include group registered retirement savings plans, deferred profit sharing plans and employee profit sharing plans.

In a consultation paper on these plans (released in April), Dina Palozzi, the former chair of the Joint Forum of Financial Market Regulators, points out that "there is a growing trend in [DC] plans to make members responsible for selecting their own investments. These decisions affect their retirement income and underscore the importance of access to clear, objective information about the risks and benefits of different investment options."

It is only a short leap from that sentiment to one that focuses on how much education is enough to ensure that an employee is a prudent investor. When the first lawsuit comes, fingers will point at employers, who have a duty of good faith toward employees. It will be a simple task to assess the value of a DC plan and what its value would have been if investments had been kept in the DB model.

Back at Lucent, Michelle Davidson, the company's spokesperson in New Jersey, says "we are confident that the allegations of fraud have no basis in facts or law." She adds there are several similar cases where this view has prevailed.

This stance hasn't been tested in a Canadian court. But several Canadian lawsuits against financial advisers have been thrown out on the grounds that advice is simply that and it is up to the investor to make a prudent decision. There's no knowing how such a suit will be settled in this country, but I'd bet my bottom dollar one is coming. BC