Legal case highlights thorny issue of consent benefits under DB pension plans

An important case around an employer’s ability to change its practice in granting consent benefits under a pension plan is winding its way through the courts.

The case, Hall et al v Canadian National Railway, involves a dispute by a group of former employees of the Canadian National Railway Co. who resigned, prior to age 55, between the years 2007 and 2010. Their defined benefit pension plan allows for early retirement where a person’s age and pensionable years of service totals 85. Historically, it also provided that these individuals would be entitled to an unreduced, early retirement pension payout, or a deferred pension, subject to the consent of CNR.

Read: Alberta Pension Services Corp. ordered to pay retiree $267K for misrepresentation of benefits

In June 2006, CNR advised its employees in writing that consent would no longer be given for those employees who resigned from employment prior to age 55. According to the plaintiffs in this case, they’d be entitled to an unreduced commuted value of their pension, or its present value, but for this change in practice by CNR. The plaintiffs allege that CNR had historically granted its consent to all employees, and consistently provided assurances orally and in writing that those employees wishing to resign prior to age 55 would receive their pensions on an unreduced basis.

After CNR’s 2006 announcement, the plaintiffs brought a claim on the basis of a breach of fiduciary duties owed to them as beneficiaries under the pension plan. They later sought to amend their claims to allege that CNR owed to them and breached its contractual duties of good faith and honest performance. They further alleged that the change wasn’t valid since it wasn’t done as an amendment to the plan authorized by the Office of the Superintendent of Financial Institutions.  CNR contested the proposed amendments to the plaintiffs’ claim on the basis that they created new causes of action that were barred by the applicable limitation period.

In 2018, a preliminary decision concluded that the allegation of breach of contract was a new cause of action that wasn’t plainly and obviously of no merit, but that the limitation period for adding a new cause of action had expired for all but one of the plaintiffs. As a result, the plaintiffs were permitted to amend their statement of claim in respect of that one plaintiff only. 

Read: Employers urged to beware litigation risk in converting pension plans

In 2019, on appeal to the Manitoba Court of Queen’s Bench, the court agreed with the earlier decision. It further noted its agreement with the suggestion that an amendment to the pension plan was unnecessary because the plan already contained a requirement for employer consent.

CNR argued, on the basis of the B.C. Court of Appeal’s decision in Patrick v. Telus Communications Inc., that there was no breach of the legislation or the terms of the pension plan, even when consent to an unreduced pension is denied after granting it for years, since the right to an unreduced pension hadn’t yet vested for any of the plaintiffs. However, the court declined to make a determination on this issue because the action was only a preliminary stage and a determination of this issue on the merits would occur at a later stage of the proceedings.

Although this case has yet to be decided on the merits, this action demonstrates the thorny issue of whether — and how — an employer can change its practice with respect to the granting of consent to consent benefits. The Telus case had involved a change in the organization’s policy from virtually blanket approval to blanket refusal of consent to unreduced pensions barring “exceptional circumstances,” after Telus’s benefits committee became convinced that unreduced pensions were no longer justifiable in the current market. 

Read: Ontario pension bill includes changes to e-communications, missing members

In that case, the court accepted Telus’s arguments respecting the discretionary nature of the consent benefit. It found Telus hadn’t evidenced an intention to either forego its strict legal rights and, further, that there was no lack of good faith on the part of Telus in coming to that decision.

The CNR case pushes this envelope further, raising the question of whether an employer can announce it will never consent to such benefits in future in respect of a group of eligible members who previously received the benefits. 

The pension regulators have been focusing on consent benefits. In 2011, the OSFI released a policy advisory providing details of its expectations with respect to consent benefits. In order for a consent benefit to be considered as such, a plan administrator, in its fiduciary role, must have the discretion to grant or deny the benefit, according to the OSFI. It also suggested that, in determining whether an administrator truly has discretion to grant or deny a benefit, documents or agreements outside the terms of the plan may be relevant and must be considered along with the plan terms. As well, an important consideration in determining whether a benefit is subject to consent is how its eligibility has been communicated to members, along with the past practice in granting consent. 

The OSFI expects member communications to clearly indicate that consent benefits are subject to the administrator’s discretion and may be denied. Further, employers are expected to exercise their discretion in a manner consistent with their statutory and fiduciary duties, and to have clearly documented procedures in place that are followed in administering consent benefits.

Read: OSFI releases new guides for DC, DB disclosure requirements

The ultimate decision in this case — assuming it isn’t settled prior to a final determination — should provide valuable guidance to employers seeking to withhold consent to consent benefits provided under their pension plans, or that wish to amend their practice to eliminate the granting of approval to consent benefits altogether. 

In the interim, employers should be aware of the potential risks in making changes to their practice of granting consent. They should also take steps to clarify their member communications and to carefully document their decisions both as being consistent with the plan terms and based on proper and valid considerations for the exercise of such discretion.