Employers urged to beware litigation risk in converting pension plans

As the drive towards target-benefit pension plans continues to make headway in Canada, litigation risk for their sponsors is on the rise.

The jurisprudence is still embryonic in Canada but it’s instructive.

“Canadian stakeholders need to exam­ine the jurisprudence to get an indication of the trends and concerns that may affect them,” says Kathryn Bush, a pension lawyer and partner at Blake Cassels & Graydon LLP in Toronto. “It’s important to remember there are not many people who actually convert voluntarily.”

As it turns out, the public sector is leading the conversion charge. British Columbia has legislation in place that will require existing multi-employer negotiated cost plans that are currently under a solvency moratorium to convert their defined benefit provisions to a target-benefit framework. Those that don’t meet the deadline will see the solvency moratorium expire.

New Brunswick a hotbed

But it’s in New Brunswick where the courts are actually testing conversion legislation. Three separate cases are challenging the government’s unilateral decision to convert public sector plans.

Two of the cases involve arguments under the Charter of Rights and Free­doms. The third case also challenges the legislation but it doesn’t rely on Charter arguments. Instead, it invokes breach of contract, trust and fiduciary duty on the part of the government.

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Other cases have challenged efforts to introduce hybrid components to defined benefit pension plans. For example, an arbitration case called Via Rail v. Unifor in 2014 involved a proposed change from a defined benefit plan to a hybrid arrangement consisting of a defined contribution component.

Via Rail argued that con­tinuing to offer the defined benefit plan to all future employees wasn’t an option given the company’s pension liabilities at the time. The union objected to the shift­ing of risk involved in the inclusion of a defined con­tribution component, noting employees were likely less sophisticated than employers in their ability to understand and manage volatility.

The arbitrator conclud­ed that the defined benefit plan, with its 107-per-cent net replacement ratio, was “arguably dysfunctional” and that the hybrid plan would still provide generous benefits.

Another arbitration case, NCR Canada Ltd. v. International Brother­hood of Electrical Workers Local 213, arose when the company amended its defined benefit pension plan in 2002 by introdu­cing a defined contribution component. Employees who became members before the amendment could choose to stay in the defined benefit plan or move to the defined contribution component. Nineteen union members stuck with the defined benefit component.

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Some 10 years later, NCR announced an intention to amend the plan further to force all defined benefit members into the defined contribution compon­ent. The union grieved, arguing NCR was estopped from amending the plan in that way because of representations made to members when it proposed the first amendment.

The arbitrator found the company was in fact so estopped. The British Col­umbia Labour Relations Board refused to second-guess the arbitrator.

Lessons for employers

As it turns out, such cases offer some lessons. “The key is not to oversell because if people believe that you have promised them a pension of a set amount, they also believe that the failure to receive that amount must be actionable,” says Bush.

“What they believe depends ultim­ately on how good the original com­munication was, and that’s why sponsors should be careful to tone down the rhetoric.”

Julius Melnitzer is a freelance writer based in Mississauga, Ont. Legal Update is a new regular column in Benefits Canada.

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