Indalex: Know where to hang your hat

The impact of the Supreme Court of Canada’s Feb.1 decision in Sun Indalex Finance, LLC v. United Steelworkers (Indalex) on lenders and credit markets has already received a lot of attention, but those aren’t the only stakeholders who will be affected.

Parts of the decision will have broader ramifications for ongoing pension plan governance, specifically the pension law concept of “two hats.”

Historically, employers administering their own pension plans have understood their dual role through the metaphor of “two hats.” In this characterization, employers making decisions in their own capacity (for example, when amending or terminating a plan) wear their “employer” or “corporate hat” and are entitled to take into account the best interests of the business.

In contrast, employers making decision in the capacity of plan administrator (for example, when investing plan assets or determining member entitlements) wear their “administrator hat” and are required to take into account the best interests of plan members.

The Ontario Court of Appeal upheld this metaphor in its 2011 Indalex decision. (Justice Gillese, who wrote the Court of Appeal’s unanimous decision, is seen as the originator of the “two hats” concept almost twenty years ago.)

Changing fashions at the Supreme Court
In a notable turn, the Supreme Court of Canada significantly qualified the long-standing two hats concept in the final Indalex decision.

Justice Deschamps, writing for two of the seven judges, indicated that it was incorrect for an employer to view decisions that it made wearing  its corporate hat as entirely separate from the corporation’s fiduciary obligations to its pension plan members as plan administrator.

Deschamps recognized that the Pension Benefits Act (PBA) allowed employers to administer their own plans, though employers must be prepared to resolve conflicts where they arise.” She concluded, “Where interests do conflict, I do not find the two hats metaphor helpful,” adding, “What is important is to consider the consequences of the decision, not its nature.”

Justice Cromwell, writing for another three judges, did not even consider the two hats metaphor in his discussion of the employer-administrator’s duties. Instead, he found that the dual role of employer-administrator is “expressly permitted under s. 8(1)(a) of the PBA, but this provision creates a situation where a single entity potentially owes two sets of fiduciary duties (one to the corporation and the other to the plan members).”

Cromwell characterized a conflict of interest as a situation “when there is a substantial risk that the employer-administrator’s representation of the plan beneficiaries would be materially and adversely affected by the employer administrator’s duties to the corporation.”

During a restructuring under the Companies’ Creditors Arrangement Act (CCAA), as was the case in Indalex, Cromwell suggested that an employer-administrator bring any such conflict to the attention of the CCAA judge, as he or she is best situated to resolve it. Cromwell left open what actions may be appropriate in other circumstances. Presumably, these will depend on the particular situation.

Finally, Justice LeBel, writing for the remaining two judges (who both dissented in the case’s disposition, but not on this point) took another view. He relied on the two hats metaphor, but found that it provided no defence to the company’s conflicting duties to the insolvent corporation and the pension plan beneficiaries in this case.

The company “could not switch off the fiduciary relationship at will when it conflicted with its business obligations or decisions,” he wrote. For Indalex, LeBel found that it was impossible to wear two hats and said that it would have been appropriate, in this circumstance, for the company “to abandon this role [of administrator] and diligently transfer its function as manager to the independent administrator.”

Where does Indalex leave us? The two hats metaphor is admittedly a simplistic model for a more complex and flexible legal overlay. Nevertheless, the concept remains a useful distillation of centuries-old trust law principles that provide employer-administrators with a great deal of freedom and adaptability in the governance and administration of their pension plans. Post-Indalex, the concept will continue to help employer-administrators and their agents conceptualize and understand their various duties.

The two hats analogy also serves as a useful starting point for identifying conflicts of interest or duty.

The concept provides a baseline to help employer-administrators recognize when one of their two hats might be getting too small, fraying at the edges or dipping unfashionably low.

The two hats are not, however, the end of the story. Employer-administrators also need to ensure that their plan documents and governance policies carefully set out their duties and do not unintentionally expand the scope of their fiduciary obligations (or restrict their ability to act in the best interests of the employer).

Whether the issue is a potential conflict of interest/duty or the proper design of plan documents and governance policies, the employer-administrator may need to get  appropriate legal and other expert advice. This should not be viewed as a stigma.

The PBA makes some conflicts of interest inherent and unavoidable. Moreover, there is no perfect plan document or governance policy. The question is rather, to paraphrase Deschamps in Indalex, how to meaningfully address the administrator’s duty. That’s something we can all tip our hats to.

Mark Firman is an associate in the pensions, benefits and executive compensation practice at McCarthy Tétrault LLP, in Toronto.