We have consistently heard the desire of pension plan sponsors to minimize escalating pension costs. The comfort food being digested by some is to convert their plan from a defined benefit(DB)model to the more financially predictable defined contribution(DC)formula. While it is true that a sponsor will lessen its financial risks by converting to a DC plan, it very well may be taking on additional legal risks. The coming into “force” of the Guidelines for Capital Accumulation Plans(the CAP Guidelines) by the Joint Forum of Financial Market Regulators serves as a timely basis to explore these legal risks in DC plans.

One potential legal risk concerns the design of investment options and information and decision-making tools to be offered to employees. The CAP Guidelines direct a plan sponsor to “ensure” that a range of investment fund options be made available, consider “the degree of diversification” and “level of risk” associated with the investment choices, and provide adequate decisionmaking tools to the employees. If an employee’s pension is poor because the investment performance does not meet the employee’s expectations, a legal claim might allege that the sponsor owed, and breached, a fiduciary duty to the employee by failing to provide adequate investment choice or meaningful access to a decision-making apparatus and is therefore responsible for damages arising from the poor investments.


It is not uncommon for the administrator to employ third-party service providers to give employees investment information or advice, or to assist them generally with making related investment decisions. The CAP Guidelines urge administrators to employ service providers, including employee investment consultants, in circumstances where the administrator believes it “does not have the necessary knowledge and skills to carry out its responsibilities” under the plan. Administrators may be responsible for the actions of investment consultants to the extent they are carrying out an administrative function under the pension plan. The statutory rule requiring an administrator to supervise and ensure the suitability of its agents has been imported into the CAP Guidelines as applying to employee investment consultants. This added administrative dynamic is not traditionally present in DB plans.

Related to the potential delegation risks for sponsors in DC plans are the potential for increased communication risks. More frequent communication means that there may be a greater risk of a miscommunication or misunderstanding. This can increase the potential for an employee claim in negligent misrepresentation against either or both the service provider and the administrator. The risks for the administrator are that much more amplified when it is not the administrator itself, but a third party employed by the administrator, who is the one engaging in the communication.

A real emerging legal issue in DC conversion design concerns the extent to which a sponsor may use a surplus in the DB trust fund to fund its normal costs under the DC arrangement. Employees argue that taking DC contribution holidays can be unlawful as contravening the DB pension trust. Recent case law, such as the Kerry decision of the Ontario Divisional Court, supports this argument. The scope of application of this principle will be determined by a higher authority, but if upheld, it would complicate one of the most attractive reasons for an employer seeking to implement a DC conversion in the first place.

In conclusion, it should not be inferred that DC plans are not appropriate models to deliver employee benefits. They may well be very appropriate, depending on the nature of the employer and the workforce. However, while a DC conversion may be an easy pill for sponsors to swallow, because of the uncertain legal risks involved, it may not, in all cases, be good medicine.

Ari Kaplan is a partner at Koskie Minsky LLP in Toronto. akaplan@koskieminsky.com

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