Plan sponsors looking to convert from a defined benefit (DB) pension plan to a defined contribution (DC) plan should review the Alberta Court of Appeal case of Halliburton Group Canada v. Alberta (Minister of Finance).
In Halliburton, the company was the sponsor and administrator of a DB plan that contained broad amendment powers. However, the plan text provided that the company could not make any amendments that would reduce the value of benefits vested in participants.
The company made several amendments to the plan, including converting the plan to a DC plan on a go-forward basis. Defined benefits that were accrued prior to the conversion of the plan were preserved as at the time of conversion. For the purpose of determining a participant’s DB pension, the amendment also froze salary and years of service as of the time of conversion.
However, the Alberta pensions regulator rejected this amendment on the basis that it interfered with vested rights contrary to the plan provisions and contravened the applicable pension legislation, and the Alberta Court of Appeal upheld the lower court and pension regulator’s decision.
The Court of Appeal considered the issue of whether the pension formula in the plan text was a vested right or part of the plan that could be reduced by amendment. The formula in the plan text was based on a participant’s highest five years of earnings out of the last 10 calendar years of his or her service prior to his or her normal retirement date. The Court of Appeal found that, based on the language of the plan, the participants had “a right to measure their pension entitlements on a prospective basis.”
From the time the members commenced participation in this plan they became entitled to a DB pension determined based on the formula, which in this case included prospective calculations. Accordingly, the amendment that would have effectively frozen a participant’s salary for the purposes of determining his or her DB pension as of the time of the conversion was not allowed.
The Halliburton case may be distinguished in certain instances based on the wording of the plan text. In some cases this decision may restrict an Alberta employer’s ability to freeze defined benefits on a conversion based on salary as of the date of the conversion. Although this is an Alberta case, it may still be persuasive authority to courts in other provinces.
Plan sponsors in any jurisdiction in Canada can learn a valuable lesson from this case. They will have to pay close attention to the language of their plans if they are considering converting to a DC plan.