It is clear at law that when an employer assumes the role of pension plan administrator, it becomes a fiduciary. However, the employer does not become a fiduciary for all plan purposes—just for those functions that relate to the administrator’s duties.
Competing priorities
Different legal consequences result depending on whether the employer’s function is considered an administrator function or an employer function. Acting as administrator, the employer’s fiduciary duties require it to act solely in the members’ best interests. Acting as employer, on the other hand, it may act in its own (financial) self-interest, subject only to a duty of good faith. Case law has held that the duty of good faith requires the employer to act in a manner that is consistent with the plan terms and applicable legislation but does not prevent the employer from preferring its own interests to those of plan members.
For employers, resolving such conflicts of interest can be tricky. First, it is necessary to determine whether the matter involves an administrator or an employer function. In some cases, the answer is easy. But when amending the plan, is the sponsor subject to a fiduciary duty to act in the members’ best interests?
This is a recurring issue in pension litigation. In Lloyd v. Imperial Oil Ltd. (2008), for example, plan members challenged the employer’s right to eliminate a subsidized early retirement benefit. The court reaffirmed the principle first established by the Pension Commission of Ontario in a 1995 case that an employer exercising its power of amendment is not subject to a fiduciary duty to plan members.
Hats off
So far, the courts have applied this principle (known as the “two hats” approach) in several cases where the employer and administrator functions were distinct under the pension legislation. But the question remains, How will the courts apply this approach in situations where the distinction between roles is not as clear?
One such area is pension plan funding. Under pension legislation, the employer’s contribution obligations are determined by an actuarial report. While the employer has an interest in the actuarial valuation, pension legislation assigns the responsibility for ensuring that the report is prepared and filed to the plan administrator. In its administrator role, the employer must ensure that the plan is “appropriately” funded.
The B.C. Supreme Court decision in Lieberman v. Business Development Bank of Canada (released Sept. 29, 2009) is one of the few cases in which the two hats approach has been applied in the context of plan funding. The issue in Lieberman was whether the employer was in breach of its fiduciary duties when it gave active employees a contribution holiday without providing an equivalent benefit to retirees. The Court held that the bank made changes to the employee contribution requirements in its capacity as an employer, not as an administrator. Therefore, it did not breach any fiduciary duties owed to the retirees.
Contrast this with how the court applied the two hats rule to contribution decisions in Morneau Sobeco Ltd. Partnership v. Aon Consulting Inc. (2008). The Ontario Court of Appeal refused to strike a claim against the members of the audit committee of an insolvent company in connection with an actuarial valuation that allegedly resulted in plan deficits, despite a Companies’ Creditors Arrangement Act order releasing company officers from liability. The Court of Appeal reasoned that the releases had been granted to audit committee members in their employer capacity, not in their administrator capacity.
How can board members and management protect themselves from liability and expensive lawsuits? First, distinguish between employer and administrator functions and ensure that all
decision-makers know which capacity they’re acting in. Second, review insurance and/or indemnities for pension committee members to ensure that they will apply to officers acting in their fiduciary capacity in relation to the company’s pension plan. Corporate indemnities, which require a director to act in the corporation’s best interests, may not apply to the fiduciary function and may need to be supplemented with other measures.
Paul Litner is a partner in the pension and benefits department at Osler, Hoskin & Harcourt LLP.
plitner@osler.com
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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the November 2009 edition of BENEFITS CANADA magazine.