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Pensions & Benefits Law A Discussion of Canadian and U.S./Cross-Border Pension & Benefit Legal Issues

Mixed Result for CCWIPP Trustees in Pension Plan Investment Prosecution

Posted in Canada Pensions & Benefits Law, DC Plans, Investments, Plan Administration

The highly anticipated judgment of the Ontario Court of Justice in the Canadian Commercial Workers Industry Pension Plan (CCWIPP) trustee prosecution (PDF) was released on December 7th. The case centered on whether members of CCWIPP’s Board of Trustees, as administrator, and the Investment Committee (a subset of the Board of Trustees) breached their obligations under the Ontario Pension Benefits Act (the PBA) in relation to the investment and administration of CCWIPP funds.

The decision of the Court was a mixed bag for the defendants and for the Financial Services Commission of Ontario (FSCO): members of the Investment Committee were convicted of breaching the quantitative investment rules under the PBA, while the Board of Trustees was convicted of failing to supervise the Committee in this regard.  However, all defendants were found not guilty in relation to the offences of failure to exercise the care, diligence, and skill of a person of ordinary prudence in dealing with pension plan assets.

Increased Vulnerability of MEPP

By way of background, CCWIPP is a multi-employer, defined contribution (DC) pension plan for grocery, food service and production sector employees. At the time of the alleged offences, CCWIPP had assets of approximately $1.1 billion. In 2006, after a FSCO investigation, a variety of charges were laid against the pension plan’s Board of Trustees and Investment Committee members in connection with certain investments made with CCWIPP funds between 2002 and 2003. These investments were made in Caribbean real estate and other business ventures that the Crown alleged should not have been made given their risk.

At the outset of her 124 page decision, Madam Justice Beverly Brown provided an overview of the CCWIPP, noting that it was a multi-employer DC plan, which did not require employers to “top-up” any unfunded liability. Furthermore, as a multi-employer plan, the CCWIPP was not eligible for protection by the Pension Benefits Guarantee Fund, and any losses could result in devastating consequences for members and former members. Justice Brown held that this increased vulnerability of the CCWIPP members should be taken into consideration when interpreting and applying the PBA.

Meeting the Standard of Care

In terms of the standard of care, diligence, and skill expected from pension fiduciaries, the Crown alleged that the defendants did not make thorough, complete and independent investigations before making these investments. The Court noted that pension plan funds should be invested prudently, and that capital should not be placed unduly at a risk of loss. However, the Court also found that pension funds should be invested so that they are capable of generating a suitable rate of return and an element of risk may be appropriate in the circumstances.

The Court noted that although the standard of care for this Board of Trustees and Investment Committee was ordinary prudence (as there was no evidence they had special skills), it is incumbent on a board of trustees or investment committee with only ordinary prudence to obtain advice from consultants or experts to supplement their knowledge.

The Court held that expert evidence was required to provide necessary context to the facts of the case. Such evidence would help it understand pension industry standards on the investment of pension funds in various businesses, and assess what kinds of investments and risk would be appropriate or inappropriate for this pension fund. However, at trial, the Crown failed to adduce any expert evidence.

The Court held that it “simply did not have evidence to assist in reviewing and analyzing this raw material which is put before the court in evidence … [and was] unable to understand how to apply the prudent person standard to the various transactions”. As such, the defendants were found not guilty in relation to the offences of failure to exercise the care, diligence and skill of a person of ordinary prudence in dealing with pension plan assets.

The Court also rejected the Crown’s argument that the defendants were responsible for demonstrating that they had conducted an appropriate investigation and acted prudently in making their decisions, since such an approach would amount to a reversal of the Crown’s onus to prove the charges. The judge stated, “the question is not whether the administrator can show prudent action, but rather whether the Crown has proven that the decisions were imprudent”.

Compliance with Quantitative Limits Required

Turning to quantitative limits, the Court noted that the PBA does not permit more than 10% of the book value of the pension plan assets to be invested in any one person (among other requirements) in order to limit a pension fund’s exposure to risk. In considering CCWIPP investments in a holding company that invested in Caribbean properties, the Court found that the total exceeded the 10% threshold, and therefore violated the quantitative limit rule under the PBA.  The Court held that the Investment Committee acted as the “administrator” of CCWIPP in making investment decisions, and as such, its members were found guilty of breaching the rule.

According to the Court, the purpose of the rule is to ensure adequate diversification of the investments of the pension plan, and as such, it captures any acts by the administrator which result in the holdings of the plan being in excess of the limitations. The Court also rejected the defence of due diligence, given that there was no evidence that the members of the Investment Committee turned their minds to the quantitative limits.

Delegated Duties Still Require Adequate Supervision

Finally, in terms of delegation by the Board of Trustees to the Investment Committee, the Court held that while delegation of investment of the pension fund is permitted under the PBA, the administrator is obligated to supervise the agent investing the funds in a prudent and reasonable manner. On the facts, the Court found that the CCWIPP Board of Trustees failed to prudently and reasonably supervise the members of the Investment Committee relating to the quantitative limits, and convicted the members of the Board of Trustees of breaching Section 22(7) of the PBA in this regard.

The defendants will be sentenced in January 2010. They are each liable for a fine of up to $100,000.