As a result of today’s difficult economic times, many employers are evaluating their retirement programs and considering how they can reduce benefits. The decision of the New Brunswick Court of Queen’s Bench in Quinn v. New Brunswick (Minister of Finance) contains guidance on the common law analysis to be applied when considering a potential option to eliminate indexing.
The plan at issue was established by the province of New Brunswick to provide pension benefits to certain unionized employees. As a result of a substantial deficit in the plan, the actuary advised the administrator that it would be necessary to take measures to reduce benefits. The administrator applied to the Court for direction with respect to the proposed amendments, including whether it could amend the plan to reduce or eliminate indexing benefits for active and retired members.
A unique feature of the plan was that it was not subject to provincial minimum standards pension legislation and hence, the issues had to be decided based on the common law. However, the case is relevant to plans that are subject to pension legislation since the amendment provision in the plan reflected the statutory requirements regarding the inability to reduce accrued benefits.
The plan terms prohibited amendments that retroactively reduced benefits earned by a member in respect of pensionable service prior to the date of such amendment. The issue was therefore whether an amendment eliminating indexing would violate this amendment provision.
The Court held that the proposed amendments reducing or eliminating indexing benefits for active members did not have the effect of reducing vested benefits, because the indexing benefits under the plan did not vest until members’ termination, retirement or death. As well, the Court interpreted the prohibition on amendments that retroactively reduced benefits earned by a member in respect of pensionable service prior to the date of such amendment as a prohibition on amendments that reduce “benefits acquired by the member at termination from the plan by the accumulation of Pensionable Service”. Accordingly, the Court held that the proposed amendments reducing or eliminating indexing benefits for active members were within the amending power under the plan and therefore permissible.
The Court also considered whether the plan could be amended to eliminate the cost of living adjustments for retired members, and specifically whether retired members could be said to vest annually in each indexing adjustment. The Court determined that such benefits vest once notwithstanding that the indexing formula in the plan did not necessarily give rise to an increase each year. It was sufficient for vesting purposes that the increase be calculable in accordance with the terms of the plan.
It is important to point out that the Court emphasized that it came to its conclusion that the indexing benefits did not vest until members’ termination, retirement or death “[c]onsidering the provisions of the Plan, the nature and purpose of the COLA benefit as set out above and the intent of the parties in enacting section 15.04(viii) of the Plan…”. In different circumstances, it would be open to a court to find that benefits vest pre-termination.
Further, as I indicated, a unique factual aspect of this case is that the plan at issue was not subject to pension standards legislation. For most pension plans, applicable pension standards legislation will impose additional restrictions related to plan amendments that will also need to be considered.