• they want to cut benefit funding and administration costs, as market volatility and low interest rates drive up solvency deficits and make planning more difficult;
• to achieve better planning and budgeting by making pension liabilities more predictable for purposes of financial reporting;
• changes in the accounting rules;
• to reduce regulatory complexity and limit the risks associated with their current DB plans; and
• to align local business decisions with those of international affiliates or parent corporations.

In this four part series I will examine these hurdles as they relate to the following ways in which a DB plan can be “restructured”: 

• plan termination/wind-up;
• closing the DB portion of the plan to new entrants and establishing a defined contribution plan for new hires; 
• implementing a soft ‘freeze’ where no more future accruals are permitted under the DB plan, but earnings increases, as they pertain to previously accrued pension benefits, are recognized; 
• implementing a hard ‘freeze’ where everything is closed off and all future service and earnings are transferred to the new plan/component; and 
• amending the plan to reduce/eliminate ancillary benefits provided under the existing plan terms.

Regardless of the way in which a company pension plan is restructured, it is key for employers to communicate these changes to their pension plans clearly and in a way in which their membership can understand.

Stay tuned for Part II of the plan restructuring series, which will address the specific issues relating to the first option - plan terminations/wind-ups.

• documents to be filed;
• plan amendment requirements (depending on whether defined benefits are being commuted or preserved); 
• funding agreement requirements if accrued defined benefits are being maintained in a separate fund;
• issues to be addressed in the actuarial valuation; 
• annuity purchase options;
• treatment of surplus (if any); 
• dealing with underfunded plans; 
• treatment of pensioners and deferred members; 
• employee excess contributions (for contributory plans); and 
• disclosure to members.

Similar to the Financial Services Commission of Ontario’s Policy C200-101 “Conversion of a Plan from Defined Benefit to Defined Contribution” (FSCO Policy), the Manitoba Policy Bulletin is quite detailed.

Interestingly though, unlike the FSCO Policy, the Manitoba Policy Bulletin does not require an administrator to give all members the option of preserving their accrued defined benefits. Rather, the Manitoba Policy Bulletin provides that only those plan members who are eligible for early retirement “must” be given the option of receiving a pension (by way of annuity) equal to their accrued defined benefits under the plan. The plan administrator, at its discretion, may decide whether this option will be made available to all plan members.

The Manitoba Policy Bulletin, however, goes on to suggest that plan administrators have members sign a form indicating “that the changes are understood and accepted”. Since members are not entitled to decline the conversion, however, it may be that some members may not be willing to sign a form indicating that they “accept” the change. More useful would be an acknowledgement by members that they understand the change, and understand their obligations under the DC plan going forward.

This decision arises from a grievance concerning the company’s decision to unilaterally convert its pension plan from a defined benefit plan to a defined contribution plan.

A new collective agreement was ratified in August 2008. The provisions dealing with the pension plan remained unchanged from the previous collective agreement, and the union failed to obtain the employer’s agreement to maintain the pension plan as a defined benefit plan. After ratification of the collective agreement, the union grieved the conversion of the pension plan and argued that such a change to the pension plan was contrary to the terms of the collective agreement. Specifically, the union argued that the collective agreement, which made reference to the pension plan, secured the “defined benefit promise” and that any substantive change to the “defined benefit promise” could only be achieved through the collective bargaining process.

The arbitrator concluded that since the pension plan formed part of the collective agreement, the amendment power contained in the pension plan, which provided that the company “reserves the right to amend the Plan or discontinue the Plan either in whole or in part at any time”, also formed part of the collective agreement. Additionally, there was nothing in the language of the collective agreement which limited the company’s right to amend the pension plan unilaterally or prevented the company from making changes to the pension plan for the duration of the collective agreement. Therefore, the company did have the power to unilaterally amend or discontinue the pension plan.

The arbitrator also noted that since the union had an opportunity to deal with the pension plan conversion through the collective bargaining process, it could not revive the issue through the grievance procedure.

The arbitrator’s decision lends support to the argument that an employer’s ability to amend a pension plan is not necessarily prohibited simply because the pension plan is incorporated by reference into a collective agreement. The employer’s amendment power is determined by the language in the collective agreement and the pension plan documents. It is therefore necessary to review the terms of the collective agreement and the relevant pension plan documents in order to determine whether a collectively bargained pension plan may be amended without union consent.

While the case has yet to be tried on its merits, an interim decision recently released offers additional lessons on the limitations of relying on releases provided by plan members as a defence against plan member claims.

Pension plan members who took up a DB/DC conversion option in 1997 (i.e., whereby plan members are offered the opportunity to exchange their DB benefits for an amount in a DC account) commenced a claim against their employer and its actuarial consulting firm, in which they alleged, among other things, breaches of fiduciary duty and negligent misrepresentations in connection with the communication of the DB/DC conversion option.

The core of the plaintiffs’ claim is that their pension benefits under the DC plan were much less than they would have been under the DB plan. The specific alleged breaches included: (i) a failure to advise the plaintiffs of the personal considerations which they ought to have had in mind when deciding whether or not to accept the conversion offer; (ii) negligent misrepresentations in relation to preparation of the written materials; and (iii) a failure to advise the plaintiffs of the risks associated with the transfer of their pension benefits to the DC plan.

From 2004 to 2008, the employer laid off a number of employees and entered into settlements, for which the employees executed agreements releasing the employer from liability from claims that the employees may have against the employer (the Releases). The plan members who executed the Releases discontinued their claims against the employer, but continued in their action against the consulting firm. The consulting firm brought a summary trial application to dismiss the claims of these plan members, arguing that they too were subject to the Releases.

In addition to other matters, the Court considered whether or not the reference in the Releases to the release of agents from liability applied to agents of the employer and determined that the Releases were ambiguous. Applying a legal principle whereby ambiguities are resolved against the drafter, the Court found that the reference in the Releases to the release of agents from liability did not apply to agents of the employer.

Risks of Transfer from DB to DC Platform

Although this decision was only an interim decision, it highlights the challenges to plan administrators/employers in meeting the legal standard for communicating with plan members about their options to transfer from a DB to a DC structure. If the case goes to trial on the merits, it will be interesting to get further details in that decision on the allegations against the employer.

From the few details in this decision it appears that the employer followed a fairly standard process, engaging a reputable actuarial consulting firm, presenting the conversion option by way of written materials and informational seminars and providing plan members with various actuarial projections and models. A decision on the merits will be instructive in terms of why the plan members allege the employer fell short of meeting its legal obligations and will hopefully offer guidance on what’s required of plan administrators/employers.

Importance of Proper Drafting

Even though it’s not clear from the decision whether or not the intent was for the Releases to apply to agents of the employer, there’s an important lesson to be learned about the inherent risk in relying on releases (or other contractual exculpatory clauses) to limit liability, rather than ensuring that legal duties are properly fulfilled.

Essentially, the Court was unable to conclude that the term “agents” covered the consulting firm, because the language in the Releases was not precise on this point. The Court highlighted the complex sentence structuring in the Releases, noting that the relevant part of the Releases was “part of a lengthy sentence that is grammatically awkward. There are eleven commas and the word “and” is used four times.” Such complex sentence structuring can give rise to ambiguities.

It is therefore important in releases provided on termination of employment, as with all other employee agreements and communications, that they be drafted clearly using “plain language” as opposed to legal jargon. As well, if particular pension issues are intended to be covered by a release provided on termination of employment, these issues should be specifically referenced. Absent a specific reference, it may be difficult to rely on the release to defend against claims related to those particular pension issues.