The Alberta Court of Appeal recently rendered a decision that
will be of interest to pension plan sponsors who are considering
converting their registered pension plans from defined benefit to
defined contribution. In Halliburton Group Canada Inc. v.
Alberta, the Alberta Court of Appeal considered whether the
plan sponsor could freeze earnings at the date of plan conversion
for the purposes of calculating a defined benefit amount at
Halliburton sponsors several pension plans registered in Alberta
under the Employment Pension Plans Act (Alberta) (EPPA).
Effective January 1, 2002, Halliburton amended its final
average-earnings defined benefit (DB) plan to convert it to a
defined contribution (DC) plan. As part of the amendment, the
benefits accrued under the DB component were preserved, but salary
and service were frozen as of the date of the conversion amendment
for the purposes of calculating a final DB amount.
The Alberta Superintendent of Pensions rejected the freeze on
the grounds that it interfered with members' vested rights
under the plan and constituted a retroactive reduction of
members' benefits in violation of the EPPA. The Superintendent
ordered Halliburton to rescind the amendment, file revised
valuation certificates, and make any necessary additional
contributions to the plan fund with interest. The Alberta Court of
Queen's Bench found that Superintendent's decision was
reasonable and, in September 2010, the Alberta Court of Appeal
In its decision, the Court of Appeal considered whether the
formula for calculating the DB pension under the plan created a
vested right or was a provision that could be reduced by amendment.
The Superintendent argued that because the pension plan did not
include a provision for tying a determination date (i.e.,
the date of an amendment) to the formula, the formula must be taken
as a vested right. Halliburton argued that a benefit is vested only
if the member would be entitled to it if he or she retired
The Court of Appeal rejected Halliburton's argument and
agreed with the Superintendent. It found that at the point any
employee became a member of the DB component of the plan, he or she
was entitled to have his or her DB benefits calculated in
accordance with the DB formula. The DB formula required that the
compensation number used be the one that is the highest for five of
the member's last 10 years of employment "prior to [the
employee's] normal retirement date."
As a result, the court held that affected members had a vested
right to benefits based on their projected five years of employment
preceding their normal retirement date. According to the court, to
freeze earnings at an earlier date (i.e., the date of the
conversion amendment) would be to retroactively reduce members'
benefits in violation of the EPPA.
Halliburton did not appeal the decision of the Alberta Court of
Implications for Plan Sponsors
As a result of this decision, an employer who sponsors an
Alberta-registered DB plan or who has employees employed in Alberta
may now be prevented from freezing earnings of Alberta plan members
on conversion. Whether a plan sponsor may do so or
not depends on the terms of the current and historical plan
documents. If, as in Halliburton, the plan documents do not include
a provision for tying a determination date to the defined benefit
formula, the plan sponsor is likely prohibited from freezing
earnings on plan conversion. If the plan documents include a
provision for tying a determination date to the defined benefit
formula, the plan sponsor may still be permitted to freeze earnings
(subject to any other restrictions in the plan documents).
An Alberta employer considering a plan conversion should
carefully review the terms of its current and historical plan
documents in order to determine whether it could fall into the
Halliburton trap and be prohibited from freezing earnings on plan
conversion. Although the decision is binding only in Alberta,
sponsors in other provinces should also be on the lookout for
similar challenges in their home provinces and regulatory
pronouncements on the case.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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