Editedy by Stephen Antle
Pension misrepresentation claims against Canadian employers and actuarial firms are on the rise. Rare until recently, the full exposure posed by such claims remains unknown, because few cases have yet come to trial. Any employer with a pension plan may be sitting on time-bomb of litigation and liability.
Pension misrepresentation claims pose a quadruple threat. First, because of the numbers of current and retired employees who are potential claimants, and because of the amounts of money involved, potential exposure is enormous.
Second, errors in pension communications often do not surface until years after they were made, often when employees approach their retirement and realize that their actual pension amount is not as envisioned. This creates special problems in defending claims, as documents and witnesses disappear in the interim.
Third, such claims may lend themselves to class proceedings. While a single employee may not have the motivation or ability to bring a claim, if the claim arises from an identical communication to many employees, a claimant may try to have the claim certified as a class proceeding.
Fourth, because a pension is of such importance to a retiree's life, and to society at large, a court may have a natural sympathy toward such claimants, prompting stringent scrutiny of communications made by the employer, which will generally be deemed more sophisticated than its employees, and able to accurately convey facts about the pension plan to them.
Pension misrepresentation claims most frequently arise when an employer gives its employees the option to switch to another form of pension plan, or to choose among pension options. Examples are many Canadian employers' offers to their employees of the option of switching from defined benefit to defined contribution plans.
Ironically, the employers that tried to do the right thing, and gave their employees options or provided them with an expansive educational program about their options, may face greater exposure. In the inherently complicated area of pensions, it is not difficult for employees to claim that certain phrases or graphs misled them into choosing an option that turned out to be unfavourable.
An employer's legal duties towards its employees in making such an offer are complicated and have not fully been settled by the Canadian courts. Where the employer acts as the administrator of the pension plan, it owes strict fiduciary duties to its employees with respect to the plan's administrative aspects, such as calculating and awarding benefits. At the same time, the employers and employees have different interests with respect to pension plans, and it is appropriate for the employer to protect its own interests. Courts have accordingly found that an employer wears two hats with respect to a plan, owing a fiduciary duty when acting as administrator and a lesser duty of good faith (that may take into account its own best interests) when acting as employer. But where an employer provides pension information to its employees, it is still a legal gray zone as to which hat it is wearing, and what duty it owes.
Recent Canadian cases give examples of the risks that employers face. In February 2011, the Ontario Court of Appeal found the federal government liable for negligent misrepresentation, and actuaries liable for negligent misrepresentation and breach of fiduciary duty. The case arose in 2000, when the government gave some employees the option of transferring their funds from the public service pension plan to a plan sponsored by the actuaries. The scheme required the employees to leave federal employment and give up entitlements under the federal plan. It was later disallowed by the CRA. The plaintiffs sued for the difference between the benefits they would have received had they stayed in the public service and those they did receive under the failed scheme. The government was primarily faulted for not disclosing its concerns about the scheme's tax legitimacy. The actuaries were faulted for not providing full disclosure of the risks and for their conflict of interest, when they held themselves out to vulnerable employees who were relying on them for expert advice. Damages were assessed at $2.8 million for seven employees, plus costs of some $700,000.
In another 2011 Ontario case, the claimant was the widow of an employee who had taken early retirement. He had selected, from the 14 pension options offered, one that offered more generous monthly payments but limited survivor benefits. He died soon after. The trial court awarded the widow damages of $17,949.97 against the employer for negligent misrepresentation, plus a $1,654.93 monthly pension and costs of $65,000. The Court of Appeal confirmed that judgment. In a similar Ontario case, another widow also succeeded in her claim. The Ontario Court of Appeal found that the pension fund had failed to fully advise her that she would renounce her survivor benefits by signing a waiver and that its silence was negligent misrepresentation.
In a B.C. case, which is only in the preliminary stages, an employee claims that the employer and its actuaries were negligent and breached fiduciary duties in introducing the option of switching from a defined benefit to a defined contribution plan in 1992 and 1993. The employee claims on his own behalf and on behalf of potentially hundreds of colleagues.
Another B.C. case also arose from the option of switching from a defined benefit to a defined contribution plan, offered in 1998. The defendant company had not even made the offer. It had been made by a company the defendant later acquired in a takeover. 65 employees sued the defendant, the actuarial firm and the individual actuary, alleging that the information provided (primarily graphs and tables comparing what each plaintiff might receive under each option) was misleading. The case was tried in August 2010, but was settled before a decision was made.
In a 2000 New Brunswick case, an employee took early retirement based on the employer's erroneous statements about how much money he would have in his pension. The court awarded him damages representing the pension income lost due to the error.
In a 1996 Federal Court case, a government employee claimed he was given erroneous advice with respect to the purchase of prior service credits under his pension plan. The court found that pension administrators owe a duty of care to the plan members to give full and complete information, because members are generally completely reliant upon them for that information. The failure of the employer to provide that information, like a positive statement, may lead to a finding of liability.
As is often the case, Canadian law in this area lags behind US trends. Two U.S. cases based on pension misrepresentations have already been decided by the U.S. Supreme Court. Happily for employers and actuaries, their unique facts limit their applicability.
A May 2011 decision in a class action arose from what was essentially a defined benefit to defined contribution plan conversion. The employees claimed they had been told in plan communications that they would continue to earn benefits after the conversion, and sued for the additional benefits they had been promised. The U.S. Supreme Court reversed lower court decisions in their favour, on the narrow procedural ground that the court could not order reformation of the former defined benefit plan under the governing Employee Retirement Income Security Act of 1974 (ERISA), and sent the case back for a re-trial, setting out a range of remedies (including injunctions and damages) that the lower court could grant if it again ruled in their favour.
In a 1996 case, the employer (Varity Corporation) had deliberately conspired to deprive its employees of pension benefits, by urging them to transfer to an insolvent company. In a decision perhaps distorted to address those egregious facts, the U.S. Supreme Court found the statements to have been made while the company was acting as a fiduciary, at least as defined under ERISA.
Employers considering amending their pension plans should do so carefully. If they do decide to proceed, they should also carefully consider the process and the communications to be presented. Communications must walk a fine line between providing too little or too simple information on one hand, and too much or too complicated information on the other.
An ideal information package will provide information to employees in both simplified bullet-points and more detailed form, and in multiple formats, such as PowerPoint presentations, brochures and booklets. More advanced packages will allow employees to use computer software to change investment return and other variables to decide whether an option is right for them.
Employees should always be cautioned that market-based projections and other assumptions may turn out differently than presented.
Assumptions must be identified and explained clearly. Complicated terms should be defined and explained.
Employees should always be encouraged to seek independent advice. An employer may even consider subsidizing visits to an independent actuary or financial advisor.
Communications should contain repeated disclaimers, placed clearly and boldly in plain language, that employees should not rely upon the materials, that they are provided only as general illustrations and that employees should seek individual advice based on their unique financial circumstances and retirement aspirations.
Finally, employers should impose strict controls on who can make representations to employees about pensions, and those persons should follow tightly-worded scripts. It is useful to distinguish between the employer providing information and facts to its employees (which it should do, albeit with caution) and providing advice to them (which it should generally never do). At times, of course, there may be a very thin line between information and advice. Suffice to say, an employer faces greater exposure where it encourages an employee to make specific pension decisions.
Where a lawsuit may be pursued a decade or more later, it is unlikely that the oral evidence of witnesses at trial will be given much weight by the court. Instead the court will rely heavily on the contemporaneous written documentation to determine the accuracy and adequacy of disclosure. It is thus important that an employer communicating about pensions carefully preserve documents, particularly those that present clear warnings of the risks associated with the offered option.
Employers that have offered their employees the option to switch between kinds of pension plans should discreetly evaluate what potential liabilities they may face, and consider whether they have an obligation to alert their insurers. It may be possible to reverse adverse transfers that have occurred or to otherwise limit the losses that employees or employer may face. As set out above, the employer will want to locate and preserve documents (both paper and electronic) related to the offer of the option, and make sure that no such documents are destroyed through routine document disclosure policies. The employer may well have obligations to alert employees of deficiencies in the communications presented to them before making their decision, if such errors are discovered at a later date.
Finally, companies considering acquisitions should strongly consider the pension issues of their targets. A company may, through no fault of its own, face serious litigation based on communications and mistakes made by the long-departed employees of an acquired company. It would be prudent to conduct due diligence on all past pension offerings and pension communications, where possible. An acquiring company should also seek representations, warranties and indemnities concerning past pension representations (as well as the administration and funding of any pension plans).
As those in the baby boomer demographic retire in these troubled economic times, pension claims will certainly rise in the immediate future. Employers would be well advised to investigate potential liability now, rather than when they are sued.About BLG
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