Canada: Amendment To Reduce Final Average Benefits Not A Void Amendment

Last Updated: September 26 2013
Article by Lyle Teichman

In a recent decision of the Financial Services Tribunal (FST) in Royal Ontario Museum Curatorial Association v. Ontario (Superintendent of Financial Services) , the FST held that an amendment to an earnings-based defined benefit pension plan (which changed the earnings component of the benefit formula from a final 3 year average earnings to final 5 year average earnings), was not a void amendment under subsection 14(1) of the Pension Benefits Act (Ontario) (PBA).  This decision will be welcomed by sponsors of Ontario-registered pension plans as it provides support for the proposition that the 2010 decision of the Alberta Court of Appeal in Haliburton Group Canada Inc. v. Alberta, does not have broad application to plans registered in Ontario.

The Royal Ontario Museum (ROM) maintained a defined benefit pension plan (Plan) for its employees, under which benefits were historically based on the member's best 3 year average earnings (Old Formula) prior to retirement.  In response to the Plan's deteriorating financial position, the ROM amended the Plan effective January 1, 2010 to change the earnings calculation from a 3 year averaging basis to a 5 year averaging basis (New Formula).  To protect active members from a retroactive reduction in the amount of pension accrued prior to January 1, 2010, the amendment provided that benefits for service prior to January 1, 2010 would be calculated based on the Old Formula using frozen salary data as at January 1, 2010, or the New Formula, based on salary data at retirement or termination, whichever produced the greater amount of pension for such service.  Benefits for service prior to the amendment date would therefore be based on the better of the Old Formula and the New Formula, while benefits for service on and after the amendment date would be based on the New Formula only.

The Royal Ontario Museum Curatorial Association (ROMCA), representing a group of Plan members, objected to the amendment on the basis that it reduced the amount of pension benefit accrued under the Plan with respect to employment prior to its effective date, and was therefore void under paragraph 14(1)(a) of the PBA.  ROMCA also argued that the amendment reduced accrued benefits contrary to the terms of the Plan.

Under the Old Formula, average earnings were calculated based on the member's average earnings in the 36 months of employment "prior to retirement" in which the member received the greatest earnings. ROMCA argued that the benefit accrued to the amendment date entailed a set of rights, including the accrued right to have earnings prior to retirement recognized post amendment in the pension accrued for service prior to the amendment date.  The ROM argued that for benefits to be accrued, they must be fully constituted and must be calculable based on known data at the relevant time.

The case centered on the meaning of "accrued" and "accrued benefit" under subsection 14(1) of the PBA, and what earnings data should be taken into account in the calculation of the accrued pension.  The FST acknowledged that it is possible for an amount to be "accrued" even though the amount may not be capable of precise calculation at the time of determination.  However, the FST went on to find that paragraph 14(1)(a) does not focus on "abstract questions of "rights"", but instead requires a concrete calculation of the amount or commuted value of a pension benefit accrued before the effective date of amendment.  As such, in an earnings-based defined benefit plan an accrued pension amount calculated as of a given date would be based on earnings data current as of that date, unless the plan provides otherwise.  The calculation therefore does not include an estimate of projected earnings.  The FST took the same view with respect to the meaning of "accrued benefits" under the terms of the Plan.

The FST distinguished the Haliburton case on the basis that the applicable statutory provision under the Employment Pension Plans Act (Alberta) differs from subsection 14(1) of the PBA and does not contain the word "accrued".  Specifically, the FST held that the validity of the amendment in the Haliburton case did not turn on whether the benefits at issue had "accrued" before the date of amendment, whereas this question was critical in the context of paragraph 14(1)(a) of the PBA. 

After stating that its position reflected the compromise intended by the Ontario legislature, the FST commented:   "In a plan structured like the one before us, it is only the amount generated on the basis of current data to which a Plan member could legitimately claim entitlement as of the effective date of the amendment.  Further entitlements may indeed accrue after that date, based both on further service and on the impact of higher earnings both on past and future service.  Those impacts can be estimated as of the effective date of the amendment. But estimates are not entitlements; they are merely estimates, which may or may not accrue to the member depending on events which remain contingent until they have actually accrued."

Implications

The ROM decision has not been appealed.  Although it is a decision of the FST, it is a helpful decision for sponsors of Ontario-registered earnings-based defined benefit plans as it provides support to sponsors that wish to amend their plans to freeze the average earnings calculation (or make other changes to the way future earnings affect service accrued to the date of plan amendment), and supports the proposition that the Haliburton case does not have broad application to plans registered in Ontario.

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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