This article was originally published in Blakes Bulletin on Pensions & Employee Benefits-August 2004
As in its politics and culture, Québec is a "distinct society" when it comes to the administration of pension plans. Its Supplemental Pension Plans Act(SPPA) includes many requirements that do not exist in other jurisdictions. That said, the basic principles for administering pension plans are quite similar to those in the rest of Canada and, therefore, some recent Québec cases could have cross-country impact.
Retirees’ Rights: The Hydro-Québec Case
The pension plan community is awaiting a Québec Court of Appeal ruling in a high-profile dispute over the obligations of pension plan administrators and pension committees to act in an even-handed manner when the interests of different classes of participants and beneficiaries are in conflict. In Association provinciale des retraités d’Hydro-Québec v. Hydro-Québec, a group of retirees alleges Hydro-Québec, as trustee of the pension plan, and the employees’ union agreed upon an allocation of surplus that was detrimental to the interest of the retirees.
The retirees say that they were not consulted or treated equitably when the decision was made to use the accumulated surplus to grant additional rights to active members or to reduce the contributions paid by Hydro-Québec. They claim to have suffered a prejudice because they were not allocated what they consider to be their fair share of the surplus. The key question raised in the Hydro-Québec case is:
According to the Civil Code of Québec and the SPPA, is the administrator of the plan bound by a fiduciary obligation that requires all the participants, active or non-active, to be treated in an even-handed manner with equity and without any bias? The retirees also asked the court to decide if such an obligation was, in fact, fulfilled in the circumstances. Unfortunately, the 2002 decision rendered by Québec’s Superior Court did not fully address these issues.
In the Superior Court’s ruling, the judge notes a majority of the members of the group of retirees were active members when the amendments were adopted. Therefore, according to the court, they did consent to the amendments since their representatives, the unions, were involved in the process. The court also found that many retirees actually benefited from the amendments by taking advantage of the new rules for early retirement.
The court, however, did not provide a clear answer on the scope of the fiduciary obligations owed to the retirees. The court resorted to a procedural technicality to dismiss the claim without discussing at any length the scope of the plan administrator’s obligations and whether the facts of this case indicate its obligations were complied with. Also, since Hydro-Québec’s pension plan is created by legislation and modifications are by way of legislative amendments, the court concluded that the retirees’ petition was not adequate under the circumstances. Even though the trial court dismissed the claim filed by the retirees, the key question raised has not been settled. It has now been left to the Court of Appeal to determine the extent of the obligations owed by the administrator to the retirees. The appeal court’s ruling could have serious consequences for pension plans in Québec and elsewhere.
Even though many pension surpluses have vanished in the past few years, the issue remains highly relevant. For example, the SPPA requires that the administration of a pension committee include a member named by the non-active members and retirees. An additional member named by the non-active members and retirees can also join the committee, but does not have the right to vote – thus, lowering the value of his or her actual input. As a result, retirees can claim they have no real control over the decisions taken by the pension committee. Also, in most cases, the employer retains the power to amend the pension plan. When a plan amendment is being considered, according to the retirees, the presence of union representatives does not ensure the retirees’ interests will be protected since the union’s and employer’s main concern is to keep active members happy.
The SPPA also enables the pension committee to recommend amendments to the pension plan. However, the scope of this power and the circumstances in which it should be used are unclear. Some retirees are of the opinion that committees should use it to ensure every member’s rights have been given due consideration in the decision-making process. Those with more conservative views argue that it should simply be used if the amendments are illegal or clearly abusive. The retirees are hoping the Québec Court of Appeal will clarify this issue and ensure the protection of their rights.
Custodian Obligations: The Place Bonaventure Case
Place Bonaventure Inc. (PBI) created a pension plan for its employees in 1965. Over 30 years later, a new group of shareholders acquired PBI and terminated the employment of 28 employees, giving 20 of the employees a severance package, and early retirement to the remaining eight.
The pension plan was amended to provide early retirement pensions without actuarial reduction, but only after the offers were presented and accepted by the eight employees and after the purchase of annuities to provide their benefits.
In Murray Black v. Place Bonaventure et al., the plaintiff claims the employer essentially used the surplus in the plan to finance the severance package for the eight employees. In the claim filed against PBI and its new shareholders, the plaintiff contests the legality of using pension assets to pay severance (in the form of increased pension benefits) without paying the associated costs by means of additional contributions to the plan.
The plaintiff also sued the custodian of the funds, which raises a very interesting question: What is the scope of the obligation of the custodian? When the custodian of the fund made the payments for the purchase of annuities for the eight employees, the plan did not allow for such a benefit. It was amended after and the plaintiff alleges the custodian had a legal duty to ensure the payments were permitted by the terms of the plan at the time of payment.
Again, the decision rendered by the Superior Court did not provide clear principles that could be relied upon. The court refused to authorize a class action and dismissed all claims against defendants after a very brief analysis.The court concluded that there was no valid legal basis to any of the claims and no serious questions at issues. That decision was appealed and the Québec Court of Appeal is expected to render a decision in the next few months.
Bankruptcy & Pensions: The Jeffrey Mines Cases
René Langlois v. Denis N. Roy et als.and Réjean Coutu v. Denis N. Roy et als. involve claims filed after the bankruptcy of Jeffrey Mines Inc. and raise questions about the duties of the pension plan administrator and investment managers when the employer faces serious financial difficulties. As noted above, Québec’s SPPA requires that a pension committee administer a pension plan. In most cases, the employer names the majority of the committee members and, sometimes, the powers of the committee will be delegated to the employer. The employer then assumes a very active role in the administration of the plan.
While the pension committee acts as a fiduciary and must make decisions that are in the best interests of members and beneficiaries, the SPPA makes no reference to the best interests of the employer when it defines the extent of the committee’s fiduciary obligation – unlike the federal Pension Benefits Standards Act, 1985.
This latent conflict of interest for members named to the committee by the employer is a well-known fact that creates tensions when decisions trigger an additional financial burden for the employer; for example, when preparation of an actuarial report is being considered to assess a plan’s financial situation in cases where the legislation does not require an actuarial report.
In the Jeffrey Mines’ case, the employer faced serious financial difficulties which resulted in bankruptcy. For some years, the precarious financial status of the employer and the extent of the pension plan deficit were known by members of the committee. According to allegations in the petitions filed recently asking for class action certification, the pension committee members and investment managers acted recklessly and did not comply with their fiduciary obligations towards the members and beneficiaries when authorizing the percentage of the assets of the pension plan invested in the stock market to be increased to 73%.
The pension committee had delegated the power to determine the investment policy to the investment manager, but the plaintiff alleges the committee knew at all times what was going on and never intervened to change the decisions. The claim is that they, therefore, authorized any decisions taken. The investment manager is, according to the plaintiff, also bound by a fiduciary obligation towards the members and beneficiaries of the pension plan by virtue of the SPPA.
The investment policy, according to the plaintiffs, was designed to obtain a maximum rate of return. When the stock market did not provide those returns, the plan’s financial situation was negatively affected. Since the employer is now financially incapable of making contributions to the pension plan, the members’ pensions will have to be reduced to reflect the actual funded status of the pension plan.
The plaintiffs allege the investment decisions authorized by the members of the pension committee were not in compliance with their fiduciary obligation since they created a higher risk of loss. They say that the funds should have been invested conservatively to protect, as much as possible, the accumulated capital. While that would have generated a lower expected rate of return, the committee could then have caused the employer to increase its contributions to the pension plan. Instead, the plaintiffs allege the pension committee and investment manager made decisions in the best interests of the employer and not the members and beneficiaries.
What was the pension committee to do? What would have been the correct method to assess the situation? Are the decisions taken by the pension committee in accordance with the legal requirements? These are now questions to be tackled by a court. Pension plan administrators and others are no doubt anxious to hear the answers, both in Québec and elsewhere.
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.