Canada: Litigation Risks Of De-Risking

Last Updated: September 28 2016
Article by Markus F. Kremer

Most Read Contributor in Canada, September 2016

At first blush, the idea that "de-risking" could carry risk seems oxymoronic. Pension de-risking, when done correctly, can be very effective. Nevertheless, sometimes the steps employers take to de-risk pension plans can create litigation risk. To understand why, we need to recognize that "de-risking" is something of a misnomer.

When we talk about "de-risking" a pension plan, we are really talking about reducing the risk to the employer.1 More specifically, the term is most often used to refer to steps that employers take to insulate themselves from the consequences of poor investment performance in defined benefit plans ("DB Plans"). While carefully-designed de-risking measures can substantially reduce the risks employers face, such steps do not eliminate risk. Instead, they simply transfer risk to another party. In some cases, that party will be an insurance company. More often than not, however, de-risking measures transfer risk to employees and beneficiaries. Employers, of course, have the right to take steps to shift risk in this way. They need to be aware, however, of the consequences of doing so.

Employees and beneficiaries who suffer losses as a result of risks that their employers have shifted to them often turn to litigation in an attempt to "return the favour", by imposing the consequences of the risk back upon their employers. When a number of beneficiaries are affected in the same way by a de-risking measure, such litigation may take the form of a class action. Ontario Courts have characterized pension claims as uniquely-suited to proceed as class actions. For employers, this means that even decisions that have a relatively small effect on each individual beneficiary may result in litigation.

The litigation risks discussed below are not reasons to forego de-risking. De-risking strategies are a good idea for most employers. Employers simply need to be aware that proper de-risking will reduce the risks they currently face, but will not entirely eliminate risk. An awareness of the remaining risks will assist employers to work with their professional advisors to reduce them further.

Communication breakdown...

The most popular de-risking techniques have one thing in common: they all involve changes to existing pension arrangements that the employer must explain to the plan beneficiaries.

Claims for negligent misrepresentation have become increasingly common in the pension sector. Such claims are not unique to de-risking measures. Whenever an employer gives an employee or pensioner a choice, the employer must be careful to provide fair and accurate information about the consequences of that choice, and to do so in a way that the employee or pensioner can understand. Otherwise, that person may have a claim, if she can prove that she relied to her detriment upon an inaccurate or misleading statement that the employer made negligently, and that she suffered a loss as a result.

Examples of "decision points" that are specific to the pension de-risking context include the following:

  • Plan Conversions: When an employer decides to replace an existing DB Plan with a defined contribution plan (a "DC Plan") or component, the employer sometimes encourages existing employees to transfer from the DB Plan to the DC Plan or component. It is essential that the employer explain to employees the consequences of a transfer, and preserve evidence of the information that the employee received (ideally with an acknowledgment of that information, signed by the employee). Otherwise, if the DC Plan performs poorly, the employee will allege that they switched to it as a result of the employer's representations.
  • Investment Options within DC Plans: Employers who implement DC Plans sometimes think that they have washed their hands of pension risk. This is not necessarily true. If employees receive inaccurate or incomplete information about the risk associated with various options within their DC Plans, they may be able to sue their employer for misrepresentation. This particular risk applies to all DC Plans, regardless of whether they have been implemented as part of a de-risking strategy.
  • Buy Outs: In some cases, employers who want to reduce the risk they face as a result of existing DB Plans will try to "buy out" their employees by paying them a lump sum in return for ceasing to participate in the pension plan. Again, there is a risk of liability if employees receive inaccurate or incomplete information.

Employers contemplating the types of changes discussed above should consult with legal and financial experts to craft an appropriate communications strategy.

Failing to plan, planning to fail...

Given the risks associated with providing options to employees, it might be tempting for employers to elect to act unilaterally. Unfortunately, this approach offers no safe harbor from litigation either.

Unless employers carefully plan and design their de-risking measures, with the benefit of legal and actuarial advice, they risk litigation. The nature of the risk depends upon the measure that the employer implements:

  • Plan Amendments: Employers can try to reduce the risks (or at least the costs) associated with DB Plans by amending their plans. Examples of such amendments include: the elimination of indexing and early retirement pensions (which can lead to unpredictable liabilities); plan "freezes" (i.e. closing the plan to new members and/or terminating the accrual of additional benefits by existing plan members); and changes in benefit or contribution formulae. The employer's ability to enact such amendments will be limited by applicable pension legislation, the plan documents, and the employer's fiduciary duties. Some amendments may also engage the so-called "50% rule" applicable in some jurisdictions, which restricts what portion of the value of a pension benefit may be funded by employee contributions. Even if the employer meets all statutory and contractual requirements, it may be vulnerable to a constructive dismissal lawsuit if an amendment substantially reduces the total compensation offered to an employee. In unionized workplaces, employees may also be able to advance labour grievances, if pension benefits are protected under a collective agreement. These risks can arise even with respect to purely prospective amendments.
  • DC Plan Design Risk: An employer that offers a DC Plan (whether as a result of de-risking or otherwise) may owe a duty of care to its employees to ensure that the plan offers appropriate options to employees and, in particular that the default option (i.e. the manner in which the employee's contributions will be invested if he fails to select an option), are appropriate. Once again, appropriate professional advice is essential.
  • Plan Merger Risk: In some cases, large companies or companies that are part of a larger corporate group may operate more than one DB Plan. Merging the plans can spread the investment risk. Plan mergers involve complicated issues of statutory and trust law and must be approached with caution (and expert legal advice!).

The buck stops at you...

De-risking is not only important for employers. Over the last decade or so, a number of companies that sponsored DB Plans have become insolvent, at a time when their pension plans had deficits.

When there is a plan deficit and no sponsor to fund it, employees whose benefits are reduced as a result will look to others to blame. In such cases, there have been claims against company directors and service providers (investment managers, institutional custodians, actuaries, etc.). These individuals and organizations should be aware that they, too, have a stake in de-risking initiatives.

The right bowl of porridge...

When it comes to the investments of a DB Plan, de-risking usually involves moving assets to more secure, lower-return investments. Assuming the investments are well-selected, this will generally reduce risk, while increasing the pension plan's cost to the employer. As a result, there is a tension between investment strategies that are "too cold" (i.e. those that are low risk but are unappetizing because they render the plan too expensive) and those that are "too hot" (i.e. those that decrease the employer's costs but create too great a risk of getting burned).

Employers must remember that what constitutes an appropriate or "low risk" investment strategy can vary significantly from one plan to the next. In the past, employees have sued pension plan investment managers for recommending inappropriate investment strategies to an employer that later became insolvent. This has occurred where: (i) the plan's membership consisted of an older population with relatively few active members; (ii) the employer was in a failing industry; and (iii) the investment strategy did not reflect the fact that the plan was unlikely to continue over a long period of time.

It is also worth noting that a conservative investment strategy is no guarantee that deficits will not arise. Even if a plan were fully-funded and invested in cash, it could develop a substantial deficit in a short period of time if long-term interest rates drop significantly. This is because actuaries are required to prepare solvency valuations for DB Plans by assuming that the plan would have to purchase annuities for all beneficiaries at the time of the valuation. Since the cost of annuities is inversely proportionate to long-term interest rates, the plan's liabilities can increase and create a deficit, even if the value of the assets has not changed.

Just when you thought you were out...

Most employers assume that once members have ceased to participate in their pension plans and have been annuitized, the employer is no longer at risk from lawsuits. This is not necessarily true.

Plan administrators may have a duty to obtain independent advice to select an appropriate annuity provider to pay pension benefits to its former employees. In at least one case, where an insurance company failed, employees successfully sued their employer with respect to benefits that had been annuitized.

Cover me, I'm de-risking...

This discussion above was not intended to provide a comprehensive description of all of the litigation risks associated with pension de-risking. It certainly should not be read as discouraging de-risking measures. Instead, it was intended to be illustrative of fact that, sometimes, de-risking involves trading one devil for another. While well-designed de-risking measures will ensure that the "new" devil is much smaller and less threatening than the current one, employers should still watch and guard against that smaller devil.

The key points that employers should remember are:

  • Don't assume that "de-risking" will eliminate risk.
  • To understand the risks that you will still face, obtain expert legal and financial advice.
  • Consider what additional measures you can take to address litigation risk. Those measures should include seeking professional advice, and may include purchasing insurance, or making changes in corporate governance and record-keeping.


1 In most single-employer defined benefit pension plans, the employer is both the sponsor and the administrator of the plan. As the sponsor, the employer is responsible for funding the plan and has the ability to amend it (subject to certain limits). As administrator, the employer has a fiduciary duty to administer the plan in the interests of the employees and beneficiaries. Some of the potential risks discussed in this article affect employers in their capacity as sponsors. Others affect only those employers who are the administrators of their pension plans.

About BLG

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.