Canada: Litigation Risks Of De-Risking

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.

Similar Articles
Relevancy Powered by MondaqAI
Borden Ladner Gervais LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Borden Ladner Gervais LLP
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions