The Manitoba Court of Appeal has outlined important principles of contractual interpretation with relation to pension plans, along with guidance on how possibly to avoid costly litigation, according to a Hewitt Research Advisory.
Although the ruling is not binding outside of Manitoba, the case addresses common law principles that are similar across jurisdictions.
The case
The case centres on a 1973 decision by The Great-West Life Assurance Co. to amend its pension plan to address the rising impact of inflation. Great-West added an indexing provision pursuant to which retirees received increments to their defined benefits otherwise payable under the plan, which “shall be as the company may from time to time determine and will be related to the investment performance of the…fund.”
The company further amended the plan text to say that indexation would be tied to Statistics Canada’s reported annual cost-of-living increase. Former employees objected, arguing that it resulted in significantly lower levels of indexation and, in previous litigation, it was determined that Great-West had to retroactively calculate pension increments in a manner that was related to the fund’s investment performance. Disputes concerning how to achieve this outcome arose, and new litigation was commenced, which resulted in the present decision.
The decision
In Dinney v. Great-West Life Assurance Co. et al., the Manitoba Court of Appeal allowed the employer’s appeal, in part, upholding the lower court’s decision that the indexing provision in the pension plan afforded Great-West discretion in selecting the method used to determine increment amounts. The company could also adopt or substitute new methods or formulas so long as they maintained a reasonable relationship to the investment performance of the fund.
In addition, the court found that, when applying contractual principles and rules of interpretation to the determination of rights under a pension plan, courts should adopt “a practical and purposive approach.” For example, wherever possible, such provisions should be construed to give reasonable and practical effect to the scheme, mindful that:
(1) it will operate over a lengthy period of time and against a constantly changing commercial background;
(2) the plan is being operated for the benefit of all retired employees; and
(3) an interpretation that provides a windfall for some might negatively impact the financial interests of others.
A final point was that, despite owing a duty of good faith to beneficiaries of the fund, the plan sponsor does not stand in a fiduciary relationship to them and “is entitled to consider its own interests” in the decisions it makes.
The indexation formula mandated by the trial judge was eventually set aside and the matter of the proper indexation formula to use was referred back to Great-West for determination in accordance with the plan’s original provision.
According to Hewitt, the Dinney decision is important for plan sponsors because it:
(1) demonstrates a willingness to adopt a commercially pragmatic approach to interpreting pension plan documents that can balance the interests of all stakeholders;
(2) confirms the central role of plan sponsors in applying such documentation, as reflected in the Court of Appeal’s rejection of an indexation formula that was opposed by Great-West; and
(3) clearly enunciates that plan sponsors are not bound by fiduciary obligations toward members and can lawfully consider their own positions and interests in the selection and future application of pension plan provisions, so long as they act in good faith.
Hewitt also notes that the court’s comments in (3) do not apply to employers in their role as plan administrator, in which case they clearly stand in a fiduciary relationship with plan members.
The court’s interpretive approach
According to the research advisory, the Court of Appeal laid out a process for plan sponsors to follow that could help insulate them from protracted litigation. Important comments were made regarding what is called the “contra proferentum rule,” which stands for the proposition that, when ambiguity exists, contractual provisions are interpreted against the interests of the party that drafted them—in this case, the plan sponsor.
The court also stressed that “a pension scheme should be interpreted as a whole [and that] the meaning of a particular clause should be considered in conjunction with other relevant clauses,” explains the advisory. As a result, the combination of these principles helped convince the court that, because the pension plan text contained a provision giving Great-West the authority to interpret plan provisions, it was entitled to determine the appropriate amount of indexation in relation to fund performance.
Finally, in concluding that the retiree’s vested right was to receive indexing according to the plan’s investment-related provision, the Court of Appeal appears to be saying that there was no way of changing the formula for future indexing adjustments. The plan’s amendment provision specifically reserved the plan sponsor’s right to amend the plan, so long as “benefits accrued to the credit of an employee” to the date of amendment were not reduced. Since the court did not comment on the amendment provision in this context, Hewitt does not know whether it concluded that a contractual obligation to future indexation is part of an employee’s accrued benefits. If so, query whether it would have made a difference to the decision if:
(1) the plan’s indexation provision itself had allowed for changes to be made to the formula, irrespective of plan performance; or
(2) the formula for indexation was to be determined on a periodic (e.g., yearly) basis.
Hewitt suggests that plan sponsors should consider reviewing their plan texts and related member communications to ensure they provide the authority to interpret plan provisions.
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