The challenge of managing pension plans during an economic downturn requires employers and administrators to revisit their legal responsibilities.
The global financial and economic pressures that so severely affected pension plans in 2008 have shown no signs of improving in 2009. As a result, the ongoing deterioration of the capital and financial markets will demand prompt and appropriate responses from plan sponsors and fiduciaries.
The Employer Response
From a plan sponsor perspective, the paramount goal in today’s economic crisis is survival. This has led employers to attempt to reduce costs in relation to their defined contribution (DC) and defined benefit (DB) pension plans.
While the need to cut costs has driven many employers to consider reducing plan contributions and/or benefits, there are legal limitations in doing so. For instance, since pension legislation prohibits the reduction of accrued benefits, such changes can usually only be implemented by employers on a go-forward basis.
An employer seeking to reduce its future contributions to a DC plan will first have to amend the plan to effect this change—an adverse amendment requiring prior notice to the plan members and the regulator’s approval. Since pension legislation includes minimum funding rules for DB plans, in most jurisdictions, it is not possible for employers to unilaterally cease making contributions toward funding deficits in the plan.
Moreover, such changes are clearly a reduction in employees’ compensation, which could give rise to constructive dismissal claims.
The Fiduciary Response
In many cases, the company sponsoring the plan is also the plan administrator. Directors of the corporate employer, then, must not allow financial decisions in the best interests of the employer to override their fiduciary duties to plan members. When it comes to pension plans, directors cannot make decisions on the presumption that it is always appropriate to act in the best financial interests of the company.
The problems arising for directors who also act as fiduciaries are illustrated by a 2008 court decision involving Slater Steel. The Ontario Court of Appeal held that court orders insulating directors from legal actions in the context of a Companies’ Creditors Arrangement Act proceeding were not available to the directors who sat on the company’s audit committee (which was responsible for the pension plan). The court reasoned that in making funding decisions in relation to the plan, the directors were acting in their capacity as fiduciaries (where their legal duty was to act in the best interests of plan members), not as directors. Therefore, they were not entitled to court protection as directors of the insolvent employer.
In these troubled times, fiduciaries should focus on two areas in particular: prudence and communications. Legally, prudence is a test of conduct, not performance. Applying that standard in the current economic environment suggests that fiduciaries need to be nimble and increase their vigilance in monitoring investments. Administrators should be meeting with investment managers, reviewing investment performance and reassessing the plan’s asset mix. And, where appropriate, they should be seeking current information and expert advice on whether or not changes to investment policies are warranted.
Case law has established that communications with plan members are a component of an administrator’s fiduciary duties. For example, in 2005, the Ontario Court of Appeal in Hembruff v. Ontario Municipal Employees Retirement Board confirmed the existence of a legal duty to communicate “highly relevant” information to plan members.
Therefore, communications with members about the impact of the economic downturn on the plan and projected benefits are advisable and could be a key facet of an administrator’s legal duties. For DB plans, members will be concerned about the security of benefits and will want to know how investments are being managed. For DC plan members, communications will be crucial, as investment performance directly affects the amount of their retirement income.
With no end in sight to the current economic crisis, administrators should be careful not to let their fiduciary obligations toward plan members be subverted to the employer’s need to reduce pension plan costs.
Paul Litner is a partner in the pension and benefits department at Osler, Hoskin & Harcourt LLP.
plitner@osler.com
> click here for a PDF version of this article
© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the April 2009 edition of BENEFITS CANADA magazine.