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Environmental, Social and Governance Factors: Should Pension Plan Administrators Look to Rating Agencies for Links Between ESG and Credit Worthiness of Target Investments?

In my August 17, 2016 post (found here), I summarized Ontario’s recent changes to the Pension Benefits Act and Regulation that require a pension plan’s statement of investment policies and procedures (“SIPP”) to include information as to whether environmental, social and governance (“ESG”) factors are incorporated into the plan’s SIPP and, if so, how those factors are incorporated.  I noted that while the incorporation of ESG factors into a pension plan’s SIPP is not a statutory requirement, the question arises as to whether a failure to consider ESG factors in your pension plan’s SIPP could be a breach of fiduciary duty.  I didn’t answer the question directly but did say that many of Canada’s largest public sector pension funds have now incorporated ESG into their investment policies.

Given that provincial pension legislation requires plan administrators to exercise the care, diligence and skill that a person of ordinary prudence would exercise when dealing with the property of another person, would that exercise not, by logical extension, include investigation of the consideration of ESG factors in the assessment of creditworthiness of investee entities?

Recent announcements by some of the world’s largest credit rating agencies recognize that ESG factors can affect borrowers’ cash flows and the corresponding likelihood that they may default on their debts. S&P Global Ratings, Moody’s, Dagong, Scope, RAM Ratings and Liberum Ratings signed a “Statement on ESG in Credit Ratings” (the “Statement”) in May of this year acknowledging that ESG factors are important elements in assessing creditworthiness of borrowers and, for corporations, “concerns such as stranded assets linked to climate change, labour relations or lack of transparency around accounting practices can cause unexpected losses, expenditure, inefficiencies, litigation, regulatory pressure and reputational impacts.”

Included in the Statement are 100 investors managing US $16 trillion of assets, all of whom are signatories to the six UN-supported Principles for Responsible Investment wherein the investors affirmed their commitment to:

  • incorporate ESG factors into investment analysis and decision-making processes;
  • seek appropriate disclosure on ESG issues by investee entities; and
  • report on activities and progress towards implementing responsible investment.

Several well-known Canadian institutional investment corporations are included in the list of 100 investors.

Rating agency reports that incorporate ESG factors in the assessment of credit risk may soon form part of the statement of the valuation method process required by pension regulators.

The Fall 2016 Corporate Knights article, Credit ratings and climate change, cited a 2015 report from the Center for International Environmental Law, which accused the rating agencies of repeating their risk analysis mistakes from the sub-prime mortgage debacle when it comes to fossil fuel investments: “In assuming a business as usual scenario, rating agencies may be artificially inflating the credit ratings and financial value of companies that contribute to global warming”.  The report added that “This poses significant risks for investors, and the climate, and could expose rating agencies themselves to legal liability.” The May 2016 Statement on ESG in Credit Ratings appears to be the first step in addressing the gap in credit rating which doesn’t necessarily consider sustainability and governance factors in credit ratings and analysis.

Plan administrators should seek legal advice to ensure their fiduciary duties are fulfilled when they embark on considering ESG factors in their investment decision making process.

Environmental, Social and Governance Factors: Should Pension Plan Administrators Look to Rating Agencies for Links Between ESG and Credit Worthiness of Target Investments?

Ontario Pension Advisory Committees

If you are involved with the administration of an Ontario registered pension plan, you should familiarize yourself with new Ontario rules regarding pension advisory committees. The new rules will be effective January 1, 2017.  They give significant additional rights to plan members, and could impose extra costs and administrative burdens on plan administrators.  You can find the new rules here: Ontario Pension Advisory Committee Rules

I wrote about these new rules a few weeks ago, when draft regulations were released by the Ontario government. The regulations are now final and are described in my article here: Pension Article

It is possible that these new rules will have no impact on your plan. If unions and plan members take no action, plan administrators are under no obligation to take any action.  There will be no pension advisory committee in that case.  But if a request is made by a union, or by at least ten members of a plan (including retirees), the new rules will be triggered.  The rules set out a clear and detailed process to communicate the request with all plan members, distribute materials and conduct a vote.

If a vote to establish an advisory committee is successful, the plan administrator is then required to do several things, including:

  • hold the initial meeting,
  • give the committee or its representative “such information as is under the administrator’s control and is required by the committee or its representative for the purposes of the committee”,
  • make the plan actuary available to meet with the committee at least annually if the plan provides defined benefits,
  • ensure that the committee has access to an individual who can report on the investments of the pension fund at least annually, and
  • provide administrative assistance to the committee.

The pension advisory committee will not have any legal authority to dictate how the plan should be administered. The new legislation says simply that “[T]he purposes of an advisory committee are (a) to monitor the administration of the pension plan; (b) to make recommendations to the administrator respecting the administration of the pension plan; and (c) to promote awareness and understanding of the pension plan.”

Reasonable costs related to the establishment and operation of the committee are payable out of the pension fund.

Please contact a member of the Pension, Benefits and Executive Compensation group at Dentons Canada LLP for more information about this potentially significant change to the governance of Ontario registered pension plans.

Ontario Pension Advisory Committees

Canada Pension Plan enhancements: it’s happening

Yesterday the federal government tabled Bill C-26, which will implement changes to the Canada Pension Plan that were announced in June, 2016.  All provinces other than Quebec are now on board, in support of increased employer and employee contributions, and higher benefits.  The higher contribution rates will not apply until January 1, 2019.  They will be phased in gradually over seven years (from 2019 to 2025).

Commentators refer to these changes as “historic”.  It has been decades since significant changes were made to the CPP.  The reality is that the Canadians who should be happiest about these changes are teenagers, since it will be many years until significantly higher benefits are paid from the CPP.

We will be providing more details about the CPP changes in the coming weeks.

 

Canada Pension Plan enhancements: it’s happening

Getting Your Act Together – B.C. & Alberta Triennial Pension Assessments

In November 2008, the Alberta/British Columbia Joint Expert Panel on Pension Standards (JEPPS) released its report on pension standards in the two provinces. The report, Getting Our Acts Together, encouraged the two provincial governments to take a leadership position in pension reform and forge harmonized pension standards legislation which would provide a solid foundation for private sector pension plans and facilitate inter-provincial labour mobility.

The JEPPS’ vision of a fully harmonized joint-regulatory environment for Canada’s two westernmost provinces failed to materialize. The vision was left on the cutting-room floor, so to speak, as Alberta adopted its reformed pension standards legislation in 2014 and BC followed-suit with its own in 2015 – absent any joint regulator, joint tribunal or joint policy advisory council, as recommended in the JEPPS report.

That said, the new Acts themselves are principles-based, as opposed to rules-based, and there is a great deal of harmonization between the two, including the requirement for plan administrators to complete a triennial administrative assessment (TAA) for their pension plans.

TAA Timing

For private sector BC and Alberta pension plans with a calendar year-end, the first TAA must be undertaken with an effective date of December 31, 2016, and a written assessment completed by December 31, 2017. The exercise is to be repeated triennially thereafter.

Topics for Assessment

The TAA requirement is designed to force a plan administrator to do some soul-searching about how well it is administering the pension plan. At a minimum, TAA requires a review of the following:

  • Legislative Compliance
  • Plan Governance
  • Plan Funding
  • Plan Investments
  • Trustee Performance (if any)
  • Administrative Staff and Agent Performance

Administrators must retain a copy of the written assessment and make it available to the provincial pension regulator on request. There’s little doubt that regulators will undertake spot audits early in 2018 to confirm that the TAA requirements have been satisfied.

Where’s the stick?

The BC and Alberta pension legislation introduced a new enforcement tool to ‘encourage’ plan administrators to complete required tasks on time. The legislation empowers the Superintendent to order administrative penalties on corporations and administrators for contraventions of legislative provisions.  The maximum penalties range from $50K to $250K for corporations or administrators and from $10K to $50K for individuals, depending on which administrative provisions have been contravened. FICOM, the BC pension regulator, issued guidelines in June of this year suggesting that the higher penalties, which are discretionary in nature, will only be imposed where there has been significant delay in completing required legislated tasks.

Even without the administrative penalty provisions, plan administrators are required to comply with applicable legislation and regulatory requirements. Failure to do so, especially if the failure leads to significant losses to the pension fund, might be viewed in subsequent court proceedings as a breach of fiduciary duty.

Penalty and fiduciary implications aside, plan stakeholders and administrators should embrace the TAA as an opportunity to assess their administrative processes. While there’s never a good time to do soul-searching of this nature, if not on a triennial basis, when would be an appropriate time to ensure that employee pensions are being properly looked after?

Start now while there’s still time

Although plan administrators have until the end of 2017 to complete their written assessments, stakeholders need to recognize that a snapshot of administrative efficiency is to be taken at year-end, so there’s little time left in 2016 to ‘right-the-ship’. They need to determine if current administrative processes sufficiently address the enumerated list of assessment topics – for example, ensure that an updated Governance Policy, Funding Policy and Statement of Investment Policies and Procedures are in place – and, if not, take steps to address any shortfalls.  Failure to fill the ‘gaps’ now might lead to a failing grade when the assessment begins in earnest at year-end.

Getting Your Act Together – B.C. & Alberta Triennial Pension Assessments

Ontario Pension Plan Members Will Soon Have Significant New Rights

Ontario is on the verge of implementing new rights for members of registered pension plans. Members will have the right to form committees that will have broad rights to review information about all aspects of plan administration including investments.  Employers who sponsor or administer a registered pension plan should familiarize themselves with these new Ontario legal requirements.  They are not yet law, but likely will be in a matter of months.

Last week the Ontario government released revised draft regulations about these new legal requirements, seeking comments by September 12th, 2016.  The new requirements have been kicking around in draft for the past six years and will replace current Ontario legislation regarding member advisory committees.  Most employers probably haven’t heard of the current requirements regarding such committees, because the current rules have no teeth.  The new ones will.  You can find the new requirements here.

The new requirements will apply to pension plans that have at least 50 members (including retirees). For those plans, if 10 members (or their union) notify their plan administrator of their desire to form a member advisory committee, a process must be launched to inform all plan members and conduct a vote.  If a majority of members vote in favour of establishing an advisory committee, it should be established in a matter of months.  The plan administrator will have no right to representation on the committee.  Reasonable expenses of the committee are payable from the pension fund.

Once a new committee is formed, the plan administrator must:

  • arrange for the plan actuary (for defined benefit plans) to meet with the committee at least annually;
  • give the committee access, at least annually, to an individual who can report on the plan’s investments; and
  • give information to the committee, and allow it to examine the plan records.

These new legal requirements will not give plan members a say on how their plan should be administered, but they certainly will change the landscape of members’ access to information about their pension plan. The new requirements will come into play only where there is sufficient interest among members, or unions, in forming a member advisory committee.

These new Ontario rules will create an entirely new type of scrutiny of pension plan administration. Prepare now.

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Ontario Pension Plan Members Will Soon Have Significant New Rights

Double Check those Bonus Plans!

The Ontario Court of Appeal’s decision in the case of Paquette v. TeraGo Networks Inc. should have all employers running to double-check and possibly amend their bonus plans.  A further case released on the same day by the same panel of judges further confirmed the law set out in the Paquette decision.

Trevor Paquette had been employed by TeraGo Networks for approximately 14 years at the time of termination.  He brought a motion for summary judgment and his common law notice period was found to be 17 months.  The motions judge also determined that he was entitled to damages in lieu of his remuneration for the entire notice period, although he denied entitlement to damages in lieu of bonus entitlement over the notice period.  The matter proceeded to appeal solely on the basis of whether or not Paquette was entitled to damages in lieu of bonus during his 17 month notice period.

Paquette’s bonus plan stated that he had to be “actively employed” at the time the bonus was paid in order to receive same.  The Court of Appeal reviewed a number of similar bonus and stock option plan cases, and confirmed that the following is the state of the law in Ontario:

  • Subject to contractual terms, a terminated employee is entitled to compensation for all losses arising from the employer’s failure to give proper notice, and the damages award should place the employee in the same financial position he or she would have been in had such notice been given.  In Paquette’s case, since he would have earned a bonus had he been given working notice, the use of the words “active employment” could not be used as an end-run around his claim for the bonus over the pay in lieu of notice period.
  • The test to be followed is two-fold: (i) the first step is to determine an employee’s common law rights and whether a bonus forms an integral part of the employee’s compensation; and (ii) the second step is to determine whether there is something in the bonus plan that would specifically remove that common law entitlement.
  • An “active employment” requirement does not preclude the employee from receiving damages representing compensation for the bonuses which the employee would have received if employment had continued through the reasonable notice period.

The key for employers then, is to ensure that the language of any bonus plan is sufficiently clear that the common law entitlement to damages in lieu of bonus is expressly removed.  As every bonus plan is different and as the drafting of this sort of exclusionary language is obviously complex, legal advice should always be sought by employers when it comes to limitations set out in bonus plans.

The Court of Appeal’s decision in Paquette v. TeraGo Networks Inc. can be found here:  http://www.canlii.org/en/on/onca/doc/2016/2016onca618/2016onca618.html.

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Double Check those Bonus Plans!

Environmental, Social and Governance Factors: Does Failure to Consider ESG Issues Constitute a Breach of Fiduciary Duty?

Changes made to the Ontario Pension Benefits Act and Regulation (the “Ontario PBA”), which came into force on January 1, 2016, now require a pension plan’s statement of investment policies and procedures (“SIPP”) to include information as to whether environmental, social and governance (“ESG”) factors are incorporated into the plan’s SIPP and, if so, how those factors are incorporated.  The changes have raised more questions than there are answers for plan administrators.  The primary question is whether there is a legal requirement to take ESG into account or must the administrator simply consider whether, or not, to incorporate ESG?

Ontario is not the only jurisdiction to introduce ESG into the SIPP equation. In 2005, Manitoba indicated that fiduciaries could consider ESG factors provided administrators otherwise complied with statutory fiduciary duties.  Not taking ESG factors into account is not a breach of any statutory law (at least not yet), but Ontario’s recent move has certainly added to the not-so-old debate:  Is a failure to consider ESG factors in your pension plan’s SIPP a breach of fiduciary duty?

On a basic level, it is the fiduciary’s role as plan administrator to be responsible for investing the pension fund in accordance with the administrator’s standard of care, in a prudent manner and always in the best interest of plan beneficiaries. Pursuant to section 22 of the Ontario PBA, prudent investing entails understanding, monitoring and investigating risk.  The administrator is responsible for determining what prudence requires within the context of the plan in question.

North American investors have in general been slow to incorporate ESG factors into their investment research, analysis and decision making, whereas European investors have been doing so for many years.

Canada’s large public sector pension funds, including CPP, Ontario Teachers’, HOOPP, OMERS, bcIMC and others, have now incorporated ESG into their investment policies. CPP Investment Board has stated:

“We believe that organizations that manage Environmental, Social and Governance (ESG) factors effectively are more likely to create sustainable value over the long term than those that do not. As we work to fulfill our mandate, we consider and integrate ESG risks and opportunities into our investment decisions.”

The link between ESG issues and bottom line profits and share prices was illustrated late in 2015 when BHP Billiton and Vale’s horrific mine disaster in Brazil resulted in the deaths of 17 people as well as hundreds of individuals losing their homes due to a massive dam burst. In February 2016, BHP recognized a US$1.12 billion provision related to the disaster.

The questions for administrators include:

  • How should you balance your primary objective to achieve optimal rates of return within an acceptable level of risk?
  • Should an investment target company’s ESG record take precedence over its increase in share price?

Administrators face significant hurdles in gathering relevant non-financial (or extra-financial) data if they wish to take ESG factors into account. Independent ESG research and analysis firms are available to help pension fund administrators gather materially relevant information on potential investments and their respective corporate ESG performance as well as information on external managers, many of whom are already integrating ESG factors into their investment processes.

Bottom line for administrators, if ESG factors are determined to be of importance in their investment policies and procedures, their first step is to separate the identifiable legal implications that will arise from incorporating ESG information into their SIPP and how their governance committee is expected to assess ESG analytics into their overall risk management policies. Does ESG act as a tie breaker when other financial considerations appear equal?  How should administrators communicate (and document) their ESG factors and decision-making processes to the plan beneficiaries?

Plan administrators should seek legal advice to ensure their fiduciary duties are fulfilled if (and more likely when) they begin to embark on considering ESG factors into their investment decision-making process.

 

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Environmental, Social and Governance Factors: Does Failure to Consider ESG Issues Constitute a Breach of Fiduciary Duty?

U.S. employers targeted by lawsuits claiming excessive fees in employee retirement and savings plans: Could it happen in Canada?

I recently wrote about the legal risks regarding plan fees that should be considered by Canadian employers who sponsor group registered retirement savings plans and defined contribution pension plans (that article can be found here).  These risks have been emphasized by several lawsuits filed against U.S. employers in the last few months.  The following is a brief update on litigation activity in the U.S. which should give pause to Canadian employers who sponsor capital accumulation plans for their employees.

This week, no fewer than seven high-profile U.S. universities were sued regarding fees charged in their defined contribution retirement plans.  Plaintiffs are seeking class-action status against these U.S. educational institutions alleging, among other things, that their employers acted imprudently by selecting high-cost funds for the plans when lower-cost alternatives were available.  These lawsuits are part of a trend that has emerged in the last decade: claims against large and small U.S. employers which allege that fees haven’t been adequately disclosed, service providers are being paid unreasonable fees for the services they provide, and insufficient diligence has been carried out to properly select reasonably-priced funds and monitor whether fees remain competitive for years after funds are selected.

Some commentators have referred to this trend as a gold rush for lawyers. Several very large, respected U.S. companies have settled claims for tens of millions of dollars, while at the same time asserting that they have acted prudently in charging plan fees for administration, record-keeping and investment services.

The spate of U.S. litigation should prompt Canadian employers to mull over the following obvious questions: Do plan fees hold up against a benchmark of fees charged by other plans?  Could the same services be provided at a lower price?  Has the employer conducted, and kept records of, regular reviews of fee options?  Was expert advice obtained in selecting funds and negotiating with service providers and investment managers?  Consider this wording in a very recent claim against a small U.S. employer:

“Defendants had a flawed process – or no process at all – for soliciting competitive bids, evaluating proposals with respect to services offered and reasonableness of fees for those services, actively monitoring the reasonableness of fees assessed to Plan participants, and choosing a service provider on a periodic, competitive basis.”

Could all Canadian employers defend such allegations – especially those who have not paid attention to the fees charged in their plans for a few years? They may mistakenly think that their trusted service provider will inform them if fees could be reduced.  That may not be the legal obligation of a service provider.  And it may not be in the financial best interests of service providers to do so.

The Ontario pension regulator has formally encouraged pension plan administrators to shine a light on fees. It stated in a 2016 guideline that it expects employers who sponsor defined contribution pension plans to give “due consideration” to including wording in statements of investment policies and procedures that sets out “expectations, ranges, or limits on total plan expenses and fees; and guidelines for monitoring expenses and fees”. Good advice, especially in light of the litigation on this topic in the U.S.

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U.S. employers targeted by lawsuits claiming excessive fees in employee retirement and savings plans: Could it happen in Canada?

How should employers deal with pensions in a severance package?

HR professionals often ask us how to deal with pension issues when they structure severance packages for non-union employees. Should employees continue to earn pension benefits after termination of employment?  If so, for how long?

Here are some legal principles that will help the puzzled professional approach these questions. See the article by Taylor Buckley here [http://www.employmentandlabour.com/limiting-liability-incentives-and-benefits-on-termination-of-employment] that describes in a general way the treatment of a variety of employee benefits on termination of employment.  This article will focus on the treatment of pensions.

Is there anything in writing?  Is there a written employment contract, collective agreement, plant closure agreement or other document that clearly describes what will happen to pension benefits when the employee is dismissed?  If the answer is yes, follow the written document.  If the answer is no, read on.

The statutory notice period?  Easy. In Ontario, employment standards legislation requires pension accruals to continue during the period of statutory notice.  For both defined benefit and defined contribution pension plans, the employee should be given credit and contributions in the pension plan for that period.  The challenge is what pension treatment should apply at the end of the statutory notice period.  Read on.

What about pension benefits during the period of common law notice?  A period of common law notice could extend for several months after a statutory notice period ends.  Courts have said that long-service, highly-paid employees who are terminated without legal “just cause”, could be entitled to a period of common law notice as long as two years.  The general rule is that an employee who is dismissed without cause is entitled to the value of the pension benefit that he/she would have received if he/she had worked for the entire period of common law notice.  The general rule won’t apply if there’s something in writing that provides for some different treatment – an employment contract, collective agreement, binding policy, etc.

If the general rule applies, the dismissed employee’s entitlement is to the value of the pension that he or she would have earned in the pension plan during the period of common-law notice. When dealing with a defined benefit pension plan, the amount of contributions is not the same as the value.  Advice of an actuary may be required to determine the value of a defined benefit pension accrual during a common law notice period.  It could be easier and less expensive for an employer to set up severance arrangements so that pension accruals continue in the pension plan, rather than pay a separate cash amount equal to the value of the pension accrual.

Are employers required by law to continue pension benefits through the entire period of common law notice?  If the general rule applies, that doesn’t mean that the dismissed employee must receive the value of pension benefits for the entire period of common law notice.  Employees can agree to some other deal.  A dismissed employee could sign a release and accept a severance arrangement that doesn’t include the accrual of pension benefits through the period of common law notice (as long as all statutory obligations are met).  That is legally acceptable, as long as the treatment of pension benefits is clear in the documentation, and the employer has acted appropriately in disclosing the pension issues to the employee.

How should an employer disclose pension issues when negotiating a severance deal?  Carefully.  Pension legislation requires an administrator of a pension plan to act as a fiduciary when explaining pension entitlements under the plan.  That includes a situation where a dismissed employee is considering pension issues in the context of a severance package.  Severance letters often say something like, “you will receive pension information under separate cover”.  If the employer is seeking a release at that point, the release may be challenged in future if the dismissed employee later says that he or she didn’t understand how his pension was being handled under the severance arrangement.  The better approach is to deal with the treatment of pensions up front, in the initial severance letter that sets out all payment terms.

Exactly what are the options in dealing with pensions during a severance period?  The easy point is that in Ontario accruals continue, without exception, during the statutory notice period.  The more difficult point is what should happen with pensions after the end of the statutory notice period.  There are two basic choices.  Pension accruals could cease at the end of the statutory notice period, in which case the dismissed employee simply receives his or her pension termination option statement.  Alternatively, pension accruals could continue for the period of time when the dismissed employee is still considered to be an employee for tax purposes.  The key here is that the status of being employed for pension accrual purposes can continue even if the individual does not report to work.  A severance deal can be structured so that for tax purposes, the individual’s employment has not terminated at the end of the statutory notice period.  Such arrangements are commonly referred to as “salary continuance arrangements”.  The individual’s salary and some benefits continue during the salary continuance period, without interruption, even though the employee no longer comes to work.  The employer doesn’t provide a Record of Employment until the end of the salary continuance period.  Documentation must be clear in confirming with the dismissed employee exactly what is happening with his/her benefits.  And the employer should be aware of what is permitted regarding benefit accruals/continuation in the relevant benefit plan text.

It is often simpler, and less expensive, to provide for continuing pension plan accrual within the pension plan during a period of salary continuance, rather than wrestle with the issue of a cash payment to compensate the dismissed employee for loss of pension accruals during a severance period.

The bottom line for employers with pension plans is that a proper structuring of a severance package requires thought beyond the question of “how many months is this employee entitled to?” There could be an expensive pension issue that employers should address at the outset.  Should the pension accruals continue throughout the salary continuance period?  Would it be easier and less expensive to simply provide a cash payment in lieu of pension accruals?  Has the dismissed employee been given clear and complete information about what his/her pension rights are in connection with his/her severance deal?  Employers should have solid answers to these pension questions before terminating employees.

Get legal advice.  We strongly recommend that employers get legal advice when dismissing employees.  Circumstances can vary, and there may be important exceptions and unique approaches to the principles described in this article.

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How should employers deal with pensions in a severance package?

New Court Decisions Reinforce Need for Benefit Communications Policy

In my last post to this blog I extolled the virtues of a benefit communications policy for HR professionals who communicate pensions and benefits to fellow employees. I pointed out that years of benefit miscommunication has an overwhelming impact on an organization’s potential legal liability. I also highlighted the fact that court decisions demonstrate time and again that important cost-savings measures, such as reducing post-retirement benefits or eliminating future pension accruals, can be derailed by ambiguous communications.

Canadian case law demonstrates how widely courts and arbitrators are prepared to cast their nets when awarding damages for benefit miscommunication. Cases involving negligent misrepresentation, for example, have resulted in awards for retiring employees, terminated employees, spouses of deceased employees and future employees. Two recent cases dealing with employee benefits and pensions demonstrate how a benefit communications policy can make a difference to employers.

In Feldstein v. 364 Northern Development Corporation, the B.C. Supreme Court awarded more than $93,000 in damages to a 364 employee, Feldstein, in respect to inaccurate information provided to him about the company’s long term disability (LTD) program during the hiring process.

During pre-employment interviews Feldstein disclosed that he suffered from a condition that could require him to apply for LTD benefits at some future date and, understandably, asked pointed questions about 364’s LTD program. The hiring manager misrepresented how the program operated and when Feldstein ultimately applied for benefits, he was denied full coverage. The court confirmed that the law required 364 to ensure that representations made to Feldstein about the LTD program were accurate and not misleading.  It concluded that Feldstein, to his detriment, had accepted employment on the strength of the company’s negligent misrepresentation and was entitled to recover damages.

Among the features of a benefit communications policy is the thorough vetting of all communications that may be relied upon by potential and current employees to make important decisions. With Feldstein’s disclosure of a pre-existing medical condition and pointed questions about 364’s LTD program, it would have been obvious to even the most casual observer that he intended to rely on the company’s explanation in making his employment decision. That alone should have spurred the hiring manager to refer to 364’s benefit communications policy (assuming it had one) which, one hopes, would have required the explanation to be thoroughly vetted before being delivered to Feldstein.

While the Feldstein case addresses communications to future employees, a more recent Quebec Superior Court decision deals with communications to current employees.

In Samoisette v. IBM Canada the employer amended its defined benefit (DB) pension plan to eliminated bridge benefit entitlements for its employees in respect of their future retirement benefits and unilaterally terminated health insurance coverage for certain employees over age 65. Affected employees challenged IBM’s right to make those changes.

The court upheld IBM’s right to unilaterally modify its health plan on the basis that all benefit communications to employees had clearly reserved to IBM the right to amend those benefits at any time. However, the bridge benefit amendment was held to be invalid on the basis that employees had relied on IBM’s unqualified representations about that benefit, which said nothing about possible future changes, when making the important decision to remain in the DB plan when an alternate (defined contribution) plan was introduced by the company. The court found that most employees who chose to remain in the DB plan did so to take advantage of the bridge benefit and, hence, IBM was prohibited from amending the bridge benefit notwithstanding that it had reserved the right to amend its pension plan in the future.

IBM was ordered to pay more than $23 million plus interest to active and retired employees a decade after the original bridge benefit amendment. Keep in mind that the Quebec court’s decision may be appealed.

While IBM effectively reserved the right to amend or terminate its health insurance coverage, it appears that its pension communications were not sufficiently explicit to overcome the expectations of employees who elected to remain in the DB plan to take advantage of the bridge benefit feature. An effective benefit communications policy will recognize when representations will be relied upon by employees to make important decisions and, among other things, will ensure that such representations include language highlighting the employer’s right to implement future changes to benefit programs.

As noted in my earlier post, a benefit communications policy should become an integral part of an organization’s risk management strategy and be aligned with existing procedures and human resource capabilities. There is no guarantee that phantoms of past benefit communications will not haunt an employer in the future.  Nevertheless, a benefit communications policy can significantly decrease the risk of future legal claims against an employer and increase the likelihood that upcoming cost-saving measures, which include changes to pension and benefit programs, will not be derailed by ambiguous employee communications.

Ensure that your organization adopts a benefit communications policy as soon as possible. If you require assistance, speak with one of our experienced pension and benefits lawyers.

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New Court Decisions Reinforce Need for Benefit Communications Policy