The Right Stuff
By: Mark Newton
An Ontario Court of Appeal has decided that until proposed changes to a plan are finalized, there is no requirement to communicate these proposals, says Mark Newton, of Cassels Brock & Blackwell.
The long-awaited Ontario Court of Appeal decision in Hembruff v. Ontario Municipal Employees Retirement System (OMERS) was released on November 1, 2005. While the appeal was heard in mid-May, the 51⁄2- month wait was well worth it.
Madam Justice Gillese, who wrote the decision, is renowned for her expertise in pension law. She overturned all of the lower court’s rulings.
The decision has significant implications for pension plan sponsors and administrators, as well as for plan members. The decision also has potentially broader implications regarding the extent of an employer’s duty to disclose and communicate proposed changes to any compensation, benefit, or pension plan.
The case stems from the resignation of 12 employees from the Toronto Police Services Board in 1998. All elected to transfer the commuted values (CVs) of their pensions out of the plan. Eight of them received their CVs in 1998. The other four received their CVs at the beginning of 1999. However, effective January 1, 1999, some improvements were made to the OMERS plan. The value of the improvements were granted to the latter four employees, but not to the eight who received their CVs in 1998. Those eight employees brought the action against OMERS, claiming that they should have benefited from the improvements. They claimed damages for breach of fiduciary duty and negligent misrepresentation. The claim succeeded at trial, in respect of six of the eight plaintiffs and was overturned on appeal.
The central issues in the case were whether a pension plan administrator has a duty to inform plan members of contemplated benefit improvements to a pension plan and, if so, when that duty arises. In the typical corporate context, management staff from human resources and finance frequently consider various types of plan amendments, depending upon the funded status of a pension plan, the competitiveness of the plan, and various other factors. Any amendments proposed by management are usually subject to the approval of the plan sponsor’s board of directors.
Often, plan changes are considered, costings are performed, and the amendments are not implemented. This is particularly true in the context of collectively bargained pension plans. Imagine if a plan sponsor or administrator were required to disclose the details of potential changes to plan members or the union every time plan amendments are considered! Yet this is what the lower court seemed to require!
OMERS’ processes are much more complex than the typical single-employer plan sponsor. OMERS has about 900 participating employers, with approximately 300,000 plan members.
Given its size and the potential cost of any plan change, it undergoes an extensive actuarial review and evaluation process prior to implementing any amendments. Further, OMERS is a statutory plan and any proposed changes are not effective until approved by order of the Lieutenant Governor in Council in the form of regulations.
OMERS’ plan change review process took place throughout 1998, starting with a review of a preliminary actuarial report in March and ending with the making of recommendations to the Ontario government in November. The Ontario government approved the final recommendations by Order in Council dated May 5, 1999. The changes were made effective retroactive to January 1, 1999.
The members who were paid out their CVs in 1998 were no longer members of the plan when the improvements were implemented. OMERS, however, felt duty-bound to extend the improvements to the members who did not receive their CVs until the beginning of 1999. (Interestingly, one of the changes to the plan was to eliminate the CV transfer option. OMERS did not apply this change to these members, given that they had made their elections in 1998.)
On the issue of whether OMERS’ failure to inform the plan members of potential plan changes constituted a negligent misrepresentation, the Court of Appeal reviewed the five-fold test for such a claim as established by the Supreme Court of Canada in 1993 in Queen v. Cognos. The court held that OMERS indeed had a duty of care toward the members. There was such a “relationship of proximity” that it would be reasonable for OMERS to foresee that plan members would place reasonable reliance upon any representations. This would be the case in most plan administrator/ plan member relationships.
However, the court held that OMERS’ failure to inform the plan members did not constitute a negligent misrepresentation and that any requirement to inform members of possible changes would be problematic. If a plan administrator informed plan members of a potential plan change that was not implemented, and the members relied on that information to their detriment, the administrator could be liable for any financial loss suffered by the members.
The court also addressed the allegation of breach of fiduciary duties. The court’s conclusions were much the same as outlined above, given that OMERS did not have a duty to disclose the potential plan changes. Any duty to communicate possible plan changes would have resulted in an “unmanageable burden” on OMERS. The court concluded that until the OMERS board finalized its recommendations, any information about plan changes would be immaterial to members and “speculative in nature.” There is no obligation on a plan administrator to communicate speculative information. Without such an obligation, there was no breach of fiduciary duties.
As a result of this decision, employers can breathe a sigh of relief in the knowledge that potential changes to pension plans, and not just to pension plans but to benefit plans and compensation plans as well, do not have to be communicated to employees until there is a finalized and documented decision to make the changes.
Mark Newton is a partner with the law firm of Cassels Brock & Blackwell in Toronto.
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