Pensions, Benefits & Executive Compensation

Introduction

This case involved determining the scope of the amendment restriction under section 14(1)(a) of the Pension Benefits Act (Ontario) (the PBA) and a plan amendment power which essentially, as is common, incorporated the section 14(1)(a) of the PBA amendment restriction.

In summary, the Financial Services Tribunal (the Tribunal) found that section 14(1) (a) of the PBA "protects only the amount of pension that past service would generate at the time the plan is amended." Accordingly, an amendment which changes the benefit formula from a final average three to a final average five formula, with protection that the benefit would never be less than the benefits under the old formula at the date of the amendment, does not violate the PBA.

The Tribunal stated that "many if not most employers in Ontario" have similar amendment restrictions and therefore this decision is of broad application. This decision will apply to not only benefit formula changes but also to benefit freezes and conversions.

Actuarial Evidence

The Tribunal considered the actuarial evidence of the three actuaries for both the Applicant, The Royal Ontario Museum Curatorial Association, and the Respondent, The Royal Ontario Museum, and found it pointed to consensus among all three actuaries as follows.

The evidence of the Respondent's actuary, Ms Jill Wagman, was described by the Tribunal as follows:

"The essence of her evidence was that '[a]s understood by actuaries, ... the amount of pension accrued is ... a known amount that can be calculated at any point in time and does not require assumptions or estimations to be made in its calculation'. In her opinion, the calculation uses earnings and service as of the date the calculation is made; calculations of accrued pension amounts do not include either future service or future salary projections (Wagman Expert Report, p.7)... Ms Wagman distinguished the calculation of accrued pension amounts from what she saw as a very different calculation, the calculation of projected pension benefits."

The evidence of the Respondent's actuary, Paul Forestell, was to similar effect, and the Applicant's actuary, Marcus Robertson's report stated: "I do not have concerns about the information provided or the claims made in the Mercer [i.e. Forestell] Report (Robertson Report, p.2). He also indicated that he had no concerns about Ms Wagman's report with the exception of her discussion of the implications of a finding in the Applicant's favour (Robertson Report, p.3)".

The Positions of the Parties

The Applicant argued that as The Royal Ontario Museum Pension Plan (the Plan) incorporated an earnings definition that requires the determination of earnings for purposes of calculating the retirement benefits to be calculated "prior to retirement", the accrued benefit earned as of December 31, 2009 must include a right to have the pension determined based on future earnings in respect of the pre-2010 service.

In contrast, the Respondent argued that the only amount of pension that had accrued prior to the amendment was the amount to which that member would be entitled if she retired or otherwise left the Plan as of that date, i.e., benefits are determined as of the effective date of the amendment, based on information current as of that date (service accumulated and earnings as of that date). Since the amendment in issue ensured that the pension earned by a member for service prior to January 1, 2010 will never fall below the amount calculated on that basis, the Respondent argued that the amendment does not violate the PBA or the Plan.

In support of its interpretation of "accrued benefits", the Respondent relied heavily on the argument that its approach was supported by the actuarial consensus "that according to standard actuarial practice, a member's 'accrued benefit' is calculated as of a specific date, based on information current as of that date." The Respondent contended that the implications of interpreting the term "accrued" in a manner that deviates from this standard practice would be "very broad and very drastic, requiring actuaries to recalculate plan values in a wide variety of contexts."

The Respondent also argued "that the 'pension promise' is contained in the whole Plan, not simply in the benefit formula. The whole Plan, the ROM argues, includes Section XIII (1), which contemplates modifications to the Plan, always provided that those modifications do not 'reduce accrued benefits'. To argue that the formula cannot be changed simply because it was in place at the time service was accumulated is to ignore the fact that the Plan gives the employer an explicit right to amend, limited only by its obligation to respect 'accrued benefits'."

Tribunal Analysis

In its analysis, the Tribunal started by determining that, consistent with the Tribunal decision in McGrath v. Superintendent of Financial Services, OMERS Administration Corporation and OMERS Sponsors Corporation, it is necessary to make the determination of what is an accrued benefit at the effective date of the amendment based on the information available at that time.

The Tribunal then noted that, while the position of the Respondent was supported by the Canadian actuarial practice in evidence, as the issue as to what is accrued for purposes of section 14(1)(a) and the Plan amendment provision is a legal question, it would have been open to the Tribunal "to conclude that actuaries have been operating on an incorrect understanding of the meaning of 'accrued benefits', or that the legislature intended to use the term 'accrued' in s.14(1)(a) in a different sense than it is normally employed by pension actuaries." Importantly, however, the Tribunal did say that it "would not be quick to dismiss an actuarial consensus with respect to the meaning of an essentially technical term which the legislature has chosen not to define."

The Tribunal found that the Canadian case law, other than the Halliburton Group Canada Inc.v.Alberta decision, had found that "accrued benefits" are calculated on a point-in-time basis based on earnings and service at the time of the calculation.

The Tribunal then considered the Halliburton decision. The Tribunal found that the Alberta Court of Appeal held that the right to have a retirement pension calculated on the basis of a pre-amendment formula for prior service was an entitlement vested in plan members, and a plan amendment which purported to reduce the value of that entitlement was therefore void.

The Tribunal found material differences between the Alberta legislation and the PBA in relation to the restriction on plan amendment:

"[106]   We are persuaded, however, that there are material differences between the statutory provisions governing Halliburton and those governing this case. Halliburton was decided under s.81 of the EPPA [the Alberta Employment Pension Plans Act], the relevant provisions of which are as follows:

(1) An amendment to a pension plan, or, where one plan has been adopted in place of another, the plan so adopted, may not reduce

(a) a person's benefits in respect of employment on or after the initial qualification date and before the date of the amendment or adoption of the other plan...

(2) Unless the plan so provides, subsection (1)(a) does not apply to that portion of the benefits that is based on the earnings of a member projected in relation to a period after the date of the amendment or adoption of the other plan.

[107]    Two differences between s.81 of the EPPA and s.14(1)(a) of the PBA stand out as critical. First, the EPPA protects 'a person's benefits in respect of employment' prior to the amendment, while the PBA protects 'the amount of pension accrued in respect of employment prior to the effective date of the amendment'. As the Responding Parties have pointed out, s.81 of the EPPA does not refer to the 'amount' of the benefit, nor does it contain the crucial word 'accrued'. Second, the EPPA specifically addresses the issue of the projected earnings and provides that those earnings fall outside the scope of s.81(1)(a) of the EPPA; the PBA makes no reference to projected earnings.

[108]    It appears to us that the Halliburton decision may ultimately turn on those differences, although we confess that we have not found all of the court's reasoning on the core issues easy to follow."

Conclusion

Accordingly, the Tribunal has found that, notwithstanding the Alberta Court of Appeal decision in Halliburton, neither the PBA, nor the Plan would prohibit the amendment in issue.

The Tribunal also found that the PBA and the plan text were not ambiguous and therefore the rule of contra proferentem, which states that, if there is an ambiguous clause in a contract or other legal document, it will be interpreted against the party responsible for drafting the clause, was not applicable.

Finally, having found that the Tribunal agreed with the Respondent's position, they did not have to consider whether to give deference to the Superintendent or what weight to give to the policy statements of the Financial Services Commission of Ontario.

This is a key decision as many pension plans in Ontario have made, or are considering making, changes to pension plans which could potentially have been subject to challenge under a Halliburton analysis, including changes to benefit formulae, freezes and conversions without salary projection.

An appeal of this decision must be commenced by September 16, 2013.