A recent decision of the Ontario Superior Court of Justice has confirmed that, in the right circumstances, a plan sponsor can remedy incorrect pension plan language by utilizing the equitable remedy of rectification.
In MTD Products Limited v. Baldin, the employer had decided to provide an unreduced early retirement benefit for one long-time employee – James Dobbie. The plan language provided that on early retirement, member benefits were to be reduced by 1/2 of 1% for each full month that the pension was paid prior to the “normal retirement date”. In order to accommodate Mr. Dobbie’s unreduced retirement benefit, it was necessary to amend the plan text.
The consulting firm engaged to draft the amendment suggested amending the plan to provide unreduced early retirement benefits for all members of the plan, and not just Mr. Dobbie. Due to cost considerations, the employer rejected this suggestion and understood that the plan was amended to provide early retirement to Mr. Dobbie only. (This understanding was consistent with the consultant’s instructions and internal notes).
Unfortunately, the language of the amendment, as filed and registered with the Financial Services Commission (FSCO), provided that the early retirement benefit was subject to the discretion of the employer. Accordingly, the early retirement benefit was captured by s.40(3) of the Pension Benefits Act, which deems an employer to have given its consent to the receipt of an ancillary benefit (such as early retirement) where consent is an eligibility requirement and members have satisfied all other eligibility requirements.
Almost ten years later, the plan was partially wound up. Upon reviewing the partial wind-up report, FSCO asked the employer to confirm that all affected members who met the requirements for early retirement (or who would grow into them) had their benefits valued in the report. This was the first time that the employer learned that the “Dobbie Amendment” had been drafted such that it provided unreduced early retirement benefits to all plan members. The potential liability for funding the unreduced early retirement benefit was equal to approximately $5,700,000.
FSCO suggested that the employer apply to the Ontario Superior Court for an order limiting the application of the amendment to Mr. Dobbie alone. The employer made an application for rectification of the plan text.
Based on the evidence provided, the Court was satisfied that the purpose of the amendment was to solely benefit Mr. Dobbie. Among other things, the Court noted that during the 10 years since the amendment had been registered, the employer had operated on the understanding that Mr. Dobbie, and Mr. Dobbie alone, was entitled to the amendment entitlements. Additionally, this understanding was consistent with plan member information, including plan booklets distributed in 1995 and 2004 to members. After considering all of the evidence surrounding the amendment, the Court concluded that there was a mistake in the wording of the amendment and the employer’s intention was not accurately recorded in the plan. As a result, the Court granted the remedy of rectification.
This decision confirms that an employer may remedy improper plan documentation through rectification where the evidence clearly demonstrates that, by mistake, the plan documentation in question does not accurately reflect the original intention.