In a decision released on October 1, 2009, the British Columbia Supreme Court decided that a reduction in retiree benefits for a group of 27,000 government retirees was within the legislative authority of the government and did not constitute either a breach of contract or a breach of fiduciary duties toward the retirees. The decision is Bennett v. British Columbia 2009 BCSC 1358.

Mr. Bennett, a retired member of the British Columbia Public Service Pension Plan, commenced a class action against the British Columbia government in August 2004. Following an appeal to the British Columbia Court of Appeal – see Bennett v. British Columbia 2007 BCCA 5 – the action was finally certified as a class action at the end of 2007.

This case follows an almost identical one brought by the British Columbia Nurses’ Union against the Municipal Pension Board of Trustees and the British Columbia Ministry of Finance: 2006 BCSC 132. That action was dismissed. Mr. Bennett’s action was also dismissed, citing the B.C. Nurses’ decision.

Until January 1, 2003, retirees of the British Columbia government received premium-free medical benefits and extended health benefits. Changes were implemented by the government to eliminate funding for the dental plan, increase the deductible for extended health benefits from $25 to $250, change the co-payments from 20% of the first $1,000 to 30% of the first $2,000, eliminate out-of-country coverage, and require retirees to pay one third of the medical benefit premiums.

There were two classes of retirees in this proceeding, one who were previously employed by the government and one who were not previously employed by the government but by various Crown agencies. The claim by the retirees alleged that the changes to the retiree benefits program introduced by the government constituted a breach of contract and a breach of fiduciary duties.

The court decided that there was neither a breach of contract nor a breach of fiduciary duties by the government. The decision presents an interesting discussion of these two aspects of the case. It also examines the issue of vesting of retiree benefits, ie, whether a right to the particular benefits enjoyed by the retirees upon retirement crystallized in the retirees. The court decided that the retiree benefits had not vested in the retirees.

With regard to the breach of contract allegation, it only applied to the retirees who were previously employed by the government. The Court of Appeal had decided in 2007 that there could be no breach of contract by the government in respect of the retirees who were employed by Crown agencies rather than by the government.

The court adopted the reasoning in the pension decision of the Supreme Court of Canada in Schmidt v. Air Products [1994] 2 S.C.R. 611, that numerous documents may constitute a “legal matrix” that must be looked to to determine the rights between employers and employees. However, the court did not agree that retirement letters, retirement application forms, retirement information seminars and the like constituted representations to attract and retain employees. They did not constitute part of the bargain between the employer and the employees.

The court found that the government never offered, as part of the initial offer of employment, a right to lifelong premium-free retiree benefits. Any subsequent written and verbal communications to employees after they were hired, leading up to retirement and following retirement, did not alter the terms of employment. The court did not find there was any fresh consideration (something of value) given by employees, which is essential in the formation of a legally binding contract. Furthermore, the Lieutenant-Governor was given discretion in the legislation to set premium rates from time to time.

The court also examined the application of the Supreme Court of Canada’s seminal decision on the subject of retiree benefits in Dayco (Canada) Ltd. v. CAW [1993] 2 S.C.R. 230. In that decision, retiree benefits negotiated as part of a collective agreement were found to have vested in the retirees at the point of retirement. The benefits in the current case were not part of a collective agreement and, as stated above, the court found that there was never any promise by the government to provide lifetime premium-free retiree benefits. Therefore, the notion of vesting of the retiree benefits, as existed in Dayco, did not apply.

With regard to the fiduciary duty issue, the court reiterated the recognized characteristics of fiduciary relationships: (i) the fiduciary must have scope for the exercise of discretion, (ii) the fiduciary in the unilateral exercise of the discretion can affect the other person’s legal or practical interest, and (iii) the other person is vulnerable to the fiduciary. The court held that the existence of these three characteristics is not determinative of the issue. The court held that “something more is needed” and that is a reasonable expectation on the part of the other party. In this case, could the retirees reasonably expect that the government would always act exclusively in their best interests, potentially at the expense of the public interest?

On the basis of this reasoning the court held that the government did not have a fiduciary duty to provide lifelong premium-free retiree benefits. If the government had such a duty, it would cause a problem with “inter-generational equity”, such that these retirees would have the benefit of lifetime premium-free status and later retirees would not enjoy similar benefits. The court adopted the reasoning in the earlier B.C. Nurses’ case:

“Courts must be careful in interpreting pension plans [benefit plans] in such a way as to confer additional benefits on some members at the expense of others.”

The court accepted that the retiree class was vulnerable in the event changes were made to the retiree benefits. However, it found that vulnerability was only one factor to consider:

“Others, more persuasive, are the public law nature of the role of the Crown, the legislative history, and the concept of inter-generational equity.”

While this decision is one that involved government retirees covered by a statutory regime, there are aspects of the decision that are of interest to private sector employers, in particular the discussion of what the “contract” is between an employer and employees vis-à-vis retiree benefits. The court discounted the legally binding nature of employee and retiree communications. The court’s discussion of fiduciary duties and whether employees could reasonably expect to have premium-free retiree benefits for life is also of interest. Employers wishing to modify retiree benefits must always tread carefully.