The decision of the Ontario Court of Appeal earlier this year in Slater Steel* exposed 10 directors, officers and employees to possible personal liability of $20 million with no meaningful recourse against the insolvent Slater Steel or its assets. This is a reminder that failure to recognize and fulfill fiduciary obligations for a pension plan can expose you to substantial personal liability.
Canadian businesses face tough economic times, particularly many manufacturing businesses with defined benefit pension plans. Efforts will be made to minimize expenses wherever possible. A company may focus on the substantial amounts contributed each year to its defined benefit pension plan.
For most defined benefit plans, the contributions are based on a report of the plan’s actuary. The actuary makes assumptions, often in consultation with the employer. An employer wishing to conserve cash may encourage the actuary to make aggressive assumptions. The Slater Steel actuary alleges that he was instructed to employ a solvency-assetadjustment or “smoothing” methods, without disclosure that there were doubts as to whether the company would remain a going concern.
Ontario and other Canadian provinces impose fiduciary duties on the designated administrator of a pension plan. The administrator does not have to fund the plan, but must monitor contributions made by the employer. If the administrator is aware that the contributions have not been determined correctly (e.g. the actuarial report was based on inappropriate assumptions), it is under an obligation to take action.
For most Ontario plans the designated administrator is also the employer. Hence there is a tension between the desire to minimize contributions and the obligation to ensure that all required contributions are made. Generally, the fiduciary duties of the employer as designated administrator trump any interest that the employer may have in conserving cash. Slater Steel even suggests that, in light of the precarious financial position of the company, there was a fiduciary duty to maximize contributions to the pension plans.
Of course, a corporate employer acts through its directors, officers and employees. Ontario law extends the fiduciary duties to those individuals. Slater Steel concludes that the fiduciary obligations are separate from, and in effect trump, the general duties of the individuals as directors, officers and employees. Also, the Court stated that an individual may not be protected against claims for breach of fiduciary obligations by a court order barring claims “arising by reason of, out of or in connection with” his or her service as an officer or director. The directors’ and officers’ charge in the CCAA proceedings is no longer available in this case.
Not all actions that affect a pension plan are subject to fiduciary obligations. An employer is generally free of fiduciary duties in determining what pension benefits it will make available to employees and changing those benefits from time to time, without prejudice to accrued benefits and subject to statutory and employment law notice requirements.
When a decision is subject to fiduciary obligations, you must give the statutory duties priority over the general interests of the company. When there is no fiduciary duty, you are free to act entirely in the interests of the company.
If, as a director, officer or employee or a member of a committee, you have responsibility for the management or administration of a pension plan or its assets, you cannot step away from the fiduciary obligations. Since directors will have residual responsibility for the company pension plan, even directors not generally involved in supervision of the plan will have some fiduciary obligations.