Sponsors of defined benefit (DB) pension plans transitioning to a defined contribution (DC) platform would be well advised to carefully consider how they communicate the change to their employees. The claim made by plan members in Dawson v. Tolko Industries Ltd. confirms the potential legal pitfalls associated with programs offering members the option to move from a DB to a DC structure.

While the case has yet to be tried on its merits, an interim decision recently released offers additional lessons on the limitations of relying on releases provided by plan members as a defence against plan member claims.

The Decision

Pension plan members who took up a DB/DC conversion option in 1997 (i.e., whereby plan members are offered the opportunity to exchange their DB benefits for an amount in a DC account) commenced a claim against their employer and its actuarial consulting firm, in which they alleged, among other things, breaches of fiduciary duty and negligent misrepresentations in connection with the communication of the DB/DC conversion option.

The core of the plaintiffs’ claim is that their pension benefits under the DC plan were much less than they would have been under the DB plan. The specific alleged breaches included: (i) a failure to advise the plaintiffs of the personal considerations which they ought to have had in mind when deciding whether or not to accept the conversion offer; (ii) negligent misrepresentations in relation to preparation of the written materials; and (iii) a failure to advise the plaintiffs of the risks associated with the transfer of their pension benefits to the DC plan.

From 2004 to 2008, the employer laid off a number of employees and entered into settlements, for which the employees executed agreements releasing the employer from liability from claims that the employees may have against the employer (the Releases). The plan members who executed the Releases discontinued their claims against the employer, but continued in their action against the consulting firm. The consulting firm brought a summary trial application to dismiss the claims of these plan members, arguing that they too were subject to the Releases.

In addition to other matters, the Court considered whether or not the reference in the Releases to the release of agents from liability applied to agents of the employer and determined that the Releases were ambiguous. Applying a legal principle whereby ambiguities are resolved against the drafter, the Court found that the reference in the Releases to the release of agents from liability did not apply to agents of the employer.

Risks of Transfer from DB to DC Platform

Although this decision was only an interim decision, it highlights the challenges to plan administrators/employers in meeting the legal standard for communicating with plan members about their options to transfer from a DB to a DC structure. If the case goes to trial on the merits, it will be interesting to get further details in that decision on the allegations against the employer.

From the few details in this decision it appears that the employer followed a fairly standard process, engaging a reputable actuarial consulting firm, presenting the conversion option by way of written materials and informational seminars and providing plan members with various actuarial projections and models. A decision on the merits will be instructive in terms of why the plan members allege the employer fell short of meeting its legal obligations and will hopefully offer guidance on what’s required of plan administrators/employers.

Importance of Proper Drafting

Even though it’s not clear from the decision whether or not the intent was for the Releases to apply to agents of the employer, there’s an important lesson to be learned about the inherent risk in relying on releases (or other contractual exculpatory clauses) to limit liability, rather than ensuring that legal duties are properly fulfilled.

Essentially, the Court was unable to conclude that the term “agents” covered the consulting firm, because the language in the Releases was not precise on this point. The Court highlighted the complex sentence structuring in the Releases, noting that the relevant part of the Releases was “part of a lengthy sentence that is grammatically awkward. There are eleven commas and the word “and” is used four times.” Such complex sentence structuring can give rise to ambiguities.

It is therefore important in releases provided on termination of employment, as with all other employee agreements and communications, that they be drafted clearly using “plain language” as opposed to legal jargon. As well, if particular pension issues are intended to be covered by a release provided on termination of employment, these issues should be specifically referenced. Absent a specific reference, it may be difficult to rely on the release to defend against claims related to those particular pension issues.