Law Times

Law Times • August 24, 2015 Page 11 www.lawtimesnews.com Litigation risk for defined-contribution plans on the rise By JuliuS Melnitzer For Law Times s defined-contribu- tion and combina- tion plans continue to make headway as the designs of choice for many employers in Canada and the United States, litigation risk for sponsors is on the rise. Generally speaking, employ- ers often prefer defined-contri- bution to defined-benefit plans because the risks shift to the em- ployees. But that's turning out to be a bit simplistic. "It is true that in a DC plan, the employee is responsible for in- vestment and mortality risk," says Kathryn Bush of Blake Cassels & Graydon LLP. "The concern, however, is that notwithstanding the shift- ing in investment and mortality risk to the employees, ultimately DC arrangements would not be without risk." While the jurisprudence is sparse in Canada with about 10 decided cases, it's much further along in the United States. "Canadian lawyers and plan sponsors need to examine both the Canadian and U.S. jurispru- dence to get a true indication of the trends and concerns that may affect them," says Bush. "It's important to remember there are not many people who actually convert voluntarily." CANADIAN JURISPRUDENCE A case involving Via Rail Can- ada Inc. and Unifor dealt with a proposed change from a de- fined-benefit to a hybrid plan consisting of a defined-contri- bution component. Via Rail employees hired before Jan. 1, 2014, belonged to a defined-benefit plan. With a new collective agreement as of July 1, 2013, the parties agree to negotiate a new pension plan for employees hired on or after Jan. 1, 2014. The parties also agreed to have an interest arbitrator de- termine the matter if they were unable to reach a consensus. Via Rail proposed placing new employees into a hybrid plan where the employer would fund the defined-benefit component and mandatory employee contri- butions would fund the defined- contribution side. The union didn't agree with the proposal. Before the arbitrator, Via Rail argued that continuing to offer the defined-benefit plan to all future employees wasn't an op- tion given the company's cur- rent pension liabilities. Via Rail noted the defined-benefit plan was far superior to plans offered by its competitors and that under its 107-per-cent net-replacement ratios, many members would receive higher disposable take- home pay in retirement than they received as active employ- ees. The hybrid plan, Via Rail noted, would still yield a net- replacement ratio of 93 per cent, which was well above the norm. "Via Rail also emphasized that the cost of current contributions to the DB plan as a percentage of payroll was significantly higher than other comparable organiza- tions," says Bush. "The company pointed to the trend away from DB plans among its competitors and submitted that the hybrid plan would permit Via Rail to bet- ter manage the risks and volatility of the DB component of its plans." The union objected to the risk shift involved in the inclu- sion of a defined-contribution component. Employees, Unifor argued, were likely less sophisti- cated than the employer in their ability to understand and man- age risks and volatility. "The union was also con- cerned with the impact that di- recting new employees towards the hybrid plan would have on the viability of the DB Plan," says Bush. The arbitrator accepted Via Rail's proposal. He concluded that the defined-benefit plan, with its 92-per-cent gross replacement ra- tio and 107-per-cent net-replace- ment ratio, was "arguably dys- functional" and that the hybrid scheme would still provide gen- erous amounts. He did, however, accept the union's proposal to include an indexing mechanism to adjust the defined-benefit com- ponent of the plan for inf lation. Similarly, a case involving NCR Canada Ltd. and the Inter- national Brotherhood of Elec- trical Workers Local 213 arose when the company amended its defined-benefit pension plan to introduce a defined-contri- bution component. Employees who became members of the plan before the 2002 amend- ment could choose whether to stay in the defined-benefit com- ponent or move to the defined- contribution side. Nineteen union members stuck with the defined-benefit component. About 10 years later, NCR an- nounced an intention to amend the plan further to force all mem- bers into the defined-contribution component. The union grieved, arguing that NCR was estopped from amending the plan in this way because of certain represen- tations made to members when it proposed the first amendment. The arbitrator found the com- pany was in fact so estopped. The British Columbia Labour Rela- tions Board refused to second- guess the arbitrator. The B.C. Court of Appeal dismissed a fur- ther appeal for lack of jurisdic- tion, ruling that the issue of es- toppel in the collective bargain- ing context wasn't a matter of general law but rather pertained to the principles and policies of labour relations. As such, the is- sue fell within the core expertise of the labour arbitrator and, on appeal, to the board. As it turns out, the case and other examples of representations that have come back to haunt companies offer a lesson. "The key is not to oversell be- cause if people believe that you have promised them a pension of a set amount, they also believe that the failure to receive that amount must be actionable," says Bush. "What they believe depends ultimately on how good the original communication was, and that's why lawyers should be telling their clients to tone down the rhetoric." Weldon v. Teck Metals Ltd. dealt with an entirely different but important issue. The case re- quired the B.C. Court of Appeal to determine the applicability of the province's six-year general limitation period that runs from the date on which the right to bring a claim arises. Here, the plaintiffs alleged Teck Metals had provided inade- quate information when it agreed to transfer to a new defined-con- tribution plan from a defined- benefit one, something that took effect on Jan. 1, 1993. Teck Metals argued the limi- tation period ran from the time the plaintiffs joined the plan on the date it took effect. The plain- tiffs claimed the limitation period didn't commence until the plain- tiffs suffered a loss either by retir- ing or otherwise becoming eli- gible for payments under the plan. The appeal court upheld the lower court's ruling that the al- leged loss had occurred in 1993. Accordingly, the limitation had expired. U.S. JURISPRUDENCE Bush organizes the U.S. cases that she has compiled into four categories: stock-drop claims, fee-based matters, issues based on plan description, and miscel- laneous cases based on fiduciary duty. What follows is a sampling of some of the cases. The leading stock-drop case is the U.S. Supreme Court's decision in Fifth Third Bancorp v. Duden- hoeffer. The case centred on Bancorp's defined-contribution retirement savings plan that in- cluded an employee stock-owner- ship plan that invested primarily in its own stock. When Bancorp's stock fell, the plan participants sued. They claimed the plan fiduciaries should have known Bancorp's stock price was too high and ex- cessively risky. The fiduciaries defended on the basis that fiducia- ries of the employee stock-owner- ship plan were subject to a relaxed duty of prudence compared with pension plan fiduciaries generally. The court disagreed, unani- mously holding that the fidu- ciaries were subject to the same duty of prudence as pension fi- duciaries generally except they didn't have an obligation to di- versify assets. In Harris v. Amgen Inc., the Ninth Circuit Court of Appeals applied Fifth Third Bancorp and refused to invoke a presump- tion of prudence or a duty to diversify in a case about two defined-contribution plans that included an option to invest in company stock. But the court did hold that the defendants had breached their duty of loyalty by failing to provide certain infor- mation to plan participants. Coulter v. Morgan Stanley & Co. Inc. arose after the defen- dants elected to make employer contributions to the employee stock-ownership plan in ques- tion in the form of company stock rather than cash. When Morgan Stanley stock plunged after the financial crisis in 2008, the plaintiffs sought to recover their losses. 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