On July 19, 2012 OSFI issued its final Instruction Guide – Authorization of Amendments Reducing Benefits in Defined Benefit Pension Plans, which replaced the previous April 2006 version. The Guide sets out the factors and specific requirements (e.g., valid amending power – unilateral or mutual by affected groups, legislative compliance, options considered, plan viability and rationale, individual notice and member representations, etc.), that OSFI considers when reviewing an application under s. 10.1(2)(a) of the PBSA seeking Superintendent authorization of a plan amendment that reduces,
- pension benefits,
- pension benefit credits, or
- an immediate or deferred pension benefit
which have accrued, or to which a member/former member has become entitled, before the amendment effective date.
These amendments are referred to as "Reducing Amendments" and are considered void unless the Superintendent exercises discretion to consent. Amendments that reduce only future service accruals do not require Superintendent authorization. While Reducing Amendments are made by a plan sponsor, the Instruction Guide makes it clear that "plan administrators" are expected to determine whether or not an amendment being filed for registration requires s. 10.1(2)(a) authorization and (through a footnote) OSFI includes "any party purporting to have authority to make an amendment to the pension plan" in the definition of plan administrator for that purpose.
In response to concerns over the long term sustainability of increasingly expensive DB benefits, many plan sponsors are reviewing their plans and considering the imposition of austerity measures. Those sponsors who continue to provide DB benefits, for at least current members, are looking at their options for reducing future service benefits and ancillary benefits. In that context sponsors may consider Reducing Amendments.
There are a number of important considerations sponsors must deal with before proceeding with any plan amendment (including Reducing Amendments) that would reduce DB benefits, including:
- the potential employment/labour law impact of any such reductions; and
- what distinguishes Reducing Amendments from other benefit reductions that do not require Superintendent authorization under s. 10.1(2)(a)?
Potential Employment/Labour Law Impact
Employees
Other than in the context of negotiated workout agreements (PBSA ss. 29.01 to 29.3) in situations of sponsor insolvency, the potential wrongful dismissal and collective bargaining implications of any pension reductions must be carefully considered. In general, any material pension reduction(s) could support constructive dismissal claims by non-union employees. This risk can be significantly minimized by providing the employees with reasonable notice of the change. This generally means that the effective date of the plan amendment effecting the reduction should follow expiry of the reasonable notice period. Similarly, in a plan covering unionized employees, unilateral pension reductions may constitute a breach of the collective agreement and be subject to a grievance. Union consent would likely be required to avoid this risk.
Do reasonable notice or union consent operate in the same way for Reducing Amendments with Superintendent authorization under s. 10.1(2)(a)? In the case of union employees the answer is yes – subject to the terms of the collective agreement, union consent to the reduction would avoid a grievance. But, in a non-union setting, can reasonable notice cure potential constructive dismissal claims in connection with Reducing Amendments, or could such amendments still be claimed to be a breach of the employment contract, even with reasonable notice?
There is no clear cut answer to this question. A court could certainly determine that a breach had occurred in such circumstances. However, there are arguments available in support of the position that since the pension plan, as regulated by OSFI, is part of the employment contract, to the extent the plan is validly amended under the PBSA (including s. 10.1(2)(a)), the amended terms are a valid and enforceable part of that contract – even to the extent that a Reducing Amendment purports to claw back benefits already earned. This would, of course, be qualified to the extent there are any collateral promises made to employees that may produce a more restrictive result.
Former Employees
Reducing the pension benefits of former employees may be far more problematic. Reducing the benefits of pensioners and deferred vested members of a plan would clearly be considered a Reducing Amendment, but would such a reduction survive a court or arbitration challenge even if the Superintendent authorized the amendment under s. 10.1(2)(a) and the union consented? For former unionized employees there would be a threshold issue of whether the union had the capacity to consent on their behalf. For former non-union employees, any reduction that purports to adversely affect their post-employment pension entitlements could not be cured by reasonable notice – their employment has already terminated. As in non-pension post retirement benefit jurisprudence, the ability of a sponsor to implement a Reducing Amendment affecting its former employees may turn on whether the sponsor validly reserved the right to make such changes before affected former employees left employment. In this regard, courts have generally held that when reserving such right an employer must use very clear and consistent language.
What are Reducing Amendments and What Distinguishes them from other Benefit Reductions?
What are Reducing Amendments?
The Instruction Guide assists plan "administrators" by describing Reducing Amendments through a number of questions:
- Does the amendment reduce the commuted value of a member's or former member's accrued pension benefit (i.e., the pension benefit credit)?
- Does the amendment reduce any pensions in pay?
- Does the amendment increase the pensionable age for past service?
- Does the amendment remove or reduce a benefit for which the member has met the eligibility conditions?
- Does the amendment introduce consent to an existing benefit, to which members were entitled without consent? For more information related to consent benefits, see the Policy Advisory on Benefits Subject to Consent.
The Instruction Guide states that if the answer is yes to any of these questions, "it is likely that the amendment is a Reducing Amendment". The Guide makes it very clear that Reducing Amendments will only be considered by the Superintendent in particular circumstances and that OSFI's review will be guided by three general principles:
- Plan "administrators" are expected to maintain promised accrued benefits, and to consider other options (such as increasing contribution levels or reducing future benefit accruals) prior to adopting any Reducing Amendment.
- Any Reducing Amendment must comply with the PBSA. For example, a Reducing Amendment cannot remove a minimum standard benefit the plan is required to provide by the PBSA, or reduce a payment already received by a former member, retiree or beneficiary, or a payment which is due before the effective date of the amendment.
- Subject to the terms of the plan, the plan "administrator" should consider the interests of all affected groups (actives, deferred vested, retirees) and apply its discretion in an even-handed manner in deciding on reductions that may apply to each of the affected groups.
What Distinguishes Reducing Amendments from other Benefit Reductions?
Based on the foregoing, authorized Reducing Amendments are likely to be rare. Nevertheless, even in circumstances where a sponsor's DB austerity review is limited to future benefit reductions only, it is important to understand what a Reducing Amendment is, to be able to determine what kinds of reductions will fall outside of the Reducing Amendment description contained in s. 10.1(2)(a) of the PBSA. An exhaustive review of this topic is beyond the scope of this post, however, I offer the following examples:
Not Reducing Amendments
- freezing the DB formula in respect of both future service and future pensionable earnings (what is known as a "hard" freeze), subject to potential application of the Halliburton Group Canada Inc. v. Alberta case (where the Alberta regulator and courts refused to allow a "hard" freeze and required continuation of pensionable earnings accruals on frozen DB service)
- reducing the DB formula for future service only
- increasing the normal retirement age for new hires only
- reducing the subsidized survivor benefit on DB accruals after the amendment effective date
- reducing or eliminating ancillary benefits to which affected
members are not entitled under the current plan terms prior to the
amendment effective date, for example:
- elimination of an age 60+30 unreduced early retirement benefit for those not 60+30 qualified at the amendment effective date
- reduction of a guaranteed indexing formula only for DB accruals after the amendment effective date
Reducing Amendments
- a "hard" freeze of a DB formula where the Halliburton case may apply
- reducing the DB formula for past service
- increasing normal retirement age for existing members in respect of past service
- reducing subsidized survivor benefit on all pensionable service
- reducing or eliminating ancillary benefits to which affected
members are entitled under the current plan terms prior to the
amendment effective date, for example:
- elimination of an age 60+30 unreduced early retirement benefit for those 60+30 qualified at the amendment effective date
- reduction of a guaranteed indexing formula for past service DB accruals
In conclusion, sponsors will have to carefully consider the implications of OSFI's position on Reducing Amendments in the context of any options under review to implement pension austerity measures. Where there is any doubt with respect to the application of the Reducing Amendment rules, OSFI may be consulted.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
