Understanding Pension Plan Laws as Employees

by | Jan 19, 2016 | Employment Law

Understanding Pension Plan Laws as Employees

There are two main types of private pension plans in Canada: (1) defined benefit plans; and (2) defined contribution plans.Defined benefit plans provide its members with a specific pension benefit on retirement.The amount of the benefit under a defined benefit plan is predetermined by a calculation that usually considers your income, years of employment, and total contribution into the plan.

In a defined contribution plan, the employee contributes a specific (or “defined”) amount to the plan, and the amount of the pension benefit upon retirement is based on a number of factors, including the amount of the employee’s total contributions, and the amount of investment income generated from the pension fund’s assets.In this type of plan, the future benefits fluctuate over time.

Defined Benefit Plans: Who Owns the Surplus?

In the case of defined benefit plans, poor investment performance may mean that the pension fund is unable to meet its financial obligations to retiring employees. Some pension contracts include provisions that require the employer to pay into the pension fund for any deficits when this happens.On the other hand, pension fund investments may perform better than expected, and leave the pension fund with extra cash over and above the pension fund’s financial obligation to its contributors!Many people might assume that any surplus in cash in a defined benefit plan belongs to the individual contributing employees who paid into the plan, and that contributing employees are entitled to a proportional share of any surplus. But is this the case?

Such was the situation facing 1,200 employees of the Hudson’s Bay Company (HBC), when their division was sold to a competitor, North West Company (NWC). The resulting lawsuit made its way to the Supreme Court in 2010, which clarified employers’ obligations in managing pension plan funds.

As a part of the purchase agreement between HBC and the NWC, the approximately 1,200 employees, along with the assets from the division’s defined benefit pension plan, were transferred to NWC.A new pension plan was created for these new employees of NWC, and it was agreed that this new plan would pay benefits that matched or exceeded the benefits payable under their pension plan with HBC.At the time of the transfer, the pension plan had a surplus of nearly $100 million. Despite this surplus, HBC did not transfer a proportionate share of the surplus to NWC along with the employees.

A class action was brought by the former employees of HBC who argued that their share of the surplus funds should have been transferred to the new NWC pension fund along with the employees.While HBC eventually agreed to transfer some of the surplus to the new NWC pension fund in order to adequately fund the NWC pension plan, the employees argued that they were entitled to the entire proportional share of the surplus.

The core of the employees’ argument was that, as the administrator of the pension fund, HBC was acting as a fiduciary, and had breached its fiduciary duty by not transferring the surplus funds to the new pension fund.They argued that, as a fiduciary, HBC had an obligation to treat the beneficiaries of the pension fund with an even hand, and had thus breached this duty by not transferring a proportionate share of the surplus.

In a unanimous decision, the Supreme Court ultimately ruled in favour of HBC, and held that while HBC was indeed acting as a fiduciary in its management of the pension fund, it had no legal obligation to transfer part of the surplus. The court held that in the absence of an express requirement in the pension plan agreement that the pension plan be used as a trust for the employees, it was in HBC’s discretion as to how and where to direct the funds. Furthermore, the existing pension plan agreement limited the employee’s entitlements to the defined pension benefits.

Your Rights Under a Pension Plan

It is always recommended that you understand any and all contracts and agreements you enter into with your employer, including pension contracts.Employees often feel pressured to sign contracts without reading them, and often feel pressured not to ask questions.

If you need expert help with the clarification or the protection of your rights under a pension plan contract, or if you believe that you have been taken advantage of by an employer, the lawyers at Mackesy Smye can help.


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