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May 15, 2013
Pensioners not entitled to full indexing

While a fully indexed pension may be a nice thing to have, full pension indexation is not a right, as the following court cases in Saskatchewan and Quebec prove.  

Prove it in writing, Saskatchewan court says.

In a March 2013 decision, the Saskatchewan Court of Appeal ruled that members of that province’s public service pension plan are not eligible to automatically receive fully indexed cost of living adjustments.

The case involves an older pension plan that did not index pension benefits against inflation.  However, over time, the employer did make ad hoc adjustments to the benefits to relieve the impact of inflation on members’ benefits.

In 1997, the Saskatchewan legislature passed a law allowing automatic adjustments to the plan’s benefits but only up to 70 per cent of the increase in the cost of living.  However, members of the plan objected, arguing that the province had promised to treat pension members “equitably and fairly” and that it was an implied term of their employment contract that their pension benefits would be kept “reasonably current” and would include fully indexed pensions.

The case then went to litigation.

In its initial ruling, the Saskatchewan Court of Queen’s Bench ruled that the members had not proven that they had a contractual right to receive fully indexed pensions, stating that they had “developed a construct of the kind of pension plan they now wished they had.  However, they have not established by evidence the legal foundation required to support such a conclusion…”  Further, it stressed, the court “is required to rule upon legal, including contractual, rights, not upon expectations; upon legal entitlements, not aspirations.”

The judgement was appealled.  However, the Saskatchewan Court of Appeal backed the lower court’s findings, noting that the members could not provide any specific document that said plan members were entitled full indexation.  In its review, the Appeals Court also relied on wording contained in the pension plan booklet that specifically stated that the plan was not indexed but was subject to review by the employer.

Only plan sponsor can approve pension indexing, Quebec court rules.

The Quebec case involves a large educational institution with a pension plan that was administered by a pension committee comprised of plan members, retirees and members appointed by the school.  

Before 2004, the pension had an indexing feature allowing pension payments to be increased by 50 per cent of the Consumer Price Index (CPI).  As plan sponsor, the school had discretion to provide supplementary benefits covering the remaining 50 per cent of the CPI.  

In 2002, the committee recommended that the plan be amended so that increases would be provided automatically on January 1 of each year beginning in 2004, provided the plan’s actuary could confirm that the plan had sufficient reserves to support the payments.

The concept was then voted on and accepted by plan members.  However, after the vote, the plan sponsor amended the plan to include a requirement that the automatic index payments would not be provided if the plan was not fully solvent.  

A year later, a group representing the plan’s pensioners contested the indexing rate.  After three years of negotiation, the retiree group and the plan sponsor agreed on a plan that would allow the plan sponsor to take contribution holidays equivalent to its solvency payments in return for a retroactive pension increase.  The new arrangement was again put to a vote in 2005.  However, the plan sponsor again changed the plan to nullify the retroactive increases until it recovered its special solvency payments.

In 2007 and 2008, the pension plan had a solvency deficiency.  As a result, no supplementary indexing payments were made.

The case then went to litigation.

In its presentation to the Quebec Superior Court, the retiree group said the solvency requirement had not been approved by plan members in the original 2002 vote, nor had the granting of priority of contribution holidays over the indexing payments to pensioners.

However the action was dismissed by the court.  The case was appealled to the Quebec Court of Appeal.

In its review, the Court of Appeal noted that all information on the plan had been distributed to plan members by the pension committee, not the plan sponsor.  Since the pension committee and the plan sponsor were two separate legal entities, the plan sponsor could not be liable for the pension committee’s failure to explain the solvency requirements of the plan or the fact that the plan sponsor’s right to take contribution holidays exceeded members’ rights to receive a fully indexed pension.
In addition, it asserted, based on the pension’s contractual terms, plan amendments did not have to be approved by its members, thereby making the earlier votes organized by the pension committee invalid and non-binding.

As a result, the plan sponsor’s various amendments to the plan were upheld and its position as sole authority to amend the pension plan confirmed.

For pension plan members and administrators, these cases illustrate the importance of having solid contractual documentation to prove entitlement to any pension benefits or involvement in any decisions relating to the terms of pension payments.   While the principles of equity, fairness or member representation may imply full entitlement or decision making power regarding specific benefits or payouts, without supporting documentation, including contracts, booklets or other reference material, they do not impose fiduciary obligations on pension plan sponsors.

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