Many in the legal community (myself included) have felt for years that the Alberta pension regulator and the Alberta courts got it wrong in Halliburton when they concluded that the employer was precluded from implementing a “hard” freeze on defined benefits (i.e., freezing both service and earnings) when converting to a defined contribution (DC) formula for future service.
The Financial Services Tribunal of Ontario (FST) in Royal Ontario Museum Curatorial Association v. Ontario (Superintendent Financial Services), has rejected the application of Halliburton in Ontario, citing differences between the Alberta and Ontario pension legislation, but also expressing difficulty in following all of the Alberta Court of Appeal’s “reasoning on the core issues”. In addition, the FST stated:
Halliburton is clearly not binding on this Tribunal. Nevertheless, the practical problem before the court in Halliburton was virtually indistinguishable from the practical problem before us: whether the relevant legal limitations on plan amendments which impede retroactive reductions in pension benefits earned by past service under the plan protect the benefit formula in effect at the time the service was acquired, or only the value of the benefit that service would have earned up to the time of plan amendment.
In 2010, the Royal Ontario Museum (ROM) amended its pension plan to change the basis for calculating benefits from a best three to a best five consecutive years of earnings prior to retirement. The change was made so that:
post-effective date benefits would be calculated for future service and earnings under the new formula, and
pre-effective date benefits would be determined based on past service and the greater of the benefit under
the old formula with earnings frozen at pre-2010 levels, and
the new formula with earnings at retirement.
One of the unions representing ROM employees applied to the Ontario Superintendent of Financial Services, seeking an order that the amendment reduced the amount of pre-effective date benefits accrued under the plan in violation of s. 14(1)(a) of the Ontario Pension Benefits Act (PBA) which states that an amendment is void if it purports to reduce the amount or commuted value of a pension benefit accrued with respect to service prior to the amendment’s effective date.
The Superintendent issued a Notice of Intended Decision refusing to make the order and the union appealed to the FST which dismissed the claim in support of the Superintendant.
The FST, in a thoughtful and well reasoned decision, stated that the case turned on “whether s. 14(1)(a) [of the Ontario PBA] protects the amount of pension that would be generated by accumulated service at the time the plan is amended, or whether it protects the amount that service would have been generated at the time of retirement if the plan has not been amended.” The FST began by considering the meaning of “accrued” and “accrued benefit” and made the following findings:
it is necessary to determine what “amount” has accrued to plan members as of the effective date of the amendment, and whether the amendment at issue reduces that amount;
there was consensus among the actuarial witnesses that if “the amount of the pension benefit accrued” were calculated on the effective date of the amendment, an actuary performing that calculation would use service and earnings data current as of that date, and would not take into account projected earnings increases – this view was generally supported by the relevant case law;
In addition to the FST’s previously noted comments on Halliburton, it found that:
the Alberta Employment Pension Plans Act (EPPA) protects “a person’s benefits in respect of employment” prior to the amendment, while the Ontario PBA protects “the amount of pension accrued in respect of employment prior to the effective date of the amendment” – s. 81 of the EPPA does not refer to the “amount” of the benefit, nor does it contain the crucial word “accrued”; and
the Alberta EPPA specifically addresses the issue of projected earnings and provides that those earnings fall outside the scope of s. 81(1)(a) of the EPPA – the Ontario PBA makes no reference to projected earnings.
The FST held that it was necessary to determine whether there was a reduction in the amount of pension that would be generated by accumulated service at the time the plan was amended and found that since there was no such reduction, the amendment was not void per s. 14(1)(a) of the PBA.
The FST decision in ROM reflects the way that most Canadian pension regulators (other than Alberta and Quebec) treat the hard versus soft freeze issue under their respective pension statutes. In other words, most regulators allow hard freezes as a matter of statutory interpretation.
For sponsors of multi-jurisdictional plans, this lack of uniformity may raise implementation issues and employee relations concerns in the context of DC conversions. In addition, while to date, only Ontario and Quebec are signatories to the new multi-lateral agreement among Canadian regulators, the impact of post-conversion employment transfers involving any other jurisdiction – and Alberta/Quebec in particular – has to be carefully considered. What happens to an employee’s soft freeze benefits if the employee is transferred into say Ontario and then ultimately retires? Based on final location treatment, are such soft freeze benefits subject to loss? Sponsors should check with the regulators of their jurisdictions of operation to make sure these questions are properly vetted.