Pension misrepresentation claims against companies and actuarial firms are on the rise.
Rare in Canadian law until recently, the full exposure posed by such claims remains unknown, given the fact that few cases have yet come to trial.
Any company with a pension plan, however, may be sitting on a time bomb of expensive litigation and liability.
A few sloppy statements made decades earlier could result in a legal judgment of tens of millions of dollars.
Pension misrepresentation claims pose several threats to companies. Because of the numbers of current and retired employees that are potential plaintiffs, and because of the amounts of money involved, potential exposure is enormous.
Errors in pension communications often do not surface until years later, when employees approach their retirement and realize that their pension incomes will be smaller than expected.
This creates special problems in defending such claims, as documents and witnesses disappear over time.
Often pension claims will be brought as class actions, as shown by the recent December 2011 Ontario Superior Court certification of a class action brought by 74 police officers suing to recover some $1.18 million in damages representing the cost of reversing an option to transfer their pensions to a different plan.
Companies are considered to be better able to provide careful and accurate facts about the pension plan to their employees, so statements will be closely scrutinized.
Dangerous times
Pension misrepresentation claims most frequently arise when the company gives one, some or all of its employees an option to switch to another form of pension plan, or to choose from one or more pension options.
Several recent cases arise from the offering of the option for employees to switch from an existing defined benefit (DB) plan to a defined contribution (DC) plan. Other companies unilaterally imposed a DC plan on their employees.
Ironically, the companies that tried to do the right thing, giving their employees an option or provided the employees with an expansive educational program about the pension options, may face greater exposure.
Company’s duties
A company’s legal duties toward its employees in pension communications are complicated and have not fully been settled by Canadian courts.
Courts have thus found that an employer wears “two hats” with respect to a pension plan.
It owes fiduciary duties when acting as administrator, but when acting as employer, negotiating or offering a pension plan option, it owes a lesser duty of good faith, which may take into account the company’s own best interests.
It is still a legal grey zone as to which hat the employer is wearing, and what duties it will owe, where a company provides pension information to its employees.
Careful communications
Communications must walk a fine line between providing too little or too simple information on one hand and providing too much or too complicated information on the other.
The employer must provide information and facts to the pension members but should never provide advice. At times, there may be a very thin line between advice and information. An employer faces greater exposure where it encourages an employee to make certain pension decisions.
An ideal information package will provide information in both simplified bullet-point form and well as in more detailed form; and in multiple formats of power-point presentations, brochures and booklets.
More advanced packages will allow employees themselves to use computer software to change investment return and other variables in order to decide whether the option is right for them. Employees should always be cautioned that market- based projections and other assumptions might turn out very differently than presented.
Assumptions must be identified and explained clearly. Complicated terms should be defined and explained. Employees should always be encouraged to seek independent advice; a company may even consider subsidizing visits to an independent actuary or financial adviser. Communications should contain repeated disclaimers, including advising employees to seek individual advice based on their unique financial circumstances and retirement aspirations.
Finally, companies should impose strict controls on who among management may make representations to employees about pensions. Those persons should follow tight scripts.
Pension lawsuits are often brought decades after statements are made, and after memories have faded, and witnesses died and disappeared. Be sure to carefully preserve documents, particularly those that present clear warnings of the risks associated with the offered option.
As baby boomers retire in these troubled economic times, pension claims will certainly continue to increase. Companies should investigate potential liability now, rather than when they are first served with a lawsuit.
