Judge finds that company misinformed managers about converting their defined-benefit plans to defined-contribution plans

By Donalee Moulton | October 2008

In an unexpected ruling, the Quebec Superior Court has ordered Abitibi-Consolidated Inc. to pay 25 managers $4.4 million in damages for misleading them about what would occur if they converted their defined-benefit pension plan to a defined-contribution plan.

“It is a rather surprising decision,” says Laurent Nahmiash, a senior partner with law firm Fraser Milner Casgrain LLP in Montreal. “The plan sponsor was held liable based on a verbal representation during the conversion. I haven’t seen this type of case in Quebec; it’s the first of its kind. It will have ramifications in the rest of Canada.”

The hammer was swung by Justice Kevin Downs, who concluded that managers at Abitibi-Consolidated (now AbitibiBowater Inc.) had been misled during an information session conducted by the firm. In 1995, the forestry giant introduced a DC plan and provided details to employees about why they should switch from the company’s existing DB plan.

The managers stated they were told verbally that the DB plan would not improve. The company denied making such a claim, however.

“Usually, when you create information sessions,” Nahmiash notes, “all the essential representations are in the materials that are distributed. There is nothing there to indicate there would be no improvements.”

THE DB PLAN IMPROVED

That turned out not to be the case. In 2002, after a number of mergers and acquisitions, the Montreal-based firm decided to harmonize all the pension plans in its arsenal and, as a result, the Abitibi-Consolidated DB plan improved. When learning of this, managers who had opted out wanted back in. Their request was denied.

Downs found the managers to be more credible than the company with respect to what had occurred more than a decade ago and, in recognition of losses the managers had incurred as a result of converting their pension plans, handed down his multimillion-dollar award. Abitibi-Consolidated knew or should have known, when it went forward with harmonizing pension plans, that its verbal representations could have caused financial injury to the plaintiffs, Downs wrote in his 34-page decision.

“This decision sends a clear signal to plan sponsors and committees that they must be very transparent when explaining the process for converting,” Nahmiash says. “They have to be very clear as to what representations are being made, and staff presenters must stick very carefully to the written material.”

The case reflects the complexity of pension management and conversion, says Bill Robson, president and CEO of the C.D. Howe Institute in Toronto. “This case illustrates what a complicated set of risks parties to a DB plan are getting into; moving from one plan to another is very delicate.

“It’s difficult for judges to step in after the fact,” he adds, “and respect some of the constraints of a modern-day pension plan.”

For many firms, that plan is no longer a DB plan. “Defined-benefit plans are in grave danger today,” Nahmiash says. “The principal factor is cost to the employer. The return on investment on pension plans is very bad and interest rates are low. Employer contributions are going through the roof.”

Peter Merrick, a certified financial planner and president of Merrick Wealth Management Inc. in Toronto, agrees: “Decisions like this are just one more nail in the coffin [for DB plans].”

EMPLOYEES WANT CONTROL

There’s another reason DB plans are no longer in favour, says Niels Veldhuis, director of fiscal studies and a senior economist at the Fraser Institute in Vancouver: employees want control over their retirement savings.

“A DC plan gives [employees] more power,” he adds.

DC plans may also give employees more peace of mind. Many companies struggle with large and often crippling unfunded liabilities on their DB pension plans, a reality that concerns many employees. “Certainly, anecdotally,” says Veldhuis, “when people see pension plans go bankrupt, they worry.”

According to a 2005 report released by the Certified General Accountants Association of Canada (the last year that the report was released), 96% of DB plans in Canada were running a deficit. The task of erasing those combined deficits would eat up $190 billion, a figure that grew by $30 billion year-over-year.

In addition, Merrick explains, “The DB plan is changing because the nature of work is changing.” He notes that high employee mobility means that plans are smaller. “The days of the pension plan with 10,000 members is going the way of the dinosaur.”