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 that have yet come to trial. Any company with a pension plan, however, may be sitting on an unknown and enormous time-bomb of litigation and liability.
THREATS POSED BY PENSION MISREPRESENTATION CLAIMS
Pension misrepresentation claims pose a quadruple threat to companies.
First, 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.
Second, errors in pension communications do not often surface until years later, often when employees approach their retirement and realize that for whatever reason – and a cynic may question whether the disparity genuinely flows from the pension communications or from a downturn in the marketplace – that the actual pension amount is not as envisioned. This creates special problems in defending such claims, as documents and witnesses disappear over time.
Third, such pension claims may lend themselves to class proceedings. While a single employee may not have the economic or emotional motivation or ability to bring a claim, where the claim arises from a communication made in identical form to multiple employees, a claimant or an entrepreneurial lawyer make seek to have the claim certified as a class action. On the other hand, where different communications are made to different employees, and where there may exist issues about whether it was reasonable for a given employee to rely upon the statements, however, a court is less likely to certify a claim as a class proceeding, on the basis that individual issues predominate over issues that are common to all members of the class.
Fourth, because a pension is of such importance to a retiree’s life, and to society at large, there may arise a natural sympathy of a court towards such claimants, prompting a stringent scrutiny of statements made by the company which will generally be deemed more sophisticated and in a better position to carefully and accurately convey facts about the pension plan to its employees.
SITUATIONS WHERE PENSION MISREPRESENTATION MAY OCCUR
Any statement by a company or its actuaries to its employees may lead to a claim in misrepresentation. Group pension misrepresentation claims most frequently arise when the company gives its employees an option to switch to another form of pension plan, or to choose from one or more pension options. This may arise from an option given to an individual employee, or an option or conversion provided to all or many employees.
A key example is the offering by many Canadian companies to their employees the option of switching from an existing defined benefit plan to a defined contribution plan. Other companies unilaterally imposed a defined contribution plan on their employees.
Ironically, the companies that tried to do the right thing, and gave their employees an option, or provided the employees with an expansive educational programme about the pension options, may face greater exposure. In the inherently complicated area of pensions, it is not difficult for plaintiffs or their clever counsel to claim that certain phrases or graphs misled the plaintiffs into choosing a pension option that turned out to be unfavourable with perfect hindsight.
The companies’ legal duties towards the employees in making such an offering are complicated and have not fully been settled by the Canadian courts. Where the company also acts as the administrator of the pension plan, it owes strict fiduciary duties to the employees in the plan with respect to the administrative aspects of the plan, such as calculating and awarding benefits. At the same time, the employees and employers have different interests with respect to the pension plan, and it is not inappropriate for the employer to consider and protect its own interests in offering or amending a pension plan.
Courts have accordingly found that an employer wears two hats with respect to a pension plan, owing fiduciary duties when acting as administrator and owing a lesser duty of good faith – that may take into account the company’s own best interests when acting as employer. But where a company provides pension information to its employees, it is still a legal gray zone as to which hat the employer is wearing, and what duties it will owe.
PROACTIVE STEPS TO AVOID LITIGATION AND LIABILITY
Companies considering amending the pension arrangements with their employees should carefully consider whether to do so and, if they do decide to proceed, must carefully consider the process and the communications to be presented. 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. An ideal information package will provide information to employees in both simplified bullet-point form and well as in more detailed form; 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 may well 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, and a company may even consider subsidizing visits to an independent actuary or financial advisor. Communications should contain repeated disclaimers, placed clearly and boldly in plain language, that employees should not rely upon the materials, and that such materials are provided only as general illustrations, and that individual employees should 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, and those person should follow tightly-worded scripts.
At this point, it would be useful to distinguish between the employer providing information and facts to the members (which employers should do, albeit with caution), and providing advice (which employers should generally never do). At times, of course, there may be a very thin line between advice and information. Suffice to say, an employer faces greater exposure where it encourages an employee through advice to make certain pension decisions.
Where a potential lawsuit may be brought a decade or more later, it is unlikely that the oral evidence of witnesses at trial will be reliable or given much weight by the court. A court will be forced to rely heavily on the written documentation to determine the accuracy and adequacy of disclosure. It is thus important that a company making such an offering, or communicating about pensions to carefully preserve documents, particularly those that present clear warnings of the risks associated with the offered option.
Companies that have in past provided their employees with the option to switch between kinds of pension arrangements should discreetly evaluate what potential liabilities they may face, and consider whether they have an obligation to alert their insurer. It may be possible to reverse any adverse transfers that occurred, or to otherwise limit the losses that the employees or the company may face. As set out above, the company will want to locate and preserve documents (both paper and electronic) related to the offering of the option, and make sure that no such documents are destroyed through routine document disclosure policies. The company may well have obligations to proactively alert employees of deficiencies in the communications presented to them before making their decision if such errors are discovered at a later date. And it may be possible to amend the plan or otherwise make changes to mitigate potential losses before they occur.
Finally, companies should strongly consider pension issues before purchasing a company. A company may through no fault of its own face significant litigation based on communications and mistakes made by the long-departed employees of an acquired company. It would be prudent to conduct, where possible, due diligence on all past pension offerings and pension communications. Where possible, an acquiring company may seek representations, warranties, and indemnities concerning past pension representations (as well as concerning the administration and funding of any pension plans).
As those in the baby boomer demographic retire in these troubled economic times, pension claims will certainly rise in the immediate future. Companies would be well advised to investigate potential liability now, rather than when they are first served with a lawsuit.