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Public Sector Plans Can be Different

December-11-2007

Area Pensions

Summary

Article originally published by Benefits Canada, December 11, 2007

"Public Sector Plans Can be Different"

On November 20, 2007, the decision of Justice de Lotbinière Panet of the Ontario Superior Court of Justice in Professional Institute of the Public Service of Canada et al. v. Attorney General of Canada was released. This case involved a claim by certain government employees with respect to surplus in their pension plans. However, it is clear from the judgment that this case will have limited application, if any, to private sector plans. Based on the application of legal principles, there are some differences in treatment between certain public and private sector pension plans.

This case concerned three pension plans established by the federal government for certain employees. The affected pension plans(the Public Service Superannuation Plan, the Canadian Forces Superannuation Plan and the RCMP Superannuation Plan)were each established by statute. Contributions were required to be made by the plan members to a Superannuation Account in respect of each plan, each of which was set up as a special account in the Consolidated Revenue Fund. The government matched employee contributions to this account. In the 1990s actuarial surpluses arose in the pension plans. The surplus issues considered by the Court relate to two different actions by the government. First, in the 1990s the government applied an accounting treatment to amortize the surpluses which resulted in a reduction of the government’s pension expense in the year and, accordingly, a reduction in the deficit. Second, new legislation was introduced in 2000 to amend the terms of the pension plans. These changes to the legislation authorized the government to withdraw any surplus in the Superannuation Accounts.

The Court considered whether, prior to the new legislation in 2000, the members had an equitable interest in the outstanding balance in the Superannuation Accounts. That is, the Court looked at whether the government’s practice of amortizing the surplus in the Superannuation Accounts was acceptable. In this regard, the Court examined whether there had been a breach of trust, a breach of fiduciary duty or a breach of the relevant statute. The Court rejected each of these claims.

In rejecting the claim for breach of trust, the Court concluded that there was no trust established in respect of these pension plans and therefore there could not have been a breach of trust. In making this determination, the Court found that there was no intention to establish a trust(which is a basic requirement to the existence of a trust). No intention could be found as there was no separate plan document, no third party trustee and no trust agreement. A second essential trust characteristic, certainty of subject matter, was also lacking, as no separate pool of funds or investments was ever established.

These plans were creatures of statute. All the plan terms were contained in the statute and there was no separate trust fund established for them. Instead, there was an account in the Consolidated Revenue Fund. These plans may be contrasted with private sector plans where there is a separate fund established and set aside to fund the pension promise. This is generally done through a trust agreement or an insurance contract. In the private sector, the issue of whether a trust exists is a question of fact and generally turns on whether there was the requisite intention to create a trust.

The Court also considered whether the government, as the administrator of the plans, was in a fiduciary position with respect to the administration of the plans. The Court examined the nature of fiduciary relationships generally, noting that in order for such a relationship to exist, the fiduciary must have the scope for the exercise of some discretion and be able to exercise that discretion so as to affect the beneficiary’s interest. The Court determined that the relevant legislation contained all provisions for the establishment and operation of the plan and Superannuation Account. There was no scope for exercise of discretion by the government and therefore the Court refused to impose a fiduciary relationship. This again may be contrasted with private sector plans where generally there is a fiduciary relationship between the plan administrator and the plan members.

The Court also considered whether the amortization of the surplus by the government amounted to a breach of the relevant statute. The view of the members was that by taking this action the government was acting as if it had ownership of the surplus and effectively took the surplus. The Court determined that the accounting practice of the government had no effect on the Superannuation Accounts. The only effect of this practice was the disclosure in the Public Accounts. The government continued to have the obligations to pay benefits as set out in the relevant statute. Again, due to the unique statutory based nature of these plans, this type of issue generally would not arise for private sector pension plans.

The Court also considered whether the introduction of the new legislation in 2000 authorized the government to withdraw any surplus. As the Court determined that the plan members did not have a legal or equitable interest which was breached by the government as a result of amortizing the surplus, their claim that the new legislation expropriated their interest in the Superannuation Accounts was also moot. They did not have an interest in the Superannuation Accounts. Accordingly, when the legislation was amended to allow the government to remove surplus from the Superannuation Accounts, this did not take away any member interest.

A Charterclaim was also advanced. This was rejected on the basis that the parties to the action did not have standing to advance a Charter claim as the plaintiffs were unions and employee or pensioner associations and not “individuals.” Furthermore, the Court concluded that even if the plaintiffs did have standing, the introduction of this new legislation did not violate the members’ equality rights under section 15 of the Charter. Similar Charter arguments could not be advanced with respect to private sector pension plans. This decision will be potentially applicable to other public sector plans. But, due to the differences between private and public sector plans, will have limited application in the private sector.

To view the article, please visit the Benefits Canada website.