A recent Québec Superior Court decision (Bernard c. Association de bienfaisance et de retraite des policiers et policières de la Ville de Montréal (“Bernard”)) highlights the importance of clear communications with pension plan members and other beneficiaries (together, “members”). Although this decision is under appeal, its practical takeaways remain relevant for plan administrators (including employers acting as plan administrators or delegated plan administrators), and the decision itself underscores time-tested principles and practices.
Facts
In Bernard, the Court addressed an administrator’s fiduciary duties in the context of a commuted value (“CV”) calculation under a Québec-registered defined benefit pension plan. A CV represents the present value of a defined benefit pension entitlement. Put differently, the CV is the amount that an actuary determines a plan member would need to receive as a lump sum today to be economically equivalent to their accrued stream of future periodic pension payments, based on prevailing interest rates and mortality assumptions. CV calculations are informed by the plan terms and heavily regulated by pension standards legislation and rules of actuarial practice. Depending on the particular defined benefit pension, a CV can be six or even seven figures. For many employees, it represents their single largest financial asset.
Under defined benefit pension plans, there are various events that can trigger a plan member’s right to “portability” for their CV, which is the right to withdraw or transfer this actuarially determined lump sum instead of receiving a periodic pension from the plan at retirement. One such event is termination of plan membership (usually coinciding with termination of employment) prior to reaching a statutorily and/or plan-specified age (often age 55).
Under the Québec Supplemental Pension Plans Act (“SPPA”), the entitlement to a full CV can depend on the plan’s solvency ratio. Unlike in many other Canadian jurisdictions, a member’s CV payable from the plan can be permanently reduced based on the plan’s level of underfunding. That is, if, on a solvency basis, the plan were only 90% funded, a terminated member electing to transfer a CV would receive only 90% of what the actuary otherwise would determine the member’s CV to be. The SPPA does not require the shortfall to be made up. The stated purpose of these rules is to ensure that terminating employees do not receive a “better” benefit than their plan’s funded levels would otherwise support if the entire plan were terminated. Otherwise, non-terminating plan members, including retirees, could essentially be seen to be subsidizing a greater entitlement for the terminating member.
A dispute over the proper extent of this permanent reduction was at issue in Bernard.
Prior to April 2020, in determining the reduction to a terminated member’s CV, the SPPA generally required the administrator to use of the solvency ratio in the plan’s most recently filed actuarial valuation or prescribed financial notice. This meant that several months could elapse between the effective date of the solvency ratio calculation, on the one hand, and a given CV calculation, on the other.
However, in April 2020, following the onset of the COVID-19 pandemic, the Québec pension regulator, Retraite Québec, issued temporary directives requiring the use of current solvency ratios for such CV calculations. These temporary directives were meant to reflect rapidly declining financial markets and pension plan solvency ratios and were intended to apply more up-to-date information than the existing statutory measures. In the fall of 2020, these temporary directives were eventually reflected in retroactive regulations.
In Bernard, the plaintiff-member had terminated membership and was provided with an estimated CV in a termination statement. He elected to receive this CV as a lump sum transfer out of the plan. After he had made this election but before the CV was actually transferred, Retraite Québec released its directive purporting to apply to all CVs to be transferred in the period that would include the plaintiff’s transfer date. Based on this directive, the administrator recalculated the plaintiff’s CV, which resulted in a revised CV that was approximately 15%, or $55,000, lower.
Positions of the Parties
The plaintiff challenged the validity of the temporary directives in place when his CV was recalculated on the basis that they had not been incorporated into legislation at this time and thus did not have binding effect, such that the administrator should not have followed them with respect to his already-calculated initial CV amount. The plaintiff also argued that, because he had already filed an election to transfer the formerly calculated CV, he had created a binding contract with the administrator compelling the administrator to transfer that specific amount. He sought compensation for the approximately $55,000 differential (with interest), as well as moral and punitive damages. In the latter regard, the plaintiff alleged that the administrator had abused its rights.
The administrator argued that it had acted prudently, diligently and competently under exceptional circumstances, including in following Retraite Québec’s temporary guidance that was later, retroactively, incorporated into a regulation.
Court Findings
The Court agreed with the administrator. In particular, it held that the administrator had indeed acted prudently, diligently, and competently by following these temporary directives, even if they had not technically had the force of law when the CV was recalculated. (The Court noted that Québec’s National Assembly was not otherwise sitting at the time the directives were issued, which rendered the directives the best available authority at the time.) In reaching this conclusion, the Court further scrutinized the communications between the administrator and the member. In reviewing the chronology of written and verbal communications between the parties, the Court found that the administrator had juggled the exigencies of responding to the member’s requests and statutory deadlines with the health emergency in a prudent manner. To support the plaintiff’s claim that the administrator “abused its rights”, the Court held that the administrator would have had to markedly depart from expected conduct, which its actions and communications in the circumstances had not done.
Key Takeaways
Times of crisis, such as the COVID-19 pandemic, highlight the importance of administrators having robust and comprehensive administration processes. Among other things, by presenting evidence of its detailed correspondence with the plan member, both pre- and post-pandemic onset, the administrator demonstrated it had acted prudently, diligently, and competently in exceptional circumstances.
We will follow the appeal of the Bernard decision with interest. In the meantime, regardless of its outcome, the Superior Court’s decision provides administrators with a few key reminders when communicating with members.
Know the rules. Be aware of the communications’ prescribed content and deadlines (including, in cases like Bernard, termination statements and portability elections), as well as any directives and expectations from regulators. We often recommend that administrators adopt policies governing member communications above and beyond what the legislation strictly requires. Well developed policies can help to mitigate compliance risks as well as provide consistent approaches to communicating point-in-time calculations of values that by their nature are subject to change (such as CV determinations). If handled inconsistently, these communications could create misplaced member expectations for baseline or minimum entitlements.
Keep it simple. In recent years, regulators have increasingly emphasized the importance of clear and understandable communications with members as well as robust member education tools. The goal of simplicity and clarity applies both to defined benefit and defined contribution pension plans. For example, the recently revised Canadian Association of Pension Supervisory Authorities (commonly known as “CAPSA”) Guideline No.3 – Guideline for Capital Accumulation Plans, which applies, among other things, to defined contribution plans under which members make investment choices, has an entire provision dedicated to best practices in ongoing member communications and decision-making tools.
Keep it documented. Document correspondence with members, including contemporaneous notes of non-written communications like telephone calls and instant messaging conversations that cannot otherwise be archived directly. This is important not only for monitoring purposes but can serve both as an educational resource for new administrator staff (further ensuring consistency in responses) as well as evidence in case of disputes.
Understand the dynamic nature of many pension-related calculations. While Bernard dealt with exceptional circumstances, where a member has acquired the right to portability but elects to transfer a CV at a later date, an initially calculated CV may need to be recalculated. Aside from the plan’s solvency ratio in the case of Québec-governed entitlements, there are several factors that can impact the calculation of a member’s CV over time, including interest rate variations. Similar discrepancies can also arise if the plan provides for “buybacks” based on the actuarial cost of purchasing additional service for prior periods (a lump sum that may be similarly determined to a CV on termination of membership) or in determining certain family law values on relationship breakdown. Practically speaking, the dynamic nature of these calculations can lead to instances where plan members see fluctuations in calculated lump sums over time for the same period(s) of service, which to some can give the mistaken impression of “lost” money. In light of Bernard, administrators will want to continue giving thought to adopting or revising policies, procedures and controls around these lump sum calculations, always informed of course by legislative requirements and regulatory guidance.
With the right policy and approach, communicating values will create its own value for the plan and its administrator themselves.
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