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Feature: Avoiding pension pitfalls

|Written By Kevin Marron
Feature: Avoiding pension pitfalls

A perfect storm is brewing on the pension plan front as factors from low interest rates to an aging workforce, liabilities, new accounting rules, and the rise of class action lawsuits create greater risk and exposure for employers.

When Selma Lussenburg was negotiating global deals as in-house counsel for AT&T, pension funds were usually an afterthought — a loose end to be tied up once the deal was almost done.


But much has changed in a few short years. The perils of pension funds now strike fear into many a corporate counsel, as yesterday’s mergers and acquisitions are haunted by lawsuits over pension surpluses, liabilities, and expenses.


Class action suits and other litigation over pension plans have proliferated in recent years and become front page news amid a current controversy about alleged abuses in the RCMP pension fund and a massive lawsuit over the handling of a $30-billion surplus in federal public service pension plans.

A perfect storm
Randy Bauslaugh, a partner in the Toronto office of Blake Cassels & Graydon LLP, says today’s spate of litigation is being driven by “a perfect storm” of things happening at the same time in the pension field, including a volatile investment climate, low interest rates, an aging workforce, retirees with longer life expectancy, new accounting rules, and the current popularity of class action lawsuits, a form of litigation that has been described as “tailor-made” for pension funds where there are a large number of members in very similar circumstances, each with a small claim that can add up to a multi-million dollar suit.


For Lussenburg, what was once an afterthought is now front and centre of her practice as senior vice president, general counsel, and corporate secretary at the Ontario Municipal Employees’ Retirement System (OMERS), one of Canada’s largest pension funds.


Pension funds and the increasing litigation around them present unique challenges for corporate counsel. While few have the in-house resources or expertise available to OMERS or other big pension funds, it is important for in-house lawyers to address these issues as best they can. “There’s a risk that needs to be managed,” says Lussenburg.

Minefield for liability
Her colleague, OMERS corporate counsel Audrey Mak, observes, “It’s a minefield for potential liability. It’s very complex and at the very least general counsel should go to some conferences and know when to call outside counsel and to get the processes put in place with their help.”


So what should in-house counsel be looking out for? What are the lessons they can learn from recent pension litigation? And how can they best protect their company’s plan?


Lussenburg notes that pension funds are unique and particularly vulnerable to lawsuits because it is hard to settle individual claims out of court. That is because administrators have a fiduciary duty to treat all fund members in an equitable manner and cannot therefore make a deal with one person without offering the same deal for everyone else in similar circumstances. In the commercial world, you might make a deal with a difficult customer, even though you believe their complaint is groundless in order to avoid the expense of a lawsuit. But a pension fund administrator can’t do that, she says. “That’s what distinguishes the pension area from other areas of law. To some extent, your freedom to contract is circumscribed.”


Roger Barton, vice president, general counsel, and secretary of the Ontario Teachers’ Pension Plan, which has net assets of $106 billion, says any corporation with a pension scheme is vulnerable to a class action lawsuit, but adds that it makes sense to assume that it is larger organizations that will present the most attractive target for plaintiffs’ lawyers.


“Yes, we worry about it,” he says. But, he adds, this concern is channelled into a determination to do things right.

“We live with the vulnerability and just plan accordingly.”

Courts entertain wider variety of claims
A review of recent and current litigation shows that the courts are now willing to entertain a wide variety of claims, according to Hugh Wright, a Halifax-based partner with McInnes Cooper. “The types of claims are limited only by the ingenuity of the counsel bringing them,” he says.

Areas of dispute
Lawyers involved in litigation identify several key touchstones for pension disputes. One of these is situations where plans have a surplus or had a surplus at the time when significant changes were made to the plan, such as a merger, a partial wind-up of the plan, or a number of layoffs. The issues in these disputes generally focus on who owns the surplus, how and when it should be distributed — for example, whether the laid-off workers should reap the benefit of the windfall at the time they leave or wait with other plan members until they retire. Disputes also arise about so called “contribution holidays,” decisions on the part of plan administrators not to contribute to the plan at a certain time because it is generating enough income from its investments.


But Paul Litner, a partner with Osler Hoskin & Harcourt LLP in Toronto, notes there are fewer and fewer surplus disputes today because of changing economic conditions. One of the emerging issues, he says, is the right of employers to use surpluses to pay expenses from the plan.


Attempts to cut back on benefits and make changes to plans are also coming to the attention of the courts. “The tricky point is figuring out what you can do without triggering a class action,” he says.

Defined contribution plans ripe for attack
Much of the litigation so far has focused on defined benefit plans that promise to provide retirees with a specific monthly or annual amount. But more and more organizations are now moving towards defined contribution plans in which the ultimate pension received will depend on the future return on the investments made. And this is an area that could be ripe for future lawsuits, says Wright. “The challenge is that there are a lot of governance requirements imposed on plan sponsors, but the day of reckoning can be many years off when the employees retire.”


In-house counsel need to understand that in most organizations, pension plans tend to have more onerous statutory obligations than other aspects of the business. And they have to make sure that decision-makers in the company understand from the outset that pensions are complex, highly regulated, and shouldn’t be undertaken lightly, says Barton of the Ontario Teachers’ Pension Plan.


Any corporate counsel who joins an organization that already has a pension plan should be aware of the danger signs, Barton adds. Human resource people who are not aware of the legal issues may be managing the plan. If it is managed by outside consultants, it is important for the in-house lawyer to examine the contracts with these providers, since service providers may have an interest in limiting their own liability and “you’re still accountable even though you’ve tried to delegate responsibility.”

Signs of trouble
The first thing to watch out for in the pension file is to see if there are any notices from regulatory bodies — an obvious sign of trouble. You should also ensure that returns are up-to-date and review what benefit consultants and actuaries say about the plan’s funding. You have to remember that one of the key statutory obligations of lawyers and others involved with a corporate pension plan is to be careful with other people’s money, Barton says.


Litner stresses the importance of having governance and risk identification systems in place. “Nine times out of 10, when there’s a problem, it’s because you didn’t have a system in place to identify it or figure out that it was a problem. Or you didn’t have a legal person turning his mind to a practice or policy to identify that it’s an issue.”
Bauslaugh of Blakes notes that it is important for lawyers to manage any audit that is conducted by outside accounting firms “so you protect the audit with privilege if you find things that are going to be a problem.”


His colleague at Blakes, litigation partner Jeff Galway, advises that it is important for lawyers to examine pension plan issues early in the process whenever the company is involved in a merger or acquisition. “Depending on whether you’re the purchaser, where you’re looking for certain indemnities, or the vendor, in which case you have to be very careful in terms of representations and warranties given, it all comes down to due diligence,” he says.

Communicate and educate
Mak at OMERS says communication and education should be key priorities for in-house counsel in dealing with pensions. You need to educate plan members if you have a direct contribution plan and your pension committee members if you have a direct benefit plan. Communications can present a huge risk, particularly in direct benefit plans, she says, because employees are relying on information that is often provided to them by help desk staff. “People have to be trained and understand how big the responsibility is to communicate and how easily one can make a mistake.”


Lussenburg also stresses the importance of process and documentation: “All the stuff that lawyers like and business people hate — having a process, monitoring it, and documenting it so you can demonstrate that you acted in good faith and prudently discharged your responsibility.”


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