Canadian Underwriter

Pension Puzzle

November 2, 2012   by Craig Harris, Freelance Writer

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One of the prime casualties in the aftermath of the 2008 economic crisis was the sponsored pension plan of a private company or organization. While the housing market and financial services industry received much of the attention during that period, pensions also took a sharp hit.

In 2008, private pension plans in the 36 countries that comprise the Organization for Economic Co-operation and Development (OECD) lost 23% of their real value on aggregate, or a staggering $5.4 trillion. Even today, pension plans are struggling with funding levels. In a report released last August, ratings agency DBRS reviewed 451 defined benefits pension plans in North America and showed a combined funding deficit of $389 billion at the end of 2011. More than two-thirds of plans reviewed in the past year were underfunded by a significant margin. “In order for companies to address this funding gap, employers will have to maintain high levels of contributions, as many plans have now entered the danger zone of funded status,” DBRS noted in the report.

This “danger zone” has several ramifications. One key facet is the liability of directors and officers, who may be involved as both “employers” and “administrators” related to the pension plan. Evolving litigation in common law has only served to further expose senior managers and boards of directors to potential pension liability.

“I don’t think the pension exposure is uniformly appreciated by directors or officers making decisions about pension funds,” says Richard Johnston, a partner in the Toronto office of Fasken Martineau LLP. “There is a range of sophistication in terms of how this issue is addressed by companies.”

Some argue that these concerns are rapidly emerging onto the radar screen for directors and officers because of the heightened activism of plan beneficiaries.

Risk managers and lawyers are becoming increasingly aware of the risk of pension liability,” suggests Ian Gold, founding partner of Thomas Gold Pettingill LLP. “Pension governance is more of a concern as a result of the recent economic downturn and the financial troubles facing pension plans: beneficiaries are increasingly scrutinizing the administration of the plan.”


There are severa l obligations that directors and officers face regarding private pension plans, spelled out by statute or common law. Many provincial and federal pension laws make directors liable for offences their corporations commit. For example, offences may include failure to submit required contributions to the pension fund or to hold contributions in trust on the employees’ behalf. Directors can be held personally liable for substantial fines, as well as amounts required to reimburse the plan.

As Gold points out, in Ontario a plan administrator can be fined $100,000 for first offence in breaching an applicable pension statute. The common law has also seen several recent developments.

“In the last four years, directors and officers have been surprised to see potential personal liability they might incur due to common law,” notes Mary Picard, a partner with Fraser Milner Casgrain LLP in Toronto.

“This is an ongoing, evolving area of litigation, particularly for companies that are in the ‘zone of insolvency.’ If they have a defined pension plan, that is one of the top questions we see when it comes to directors and officers.”

A leading case in this area involves the insolvency of Slater Steel. In a 2008 decision, the Court of Appeal for Ontario essentially allowed a claim to proceed against corporate directors and officers related to a shortfall in the company’s defined benefits pension plan.

 The case, Morneau Sobeco Ltd. Partnership v. Aon Consulting Inc., also involved disputes regarding actuarial assumptions used in the administration of the pension plan. “The decision in the Ontario Court of Appeal in Slater Steel exposed 10 directors, officers and employees to possible personal liability of $20 million with no meaningful recourse against the insolvent Slater Steel or its assets,” Johnston notes in a commentary on the case. “This is a reminder that failure to recognize and fulfill fiduciary obligations for a pension plan can expose (directors and officers) to substantial personal liability.”


One of the critical issues in this case was the fiduciary obligation of the directors and officers as “administrators” of Slater Steel’s pension plan, as opposed to “employers.” As Johnston notes, Ontario and other Canadian provinces impose fiduciary duties on the designated administrator of a pension plan. But for most plans, the designated administrator is also the employer. This so-called “two hats” approach adopted by the courts distinguishes that an employer may be free of fiduciary duties in determining pension benefits and changing those benefits. However, when the employer (directors and officers) acts as a plan administrator, it accepts fiduciary obligations.

Cases such as Slater Steel can blur the lines between employer and administrator, creating potential conflicts of interest – and liability. “One of the issues that Slater brought out is that directors and officers have an inherent conflict when it comes to administering a pension plan,” Picard says.

“They owe a duty to the stakeholders of the corporation and also a duty to members of the pension plan. On a day-to-day level, that conflict can be very difficult,” she adds. The potential for increased exposure to pension liability should be met with a comprehensive risk management program, several sources recommend. “Risk management is about education and the implementation of sound procedures,” Gold says. “Directors and officers who are involved in the administration of a pension plan should be familiarizing themselves with the Canadian Association of Pension Supervisory Authority’s governance guidelines and educating themselves on the relevant law with respect to their legal duties,” he advises.

“With respect to pensions, directors and officers should insist on a clear governance policy outlined in a formal document,” says Alexandra North, an associate with Fraser Milner Casgrain LLP. “Directors should also review any actuarial evaluations, audit reports and minutes of pension committee meetings.”


Insurance, in the form of directors and officers (D&O) liability and fiduciary liability, can also play a role in addressing the pension liability puzzle. D&O policies can vary significantly among insurance providers in terms of coverage, terms and exclusions. For example, a common exclusion under D&O involves claims against a director or officer in relation to pension liability caused by a breach of duties imposed on a pension fiduciary under statute or common law.

“In general, D&O policies exclude pension liability and, therefore, a fiduciary liability policy is a more appropriate option,” says Gold. “However, all policies will contain exclusions that will affect coverage. For example, it is unlikely that willful misconduct or a fine would be covered under an insurance policy.”

Fiduciary liability insurance provides specific protection for organizations and individuals responsible for the governance, management and administration of pension and benefit plans. “

There is a need to get proper advice as the nature of the coverage required by an organization,” Johnston says. “There may be add-on coverage to a D&O policy for fiduciary obligations or there may be a need to purchase separate fiduciary liability insurance.

Either way, the word ‘fiduciary’ needs to be front and centre when looking at insurance coverage.” Picard reports that she has seen an upswing in requests for fiduciary liability insurance in recent months. “There does not seem to be any clear answers or standard practices regarding what coverage exists or the amount of protection required,” she comments.

“This has to be worked out with the broker. O
ne client asked me how much financial coverage they should get. I said, ‘for the entire amount of the pension plan’; that is the potential exposure.”


Johnson says he believes there is a need for more education regarding coverage, risk and terms from insurers and brokers when it comes to pension liability. “I think there should be more information about what is covered under these policies,” he argues. “Those marketing insurance should understand the exposures directors and officers have under pension plans and how they may or may not be covered.”

That need may become more pressing in the years ahead, as pension plans evolve and continue to struggle with underfunding issues. The focus of pension litigation traditionally has been on defined benefit pensions, Johnston says, but defined contribution plans, which are increasing in popularity among plan administrators and offer more investment choices to beneficiaries, could create significant exposures going forward.

“When you look at these plans, it is not until many years later that people look at their investments, either when they are close to or at retirement,” Johnston observes. “They may question the selection of investments, particularly ‘default’ investments that are offered if no option is taken by a beneficiary. The decisions made in the past related to investments and the plan will be under the microscope. That is when you will want to have documented policies and procedures in place.”

Others contend that pension liability and ongoing litigation may make for improved awareness and better governance practices in the future.

“My feeling is that we will see better governance of pension plans as a result of this disruption and uncertainty,” Picard concludes. “Ultimately, pension plan members will be better served,” she adds. “Hopefully, the rise in pension litigation in Canada will motivate boards to pay closer attention to their legal obligations to plan beneficiaries,” Gold notes. “Better pension governance will mean less liability for administrators and better outcomes for plan beneficiaries.”

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