Mathews Dinsdale’s Stephen Bernardo successfully argued that under the terms of the collective agreement, the Company was entitled to unilaterally convert its employee pension plan (the “Plan”) from a defined benefit (“DB”) plan to a defined contribution (“DC”) plan.
Under a DB plan, a retiree is guaranteed a set level of income at retirement (i.e. a “defined benefit”) regardless of how well the plan’s investments perform. If the plan falls short, the employer is liable to the retirees for the deficit. By contrast, under a DC plan the employer’s responsibility is restricted to making a certain (i.e. “defined”) contribution to the pension plan. If the plan performs poorly, the employer is not liable for any shortfall so long as it has made the requisite contributions. In short, under a DC plan, the investment risk and interest rate risk lies with the employees and not the employer.
A DB plan had been in effect at the Company since 1967. While bargaining for a renewal of the collective agreement in mid-2008, the Company advised the Union of its intention to convert the DB pension plan to a DC plan effective January, 2009.
The Company and the Union had expressly incorporated the Plan into their collective agreement. The Plan text itself included the following provision: “The Company intends to maintain the Plan indefinitely, but reserves the right to amend or discontinue the Plan either in whole or in part at any time.”
The arbitrator rejected the Union’s argument that by incorporating the Plan into the collective agreement, the Company gave the Union a say over any changes made to the Plan. The arbitrator noted that the Union had tried and failed to secure the continuance of the DB plan during the latest round of collective bargaining, and that the Union could not now attempt to achieve through arbitration what it had failed to obtain through negotiations.
The arbitrator accepted the Company’s argument that it would be an excess of jurisdiction to read out the clause in the incorporated Plan which provided the Company with the unilateral right to amend the Plan. He accepted that the change in the Plan would create financial savings for the Company while imposing some level of hardship on the employees, but concluded that he could not ignore the Company’s express right to unilaterally amend the Plan.
This is one of the first decisions to directly address whether an employer may unilaterally convert from a defined benefit to a defined contribution plan. This decision will be a significant precedent for any unionized employer that sponsors a DB plan and is considering a conversion to a DC plan. Employers who are considering such an amendment should examine their collective agreements and their pension plan documents and seek the appropriate legal advice in order to determine whether such an amendment is permitted under their pension plan.