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Can an Employer Unilaterally Change its Pension Plan from a Defined Benefit Plan to a Defined Contribution Plan in the Unionized Context?

In recent years, most employers who have Defined Benefit pension plans (“DB” plans) are looking for ways to contain rising costs associated with the DB plan and to maintain a level of predictability with respect to contributions made to the plan.  In order to achieve this, employers are increasingly switching to Defined Contribution pension plans (“DC” plan) in an effort to achieve more predictable funding costs.  However, a unilateral change from a DB plan to a DC plan made by an employer is not without risk in the unionized setting.

In virtually all pension plan documents, a clause exists which gives the employer the unilateral right to amend, modify or make changes to the pension plan, provided that the change does not result in a reduction of accrued benefits to plan members.  Often times, employers in a unionized setting mistakenly believe that this gives them the “green light” to go ahead and make revisions to the plan, without union involvement, negotiation or consultation.  While there is arbitral jurisprudence to support the position that in some cases, an employer will be entitled to unilaterally amend plans from a DB to a DC plan without union consent, case law confirms that before an employer makes such changes, the language of the pension plan document must be reconciled with collective agreement language. 

The case of St. Mary’s Cement v. United Steelworkers, Local 9235 (Pension Plan Grievance), [2010] O.L.A.A. No. 152 (“St. Mary’s”) is a good example that highlights the issues entailed when an employer seeks to unilaterally switch its DB plan to a DC plan, without union consent.  In this case, the Company froze the defined benefit portion of its employee’s DB pension plan and introduced a DC plan that would take effect a couple of months later.  Notice was given to the Union and employees of the change a couple of months before it was to take effect.

The Union objected to the changes proposed on the basis of language contained in the collective agreement which stipulated that the Pension plan formed part of the collective agreement.  It further maintained that the inclusion of this language prohibited the Company from adopting unilateral changes to the plan because the pension plan was incorporated into the collective agreement and effectively secured the “defined benefit promise”.  The Company, on the other hand, agreed that the Pension plan was incorporated into the agreement, but maintained that it had the unilateral right to amend or modify the plan, as provided for in the pension plan.

In reviewing the arguments put forth by the parties, Arbitrator Hunter agreed with the Company and found that there was no express provision in the collective agreement that conflicted with the pension plan text giving the employer the unilateral right to amend.  Not only was there no conflicting language, there was language in the collective agreement which expressly stated that “the Company intends to maintain the Plan indefinitely, but reserves the right to amend the Plan or discontinue the plan either in whole or in part at any time”.    In the arbitrator’s view, if it were to find in favour of the Union, it would effectively have to “read out” this language from the collective agreement.  On this basis, the Company was able to unilaterally amend the DB plan to a DC plan.

Although this case is favourable to employers, a word of caution is warranted.  The result in this case is limited to the specific facts presented to the arbitrator, and turned on the specific language of the collective agreement.  It is clear from a review of the case that the collective agreement language specifically permitted the employer to amend the plan.  This may not be the case in the context of other collective agreements.

Before deciding to make any unilateral changes to a pension plan in the unionized context, employers should carefully assess the language of the collective agreement, pension plan text, and consult with its actuaries to determine whether any change to the pension plan will result in a reduction of accrued benefits to plan members.  Given the complexity of pension language contained in many collective agreements and pension plan documents, it is also advisable to seek legal advice before an employer unilaterally makes any changes to its pension plan.  In this regard, the lawyers at CCPartners can assist employers in navigating through this complex area of the law.