Case Summary: Halliburton Group Canada Inc. v. Alberta
Halliburton sponsors several pension plans registered in Alberta under the Employment Pension Plans Act (Alberta) (EPPA). Effective January 1, 2002, Halliburton amended its final average-earnings defined benefit (DB) plan to convert it to a defined contribution (DC) plan. As part of the amendment, the benefits accrued under the DB component were preserved, but salary and service were frozen as of the date of the conversion amendment for the purposes of calculating a final DB amount.
The Alberta Superintendent of Pensions rejected the freeze on the grounds that it interfered with members’ vested rights under the plan and constituted a retroactive reduction of members’ benefits in violation of the EPPA. The Superintendent ordered Halliburton to rescind the amendment, file revised valuation certificates, and make any necessary additional contributions to the plan fund with interest. The Alberta Court of Queen’s Bench found that Superintendent’s decision was reasonable and, in September 2010, the Alberta Court of Appeal agreed.
In its decision, the Court of Appeal considered whether the formula for calculating the DB pension under the plan created a vested right or was a provision that could be reduced by amendment. The Superintendent argued that because the pension plan did not include a provision for tying a determination date (i.e., the date of an amendment) to the formula, the formula must be taken as a vested right. Halliburton argued that a benefit is vested only if the member would be entitled to it if he or she retired today.
The Court of Appeal rejected Halliburton’s argument and agreed with the Superintendent. It found that at the point any employee became a member of the DB component of the plan, he or she was entitled to have his or her DB benefits calculated in accordance with the DB formula. The DB formula required that the compensation number used be the one that is the highest for five of the member’s last 10 years of employment "prior to [the employee’s] normal retirement date."
As a result, the court held that affected members had a vested right to benefits based on their projected five years of employment preceding their normal retirement date. According to the court, to freeze earnings at an earlier date (i.e., the date of the conversion amendment) would be to retroactively reduce members’ benefits in violation of the EPPA.
Halliburton did not appeal the decision of the Alberta Court of Appeal.
Implications for Plan Sponsors
As a result of this decision, an employer who sponsors an Alberta-registered DB plan or who has employees employed in Alberta may now be prevented from freezing earnings of Alberta plan members on conversion. Whether a plan sponsor may do so or not depends on the terms of the current and historical plan documents. If, as in Halliburton, the plan documents do not include a provision for tying a determination date to the defined benefit formula, the plan sponsor is likely prohibited from freezing earnings on plan conversion. If the plan documents include a provision for tying a determination date to the defined benefit formula, the plan sponsor may still be permitted to freeze earnings (subject to any other restrictions in the plan documents).
An Alberta employer considering a plan conversion should carefully review the terms of its current and historical plan documents in order to determine whether it could fall into the Halliburton trap and be prohibited from freezing earnings on plan conversion. Although the decision is binding only in Alberta, sponsors in other provinces should also be on the lookout for similar challenges in their home provinces and regulatory pronouncements on the case.