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Brief: Fund decision makers 'frightened' of being personally sued

|Written By Daryl-Lynn Carlson

Parties involved in administering pension plans are bracing for the outcome of several cases moving through the courts that could hold them individually responsible for poor fund investment decisions.

J. David Vincent notes there is not much case law in Canada relating to pension plan investments and liability.

The nature of the arguments is reminiscent of the same corporate governance issues raised in Sarbanes Oxley accountability legislation first introduced in the United States following a rash of high-profile corporate scandals.

And similarly, the outcome of four cases in particular might not necessarily be detrimental.

"What I find interesting as a development is that the whole subject of pension plan investments and the liability related to pension plan investments is something that there is not much law on in Canada," observes J. David Vincent, partner and co-chair of Ogilvy Renault LLP's pension and benefit plans practice in Toronto.

"Those cases presently before the courts are cases where someone has suggested or claimed that people who are responsible for making investment decisions somehow made a mistake, breached a duty, or caused damage in making a decision. That issue has really not received consideration from the courts but it's a very important issue."

The cases ? all class actions ? that have captured attention are:

* Martin v. Barrett et al. as trustees of Participating Co-Operatives of Ontario, which has been ongoing since 2002 and where members are suing past and current trustees, an investment manager, actuary, custodian, and legal advisor for $100 million after the pension plan incurred $120 million in liabilities.

* CUPE v. OMERS, which seeks $60 million on behalf of unionized plan members against the OMERS board of trustees, three senior management personnel, and a pension investment corporation called Borealis, which OMERS had owned, then sold, and later repurchased.

* Coutu v. Pension Committee of Jeffrey Mines, which involves a suit filed by pension plan members against the pension committee, actuary, and investment manager for $13 million after the plan came up short on its liabilities following the bankruptcy of Jeffrey Mines.

* Syndicat General des Professeurs de l'universit? de Montr?al v. Gourdeau, a class action by University of Montreal professors against their pension plan committee for alleged failure of a $100-million hedge fund investment whose managers were charged with securities fraud.

"In many of these cases, individuals are being sued personally for the decisions that they've made in the corporate capacity. Probably every single one of those individuals is surprised to be sued personally for the decisions that they've made," says Vincent.

"If your job is to administer a pension plan and make investment decisions on behalf of that plan, typically most people who are in that situation don't expect to be sued if they make a mistake."

Then again, notes Vincent, pension fund administration statutes in Canada are vague and somewhat general, especially compared to the U.S. where the Employee Retirement Income Security Act (ERISA) affords fund administrators safe harbour if they can demonstrate they've complied with the Act.

Vincent cites recent statistics that indicate total assets of registered pension benefits have reached a record $1 trillion in Canada.

"There are rules in the pension law legislation that talk about what a pension plan can invest in, but they're fairly general rules and they tend to be sort of quantitative restrictions compared to what the Americans would consider safe harbour rules," Vincent says.

Yet in Canada, "the prospect of personal liability is a frightening one for many of our clients who are in the position of making discretionary decisions in a large pool of capital. If people are held personally liable for decisions that they make, it's going to have a real chill effect."

Vincent, whose firm is representing the actuary in the Jeffrey Mines matter, says he is hopeful the courts will weigh a balance to accommodate employer pension funds and offset that chill while instituting much-needed guidance for their administration.

Deron P. Waldock, now a partner at Bennett Jones LLP's corporate and commercial group in Toronto, agrees the current cases before the courts will in any event put more onus on all capacities of fund administration.

Waldock also notes that the introduction of class action legislation across the country has facilitated getting the cases into court.

"Plaintiffs individually, looking at their particular interests, it's not a lot of money and certainly wouldn't drive them to see a lawyer to recoup their costs," says Waldock. "But you get a big group together and the amounts of money people are talking about are really staggering.

"So what you're seeing in the cases right now is the genesis of that [class action] flood gate opening."

Waldock also points to a fifth case now in the appellate court, which many observers hope will be overturned.

The plaintiffs in the case, Kerry (Canada) Inc. v. Ontario (Superintendent of Financial Services), successfully argued that using surplus from the fund's defined benefit portion to effectively offset its contribution requirements to the defined contribution portion was inappropriate and a breach of trust.

"Up until the Kerry case, most plans ? hybrid plans ? probably at one point in time took contribution holidays and the consensus was that was probably appropriate within the legal parameters," Waldock says.

He suggests this illustrates that class actions are enabling plaintiffs to argue all means of "fringe issues" ? for better or for worse ? especially as funds incur losses.

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