Commercial Litigation and Dispute Resolution Blog

Retirement benefits have been much in the news recently with the announcement by the federal government that the eligibility age for public Old Age Security benefits will rise from 65-67 beginning in 2023.  Concerns about the affordability of retiree benefits is particularly acute in the private sector where factors such as the aging population, economic uncertainty, government offloading of public services and escalating health care costs are causing employers to examine their ability to continue to provide post-retirement benefits to their retirees.

It is generally accepted that employers can make changes to their benefit plans prospectively including changes to the health and welfare benefits that will be available to their employees in the future when they retire (health and welfare benefits must be distinguished from pension benefits that are subject to different rules and have a measure of statutory protection under pension standards legislation).  Less clear is whether employers can change the benefits provided to those people who are already retired.  Two recent British Columbia cases deal with this situation.

In Lacy et. al. v. Weyerhaeuser Company Limited, 2012 BCSC 353, five former MacMillan Bloedel employees sued Weyerhaeuser for changes made to Weyerhaeuser’s retiree benefit plan (Weyerhaeuser had purchased MacBlo in 1999 and had assumed responsibility for the retiree plan).  Up until 2010, retirees were eligible to have 100% of the cost of the premiums for the provincial Medical Services Plan and an extended health care plan paid by the company.  In October 2009 however, Weyerhaeuser advised retirees that due to concerns about the viability and affordability of the benefit plans, the company was freezing its contribution at 50% of the cost in place as of January 1, 2010 and that any future increases would be borne by retirees.

In his decision dated March 9, 2012, Mr. Justice Saunders of the B.C. Supreme Court found in favour of the Plaintiff retirees and held that Weyerhaeuser was not entitled to make the change.  He concluded that while the benefits were originally extended to retirees as a matter of company policy, over time they had evolved into a contractual obligation and had become a form of deferred compensation.  The Judge found that the promise of premium-free benefits in retirement had been communicated to the Plaintiffs throughout much of their working lives and, as such, was binding upon Weyerhaeuser.  The benefits vested upon retirement and accordingly the Plaintiffs were entitled to the level of benefits in place as of the date each of them retired.

Shortly after the Lacey decision was released, the B.C. Court of Appeal rendered its decision in Bennett v. British Columbia, 2012 BCCA 115.  Bennett involved an appeal from the dismissal of a class action brought by former B.C. public servants challenging changes made to their retiree benefits provided through the B.C. Public Service Pension Plan.  The changes in issue were similar to those considered in the Lacey case in that retirees were required for the first time to contribute to the cost of the benefits.  The Plaintiffs’ claims were similar as well in that they alleged that they had been promised premium-free retiree benefits as part of their contracts of employment with the provincial government.  Unlike in Lacey however, the Court disagreed.

In Bennett, the Court held that the statements relied upon by the Plaintiffs were not contractual promises but rather were merely descriptions of the retirement benefits available from time to time.  The Court distinguished between representations and promises and found that the various statements about the future benefits fell short of having contractual force.  The Court further found that many of the statements were made well after the Plaintiffs were hired and often when they were close to retirement.  As such, the Plaintiffs’ continued employment and service did not provide any new or good consideration for the “promise” of benefits in retirement.

The Lacey decision is currently under appeal and it remains to be seen whether the Court of Appeal will apply a similar analysis as that employed in Bennett and overturn the decision.  In the meantime, notwithstanding the different result in the two decisions, certain common lessons can be drawn for employers who are considering the future of their retiree benefit programs:

• If retiree benefits vest or become guaranteed, they do so at the date of retirement so employers are generally free to make changes prospectively to the benefits for future retirees (subject to any employment law concerns about alteration of existing employment contracts); and

• The ability to change benefits for current retirees will depend in large part about how the benefits have been implemented and communicated to employees and retirees over time.  Employers will be in a stronger position if they have made it clear in relevant communications that they reserve the right to change the benefits.

One issue that forms an undercurrent to both the Lacey and Bennett decisions, but is not addressed by the courts in any detail, is the significantly changed circumstances that exist today from when many of the retirement promises in issue were made.  For example, all of the Plaintiffs in Lacey worked in and retired from the forest industry at a time when that industry was flourishing and when companies operating in the industry were well able to afford generous benefit packages for their retirees.  At the same time, the cost of those benefit packages was relatively small.  Those days are long gone.  Today, the B.C. forest industry has been ravaged by the economy and many companies in the industry simply cannot afford to maintain the existing retiree benefit plans.  If they are held to promises or representations made in the past (often by predecessor companies) under very different circumstances, their economic viability may be threatened.

Because retiree health benefits are not paid out of accumulated assets like pension benefits, but rather are funded by current operating revenues, any threat to the viability of the employer company is in effect also a threat to the long term viability and security of the benefits.  Accordingly, in many instances, retirees would be better served by working with their former employers to achieve some form of compromise that would permit the employer to realize some cost savings while at the same time maintaining a reasonable level of benefit coverage.  If retirees insist however on compelling the employer to maintain historical benefit levels, they do so to the prejudice of current employees and ultimately to their potential prejudice as well.