Can Employers Reduce Retiree Benefits?

August 27, 2013

A recent Ontario Superior Court of Justice decision may have implications for pension reform a cross the country, including in New Brunswick. In O’Neill v General Motors of Canada, 2013 ONSC 4654 (“O’Neill”), the employer, General Motors of Canada (“GM”), substantially reduced the health care and life insurance benefits of former salaried and executive employees after they had retired. The central issue was whether GM was entitled to reduce the benefits of retirees.

Generally, an employer may change retiree benefits if there is clear and unambiguous contractual language permitting the employer to do so.

In assessing whether GM posed a contractual right to modify retiree benefits, the Court recognized the fact that the contractual commitments to unionized employees differed from those that GM had made to its non-unionized executive employees.

The Court examined more than 260 benefit booklets, brochures and information distributed to employees over the course of their employment to determine if GM posed a contractual right to modify retiree benefits. The benefit booklets stated that GM reserved the right to amend, suspend or terminate any benefit program at any time. This reservation of rights was not included in the brochures and other benefit information provided to employees. GM relied on the reservation of rights provision in the benefit booklets to unilaterally reduce life insurance and health care benefits for retirees. However, the Court noted that not all of the documentation pertaining to retiree benefits included the reservation of rights. The documents were found to be vague and inconsistent with respect to GM’s right to alter core benefits after retirement. This, in turn, was found to create a reasonable expectation that those benefits would remain available to retirees for life. GM was ordered to reinstate those benefits and reimburse the affected retirees.

The O’Neill decision was not a victory for all GM retirees. The evidence established that GM had maintained clear and unambiguous language permitting it to unilaterally alter benefits of non-unionized executive employees. The Court therefore concluded that GM had a contractual right to alter the benefits promised to the executives, even after their retirement.

What This Means for Employers

An employer seeking to unilaterally alter, reduce or terminate retiree benefits should ensure they have a clear contractual right to do so.

This decision will likely have a chilling effect on employers across the country. For example, the New Brunswick provincial government is currently in the midst of heated pension reform with the public sector employees. The provincial government is seeking to convert its defined benefits pension plans to a shared-risk pension plan which could result in a reduction in benefits for both retirees and current employees.

The similarities between the situation in New Brunswick and the O’Neill decision are striking. Like in the O’Neill case, the provincial government is contemplating changes which would reduce the benefits of retirees. As in O’Neill, the civil servant retirees in New Brunswick likely expected their pensions to remain unaltered throughout their retirement. According to , the ability of the provincial government to amend the benefits for retirees will depend upon the contractual rights between the parties and whether the provincial government has, over the years, maintained clear and unambiguous language establishing the right to unilaterally amend benefits.

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