Some economists and experts predict that higher interest rates may make defined benefit (DB) pension plans more appealing to employers and more prevalent in upcoming negotiations.1 Nonetheless, the "mirage of brighter markets"2 was not enough to solve the problem of chronic under-funding of Quebec municipal sector pension plans, reasoned the majority of the Quebec Court of Appeal in a decision dated May 10, 2023.3 The Court rejected the unions' argument that the improvement in markets meant that the Quebec government's intervention in their pension plans and their right to negotiate their terms of employment, was unjustified and unconstitutional under the Act to foster the financial health and sustainability of municipal defined benefit pension plans ("Bill 15" or the "Act").

Numerous unions and associations of employees and retirees challenged the Act on the grounds that it infringed on the fundamental right of freedom of association, which is protected by the Canadian Charter of Rights and Freedoms and Quebec's Charter of Human Rights and Freedoms (the "Charters"), namely, the right to engage in a meaningful collective bargaining process with respect to terms of the pension plans, recognized by jurisprudence as being key conditions of employment. The Court unanimously held that the Act was valid for active plan members but found that the parts of Bill 15 affecting retiree rights were unconstitutional.

Historical and Economic Context

Bill 15 was one in a series of measures taken by the National Assembly in response to the 2013 D'Amours Report4 intended to restore the funded position of certain Quebec municipal pension plans. The plans' problems and the Act's solutions were not unique to the municipal sector. Generally speaking, when facing a pension deficit, an employer in a traditional DB plan must make "amortization" payments to make up the deficiency over time. The deficiencies in DB pension funds that occur when the liabilities (the plan's obligations to the members) exceed the assets (investments and cash held by the plan) may arise for other employers in all types of businesses and industries.

The Act was a response to the 2008 economic crisis and its disastrous impact on the assets of DB pension plans. The collapse of most asset markets and the corresponding drop in interest rates led to significant deficiencies in DB pension funds, and the municipal sector was severely hit by the crisis. Quebec proceeded to enact legislation to relieve the heavy burdens on municipalities. One measure increased the amortization period to pay plan deficits to ten years from the previous five years. This measure did not succeed in improving the plans' funded positions.

The financial situation of the municipal plans, most of which were negotiated during collective bargaining, continued to worsen, even after the province of Quebec came out of the economic crisis. The government called on a group of recognized experts, led by Alban D'Amours, a former CEO and Chairman of the Desjardins Group, to analyze the overall situation regarding the rules governing pension plan funding. In light of the recommendations in the D'Amours Report, the National Assembly passed the Act at the end of 2014, which laid out a mandatory procedure to restore the plans' financial health by addressing numerous relevant issues: contribution holidays, early retirement subsidies, the accumulated actuarial deficiencies as at December 31, 2013, employee and employer contributions, the sharing of the financial burden, capitalization, the stabilization fund, future deficiencies, the rights of employees who leave employment before age 55, and indexation of pensions.

The Impact of Bill 15

Bill 15 required the preparation of a special actuarial report for each plan to establish the plan's degree of solvency and quantify its deficit as at December 31, 2013. The Act also laid down certain basic rules the parties must follow going forward, for which no exemptions were permitted. For example, the current service contribution could no longer exceed 18% of the payroll, employers and plan members would share equally in future deficiencies and employer-employee cost sharing of up to 50/50 for past deficiencies. The Act set aside protections for vested rights and against retroactive changes provided in the collective agreements and the Supplemental Pension Plans Act.5 For all other relevant matters, the Act directed the parties to engage in negotiations outside of the normal collective bargaining process to find ways to secure the solvency and financial well-being of the plan. If they could not reach agreement, the Act provided for naming an arbitrator to settle the issues in dispute by way of binding arbitration.

The Act gave the parties limited time to negotiate and decide jointly on the major restructuring that their plan had to undergo to achieve the legislative objectives. For active members, several compromises and sacrifices had to be considered, one of which was reducing the value of their future pensions, including for past service, and a substantial increase in member contributions. For retirees, the legislature provided only one way to contribute to the financial well-being of the plan: suspension of the indexation that protected their pensions from inflation.

Decision of the Court

The Court unanimously ruled that Bill 15 was valid for active members, i.e., employees who work every working day and who accrue pensions as they render services to their employer. The Court determined that the Act required greater contributions from them to eliminate the deficiencies and restore their pension plans to financial health, and infringed on the rights negotiated by their unions and stipulated in the collective agreements. The Court also pointed out that an increase in employee contributions resulted in a reduction in their overall pay. Furthermore, the Act removed important subjects from collective bargaining, which had to be negotiated outside the existing collective agreements and, therefore, without recourse to the right to strike. For these reasons, the majority of the Court concluded that the Act amounted to a substantial interference with the "freedom of association" protected under the Canadian and Quebec Charters. However, the majority concluded that the Act was, for active members, a reasonable limit and infringement that was justified in a free and democratic society, underscoring the evidence of the financial and demographic pressures and market fluctuation at the time, which jeopardized the very existence of DB pension plans.

The minority ended their analysis at the "freedom of association" stage. It held that the interference was not substantial since the active members could still negotiate compensation by their employer for the sacrifices they had to make under the Act and pointed to various agreements where this had been done.

The Specific Case of Retirees

The Act permitted the suspension of indexation of retirees' pensions in the event of inflation. For the Court, retirees are left in a completely different position than active members. The Court relied on a 1993 decision6 of the Supreme Court that when an employee retires, the rights "crystallize" and become "vested rights" that are protected from collective bargaining in a unionized workplace.

However, the Act allowed the municipality to order, automatically, that pensions cease to be indexed after simply holding an information meeting. The alternative solutions, namely limited collective bargaining and interest arbitration, were not available. It is this part of the Act that was struck down.

It is important to note that the inflation protection from pension indexation is a benefit that retirees negotiated when they were active members and that, as a result, the Court found the legislative initiative to be a substantial and unjustified interference in their freedom of association. There were other details in the analysis done by the Court, such as the fact that the only retirees affected were those who benefited from automatic indexation.

In short, the floor of the legislative scheme relating to retirees fell apart.

Conclusion

The division within the Court of Appeal on the issue of what constitutes "substantial interference" in freedom of association means that the Supreme Court of Canada might eventually hear the case. Furthermore, this is a case where recent Supreme Court of Canada decisions from the last decade that expanded the constitutional rights of workers run up against a critical legislative reform in the specialized field of pension plans to ensure that they continue to be economically sound and to avoid higher costs to taxpayers.

However, the predominant effect of the decision is the recognition of retirees' rights and interests and the protection of the purchasing power that their lifetime pensions may afford them. This last aspect may be even more essential these days than ten years ago when the Act was enacted, given that we had significant inflation since 2022.

This recognition and protection of retirees are not a result, in this case, of their universal situation or their vulnerability in general. In a way, they are afforded constitutional protection as a subcategory of "former unionized workers" who are no longer able to benefit from what their unions negotiated for them while they were active participants.

Footnotes

1. Financial Post, "Why defined-benefit pension plans may be poised for a comeback," October 4, 2023.

2. English translation of the expression "Le mirage d'une embellie des marchés" in the Court decision.

3. Alliance des professionnels et des professionnelles de la Ville de Québec c. Procureur général du Québec, 2023 QCCA 626 (CanLII).

4. Expert report on the Future of the Québec Retirement System, Innovating for a Sustainable Retirement System, Bibliothèque et Archives nationales du Québec 2013.

5. Bill 15, section 21.

6. Dayco (Canada) Ltd. c. TCA-Canada, [1993] 2 R.C.S. 230.

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