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Sunday, April 4, 2010

CSR and Pension Benefit Legacies

In a recent article of the Financial Times (full article here), it was noted that a pension scheme of a major food manufacturer was found to have a provision that prevents alteration of the pension plan insofar as such a change would be "unfair or materially detrimental" to the plan's beneficiaries. The article hypothesizes that the "unusual clause" could be linked to the company's "Quaker heritage" and "its doctrine of giving a fair deal to staff and suppliers". This raises some interesting legal issues, and reveals the potential for Corporate Social Responsibility (CSR) motivations to affect legal relations far into the future.

It should be noted that it is not so unusual that a pension plan scheme establishes a trust relationship which prevents the employers from unilaterally amending the plan and its terms in a manner that is "detrimental" to plan beneficiaries.  The language regarding "unfairness" is perhaps unique however, in the sense that it would seem to create a different test for an improper amendment than simply a reduction in benefits.  The question becomes what constitutes "unfairness" and how an alteration of the plan that was not "materially detrimental" to employees could be deemed "unfair".

Conceivably, such language could impair a company's ability to to make changes to the plan that would affect new members differently than existing members, such as if benefits for new members were removed while such benefits were maintained for current or vested members.  Such a limitation could be particularly constraining in the context of a unionized workplace, where benefit (including pension) entitlement was contemplated by the collective agreement, and thus required for all unionized employees.  It is possible that unequal benefit entitlement in a grandfathering scenario could be construed as "unfair", and therefore contrary to the plan.  In this way, the concept of "fairness" could be incorporated into the collective agreement by its incorporation of the pension plan.

That being said, "fairness" is not the same as "equality", and as such it could be argued persuasively that a grandfathering scenario would not be unfair, so long as similarly situated employees were treated alike (i.e. that new employees were provided the same benefits as one another, but not necessarily the same benefits as differently situated employees).

While there could be arguments both ways, this scenario clearly reveals how CSR type decisions made by companies can affect organizational obligations decades down the road.  Pension obligations are often in the nature of a trust, and therefore are a special kind of contractual obligation that can be very difficult to change, regardless of economic circumstances.

Another CSR-related question is whether the alteration of such a plan, or the provision of incentives (or disincentives) to employees to give up their plan entitlements, would be consistent with a company's ethical or social responsibility obligations, aside from the question of legal validity.  It is here that legal strategy and CSR become intertwined, and the employer must consider how the cost/benefit objectives of the company to control pension costs can be reconciled with CSR expectations of major stakeholders.  Ultimately, the well-being of the company may be contingent upon controlling pension liabilities, and the common interests of stakeholders in the organization's economic viability may provide the most persuasive reasoning for reducing or eliminating the benefit.  It is important for companies that have expressly adopted a CSR mandate to give conscious consideration to such reasoning when making such legal decisions.

In all, this scenario illustrates that, while CSR objectives of positive employee relations may motivate language emphasizing fairness and equality, it is important to understand how such language will affect commercial and social relations far into the future.

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