Fiduciary Responsibility 

What Is a Fiduciary?

The term fiduciary comes from the Latin fiducia, meaning trust or confidence.¹ In law, a person in whom trust or confidence is reposed is termed a fiduciary when the relationship is such that the fiduciary is impressed with a duty of loyalty to those placing their trust in them.² The classic example of a fiduciary relationship is that of a trustee vis-à-vis a trust. When a trust deed or agreement vests legal title to property to a trustee, the trustee is required to use the property for a certain purpose that serves the best interest of the trust beneficiary.

The fiduciary concept has been substantially expanded beyond the traditional doctrine rooted in trust law and has been applied by Canadian courts in the pension and benefit plan context. The scope of the fiduciary principle was most recently articulated by the Ontario Court of Appeal in the pension context when it confirmed that an employer/ administrator³ of a single employer plan owed a fiduciary duty to pension plan beneficiaries when it granted priority claim to its assets to lenders over its obligation to fund its employees’ pension plans—where these corporate interests conflicted with the interests of the pension plan beneficiaries. Madam Justice Gillese of the Ontario Court of Appeal summarized the fiduciary concept as follows:

“A fiduciary relationship will be held to exist where, given all the surrounding circumstances, one person could reasonably have expected that the other person in the relationship would act in the former’s best interests. The key factual characteristics of a fiduciary relationship are: the scope for the exercise of discretion or power; the ability to exercise that power unilater- ally so as to affect the beneficiary’s legal or practical interests; and, a peculiar vulnerability on the part of the beneficiary to the exercise of that discretion or power.” ⁴

From this expanded definition, it becomes clear that anyone who has the authority to act with respect to an employee benefit plan in a way that can affect the interests of a plan beneficiary, where the beneficiary reposes their trust and confidence in that person (e.g., by making investment or benefit entitlement decisions or through a power to amend the plan), is likely to be labelled a fiduciary. Accordingly, Canadian courts have held employers, corporate trustees and boards of trustees affiliated with benefit plans as fiduciaries accountable to benefit plan beneficiaries. In Indalex, the Ontario Court of Appeal stated the characteristics of a fiduciary relationship are “readily apparent” in the relationship a pension plan administrator has with plan members and beneficiaries:

In the administration of a trust, benefit plan trustees and professional advisors are governed primarily by the common law standards of fiduciary conduct. However, legislation, plan provisions and trust agreements can also have an influence on the administration of a trust.

The federal government and each of the ten provinces have pension benefits legislation,⁶ although Prince Edward Island’s legislation has yet to be proclaimed. When the Supreme Court of Canada upheld the Court of Appeal decision in Indalex, it made clear that trustees and other administrators of a pension plan have fiduciary obligations to plan members and beneficiaries. These duties and responsibilities arise both from common law and by virtue of the pension benefits statutes, which impose “fiduciary-like” standards of care on plan administrators and the administrator’s agents.⁷

There is no legislative parallel to that for pension benefits for health and welfare benefits, vacation pay trust funds, training trust funds or supplementary unemployment insurance benefits. There is, however, legislation respecting trustees in general that may apply. Because this general legislation is also concerned with the trustees of estates for minors, executors appointed under a will, etc., it does not deal with employee benefit plan administration in the same detailed way pension benefits legislation does.

In some jurisdictions, the administration of employee benefit plans is affected by provisions in labour relations legislation. For example, the Alberta Labour Relations Code⁸ limits the personal liability of trustees and the joint board of trustees of an employee benefits plan, except where the trustees failed to act honestly or in accordance with the intent and purpose of the trust instrument.⁹ This provision is expressly stated to be paramount over any provision in the Trustee Act.

Finally, all employee benefit plans in Canada are affected by the provisions of the Income Tax Act. For example, this legislation places a ceiling on the amount of pension benefit payable to a retiree annually without tax consequences to the sponsor. Trustees of any pension plan need to consider compliance with the tax regulations and tax consequences when making fiduciary decisions with respect to a pension plan. 

The Common Law Duty of Care

When explaining a trustee’s fiduciary duty under common law, it is often said a trustee owes a duty of care to the beneficiaries of the trust. Generally speaking, this duty is one of utmost good faith, requiring a “heightened sense of loyalty and fidelity” on the part of the trustee.¹⁰ The fiduciary duty of care encompasses at least four distinct, specific duties:

1. The conflict-of-interest rule—to act scrupulously for the benefit of the trust or the beneficiaries and never for themselves while carrying out fiduciary duties
2. The standard-of-care rule—to be active in carrying out duties and performing them with complete integrity
3. The no-delegation rule—to carry out duties personally as a result of the trust and confidence re- posed in them
4. The even-handed rule—to act impartially between the beneficiaries unless the trust instrument authorizes favouritism.

These duties apply to all trustees—including employee benefit plan trustees—and extend to other aspects of plan administration where the trustees have discretionary powers of decision.¹¹

Conflict-of-Interest Rule

A leading case on trustees and conflicts of interest remains an English court decision made almost 300 years ago. In Keech v. Sandford,¹² a trustee (Sandford) held a lease as trust property. When the lease expired, the owner (Keech) refused to renew it with Sandford in his capacity as trustee. When Keech offered the lease to Sandford in his personal capacity, Sandford accepted it. In so doing, Sandford was found to have placed himself in a conflict-of-interest position—despite the fact the lease was no longer available to the trust. Essentially what this means is that a trustee breaches (violates) the conflict-of-interest rule if they secure a benefit as a result of their status as trustee. It makes no difference whether the benefit is secured at the expense of the trust or it is a benefit that the trust is incapable of obtaining.

The fiduciary duty of pension plan trustees and other administrators to avoid conflicts of interest is also imposed by pension legislation in most jurisdictions, reflecting the common law duty.¹³ For example, section 8(10) of the Federal Pension Benefits Standards Act,¹⁴ prohibits an employer/administrator from putting itself in a material conflict of interest. As noted by the Supreme Court of Canada (SCC) in Buschau v. Rogers Communications Inc.,¹⁵ this prohibition precludes an employer from withdrawing pension plan assets for its own purpose in conflict with the beneficiaries’ interest in maintaining a sufficiently funded pension plan.¹⁶ 

As part of the Indalex case, the Court of Appeal for Ontario considered the actions of the administrator for an employer-sponsored pension plan while under insolvency protection. The court added that the prohibition against conflict of interest “is not confined to situations where the fiduciary’s personal interest conflicts with those of the beneficiaries. It may also apply where the fiduciary acts for two parties who are adverse in interest.”¹⁷ While a majority of the Supreme Court of Canada agreed that Indalex’s corporate interests were in conflict with its obligation as plan administrator, the mere existence of such a conflict does not automatically prohibit the employer from acting in its corporate interest, particularly where the conflict is specifically authorized by pension benefits legislation that contemplates employer sponsors acting as pension plan fiduciaries.¹⁸ In the Supreme Court’s view, the fiduciary obligation only required Indalex to address its conflict as both employer and plan administrator. Justice Cromwell reasoned:

In Cowan v. Scargill, the United Kingdom High Court considered the actions of union trustees for a pension plan benefiting members employed in the coal mining industry. The trustees approved certain restrictions on plan investments including prohibitions on 1) investments in any company engaged in energy industries that were in direct competition with coal and 2) increases in foreign investments. While the union trustees took the position that these restrictions were in the best interest of the beneficiaries, the court disagreed and held that the trustees were advancing the political or policy interests of the union or the interests of the coal industry generally. The court concluded that:

“. . . in considering what investments to make trustees must put on one side their own personal interests and views. Trustees may have strongly held social or political views. They may be firmly opposed to any investment in South Africa or other countries, or they may object to any form of investment in companies concerned with alcohol, tobacco, armaments or many other things. In the conduct of their own affairs, of course, they are free to abstain from making any such investments. Yet un- der a trust, if investments of this type would be more beneficial to the beneficiaries than other investments, the trustees must not refrain from making the invest- ments by reasons of the views that they hold.”²⁰

In reaching this conclusion, the court noted that many of the beneficiaries who were retired or never worked in the coal industry would not benefit from the union’s attempt to protect the coal industry. Such investment policies would only benefit active employees.

Generally, trustees and other fiduciaries are required to avoid not only actual conflicts of interest but also potential conflicts of interest. However, in Indalex, the SCC noted that not all conflicts of interest require a fiduciary or trustee to refrain from acting in a manner conflicting with their duty to the beneficiaries, provided the conflict is adequately addressed in the particular circumstances.

Common Law Standard of Care

The classic formulation of the standard of care owed by a trustee to trust beneficiaries is more than 100 years old:

The standard of care and diligence for trustees and those acting in an equivalent fiduciary capacity is the highest legal standard known.²² The standard required when administering a trust is that of a person of ordinary prudence in managing his or her own affairs^.23 At a minimum, the standard of care requires the fiduciary to acquaint himself or herself with the terms of the trust, with the state of the trust property and with the contents of all documents affecting trust property.²⁴

In Ford v. Laidlaw Carriers Inc., the Ontario Court of Justice also noted the standard of care requires that:

The court, in its decision, held that:

Fiduciaries are required to act strictly in accordance with the terms of the trust. If fiduciaries do so, they will not be liable if a loss subsequently occurs to some beneficiaries.²⁷ This standard of care also requires fiduciaries to take legal action to protect trust property and to defend against such proceedings when there is a reasonable prospect of success.²⁸ A failure to perform any one of these duties could amount to a breach of the standard of care owed to the beneficiaries.

The standard is not one of absolute correctness but one that excuses mistakes or errors of judgment when such errors arise honestly and in good faith.²⁹ This leeway is exemplified by the case of trustees who sold trust property for its appraised value and were not found to have breached the standard of care even though the market value of the property was much higher.³⁰

Although the common law in Canada has traditionally established the same standard of care for all trustees, regardless of whether they are lay or professional trustees, courts have been holding professional trustees to a higher standard of care.³¹ The British Columbia Court of Appeal (BCCA) has noted the trend toward increased responsibility for professional trustees to exercise reasonable care in protecting the beneficiaries’ interests:

In many instances, statutes have been used to elevate the standard of care for professional trustees or advisors with special skills, including benefit plan trustees. An example is the Ontario Pension Benefits Act, which requires trustees to bring to bear all of the relevant knowledge and skill they possess or ought to possess as a result of their professional business or calling.³³ In R. v. Christophe,³⁴ the court questioned whether the “knowledge and skill” requirement meant the standard is lowered if a trustee lacked background and experience in performing the duties of a benefit plan trustee. The court ultimately determined that an administrator without special background or knowledge “would be ill-advised to make the decisions without professional advice and consultation.”³⁵

A higher standard is expected for an agent paid for services than an agent acting without reward. The care, skill or diligence required is not merely that which the agent possesses, but rather that which is reasonably necessary for the due performance of the undertaking. Agents who serve a particular trade or profession and hold themselves out to the world for employment as such represent themselves as reasonably competent to carry out the business they undertake in such trade or profession. The agent must show the care and diligence exercised as is usual and requisite in the business for which payment is received.³⁶ 

No-Delegation Rule

The no-delegation rule requires fiduciaries to oversee all aspects of trust administration personally and prohibits trustees from delegating any tasks requiring the exercise of discretion to others. However, as an exception to this rule, fiduciaries may select agents to perform certain tasks when it is prudent in the ordinary course of business to delegate such duties.³⁷ Administrators who do not obtain advice in areas where they do not possess the necessary knowledge and skill are at risk of criticism or liability for imprudent decisions.³⁸ Likewise, trustees without special background or knowledge are “ill-advised to make the decisions without professional advice and consultation.”³⁹

Unlike the conflict-of-interest rule and the standard-of-care rule, it is possible for a trust instrument to override the no-delegation rule. Most employee benefit plans and the trust agreements that establish these plans empower trustees to retain professional advisors to assist in trust administration. These trustees have a duty to personally select the agent and be satisfied with the agent’s suitability to perform the act for which the agent is employed.⁴⁰ Even when a trustee is permitted to employ agents or otherwise delegate functions, the trustee is obligated to:

• Select and supervise the agent or employee personally.
• Employ the agent only so far as the matter lies within the agent’s professional competence.

If these prerequisites are satisfied, the trustee is not liable for any trust loss due to the agent’s dishonesty, unless the trustee assists the agent in perfidy by failing to supervise them properly.⁴¹ In a case dealing with the administrator of an estate, it was noted that:

“An administrator who puts the assets of an estate in the hands of an agent and takes no steps to ensure that the assets are properly dealt with has breached the duty to supervise.” ⁴²

In addition to the documents of the specific plan, the pension legislation in several Canadian jurisdictions also expressly authorizes the delegation of tasks to employees or agents or permits the administrator to rely in good faith on the reports of professionals.

Certain tasks are so central to the administration of a trust that they cannot be delegated to advisors or plan beneficiaries.⁴³ What tasks are non-delegable depends on the nature of the fiduciary duty and the settlor’s (the person who establishes the trust) intent as revealed in the trust instrument.

The rule that emerges from the authorities seems to be this: Whenever the power, discretion or duty assigned to a fiduciary requires a policy decision to be made, the fiduciary must make it himself or herself. A dispositive policy decision determines how much and at what time a beneficiary receives the benefit. An administrative policy decision directly affects the likelihood of achieving a trust’s object or purpose.⁴⁴ For example, if the purpose of a trust fund is to provide academic scholarships, determining who receives the scholarships is a decision that must be made by the trustee personally.⁴⁵ If a trust consists of real estate property and the trustee is expressly empowered to retain the property, the trustee is required to personally make the decision whether to retain the property.⁴⁶

It must be emphasized that the common law requirement that fiduciaries act personally does not preclude them from seeking professional advice; it merely precludes fiduciaries from divorcing themselves completely from the decision-making process.⁴⁷

The Ontario Provincial Court dealt with delegating of responsibilities for a pension plan in a criminal law con- text. In R. v. Blair,⁴⁸ the committee administering the plan claimed it had delegated the supervisory function to an investment manager from a trust company. The investment manager used half of the trust funds to purchase the sponsoring employer’s shares to stave off a hostile takeover. The subsequent devaluation of the shares caused a major loss to the trust. The committee was charged criminally under the Ontario Pension Benefits Act (PBA) for, inter alia, breaching the regulation that restricts a pension plan’s investment in the sponsoring employer’s corporation to 10% of the total book value of a pension fund's assets. The court held:

On appeal to the Ontario Court General Division, however, the Provincial Court’s decision was overturned. The primary reason for the reversal of the conviction was that the pension committee was not held to be the plan administrator within the meaning of PBA, and, therefore, committee members could not be convicted for breaching legal obligations imposed on the administrator by the statute. Moreover, the general division emphasized the lower court’s failure to consider the role of the custodial trustee in monitoring fund investments when it determined the committee had not prudently delegated and supervised the investment manager. 

The general division decision in the R. v. Blair appeal did not alter the fundamental principles of the no-delegation rule relied on by the lower court. Where trustees delegate certain responsibilities, the trustees must prudently select and supervise the agents or advisors selected.⁵⁰ In fact, the New Brunswick Court of Appeal recently affirmed in Fredericton Police Association v. Superintendent of Pensions that a plan’s agent, an actuary, was subject to the same duty of care, diligence and skill required of a plan administrator—including the obligation to avoid conflicts of interest.⁵¹

In more recent cases, trustees have been charged with and convicted for failing to adequately supervise their agents. The Ontario Provincial Court decision R. v. Christophe⁵² found trustees of a multiemployer pension plan guilty of violating the Federal Investment Rules and the Ontario Pension Benefits Act. The Ontario court convicted the trustees and agreed with the Crown that agents could have been required to keep records and make presentations to ensure that the trustees were more frequently advised and kept informed. The duty to supervise requires trustees to monitor and question their agents.

Even-Handed Rule

The even-handed rule generally requires fiduciaries to treat different beneficiaries and classes of beneficiaries equitably. However, as with the no-delegation rule, this rule is subject to modification in the trust agreement. For example, a wealthy person dies and leaves a will distributing their money among their children in unequal proportions. In this scenario, the executor of the will is a trustee and the children are the beneficiaries of the trust. Contrary to what the name of the rule implies, the executor is not required to give each child an “even” share of the money. Instead, the executor must distribute the money unequally as stated in the will.

In a similar fashion, many employee benefit plans provide for the unequal allocation of benefits. Consider a pension plan. Participants who retire before a certain date may be entitled to benefits at one rate, while those who retire later have a different rate. To the extent that the plan provisions permit the trustees to favour one group of beneficiaries, the even-handed rule is not breached.

There are occasions when trustees are required to make discretionary decisions not contemplated by a plan or trust agreement. Perhaps money in excess of that required to fund the promised benefits has accumulated. Plan trustees might want to use this money to increase benefits. In doing so, they must determine who will receive the increased benefits. Will the increase be retrospective so that those who have already retired will profit or will only future retirees enjoy the additional dollars? On the other hand, a fund’s solvency might be threatened and reducing benefits is being considered. Trustees must assess the burden that different classes of beneficiaries must bear.

In Neville v. Wynne, the BC Court of Appeal considered the actions of trustees facing a choice between reducing benefits and a wind-up of their plan.⁵³ The trustees decided to cut the benefits for all participants, both active and retired, but the reductions had a greater impact on active members than retired members. The trustees reasoned that this disproportionate impact of the reductions on active members was appropriate as they continued to work and accumulate pensions and their benefits were indexed for inflation. In contrast, the pensions of those already retired were not indexed. The BCCA agreed with the BC Supreme Court's reasoning on the following principles: 

The BCCA affirmed the trial judge's approach and stated that while “[r]educing everyone by the same numerical figure may achieve formal equality […] it may also ignore the past and future considerations taken into account by the Trustees in striving to achieve a balanced outcome.”⁵⁵ Thus, the BCCA held the trustees’ decision was arrived at “impartially” and “maintained an even balance amongst the beneficiaries.”⁵⁶

In Larkin v. Johnson, another BCCA decision involving plan amendments, plan members alleged that the trustees breached their fiduciary duties by increasing the normal retirement age from 62 to 65 in March 2016.57 More specifically, the members argued the trustees failed to “assess decisions on an ongoing basis and act in the best interest of the beneficiaries where the underlying assumptions have materially changed.”⁵⁸ The BCCA found the trustees adequately justified the increase in normal retirement age in June 2016 when it provided to members that “[p]ensioners are living longer and collecting pension payments over a longer period of time.”⁵⁹ In dismissing the appeal, the Court of Appeal found: 

Until now, reference has been made to common law fiduciary standards as if they apply only to trustees. Certainly, trustees are the preeminent example of fiduciaries but, increasingly, common law has extended the concept of fiduciary to impress these duties on all manner of persons. Almost anyone who is given discretionary power and is required to exercise this power in the best interests of another may be considered a fiduciary.61 As the SCC has stated:

“It is sometimes said that the nature of fiduciary relationships is both established and exhausted by the standard of categories of agent, trustee, partner, director, and the like. I do not agree. It is the nature of the relationship, not the specific category of actor involved that gives rise to the fiduciary duty. The categories of fiduciary, like those of negligence, should not be considered closed.” ⁶²

When the court is dealing with one of the relationships traditionally considered to be fiduciary in nature, such as trustees, agents and partners, the characteristics or criteria for a fiduciary duty are assumed to exist. Conversely, when confronted with a relationship that does not fall within one of the traditional categories, it is essential the court consider what the essential ingredients of a fiduciary relationship are and whether these characteristics are present.⁶³ While no “ironclad” formula has been formulated by the courts, the Supreme Court of Canada has confirmed that the key ingredients of a fiduciary relationship are:⁶⁴

•  The fiduciary has discretionary power.
  
• The fiduciary can unilaterally exercise this power so as to affect the beneficiaries’ interests.
• The beneficiary is vulnerable to the fiduciary’s discretionary power.
• The beneficiary reasonably relies on the fiduciary to exercise this power in his or her best interest.⁶⁵

Although the jurisprudence is not extensive, Canadian courts have imposed the fiduciary label on benefit plan administrators, advisors and agents based on the common law principle. Collins v. Ontario (Pension Commission) ⁶⁶ was a case in which a regulatory agency, the Pension Commission of Ontario, was held to owe a fiduciary duty to the members of a pension plan. While there has been considerably less litigation in Canada than in the United States on the issue, the courts have also held that financial advisors⁶⁷ may be fiduciaries and, in at least one decision, a pension fund manager was accountable for losses suffered by the Metropolitan Toronto Pension Plan based on a breach of fiduciary duty.⁶⁸

Actuaries

In the British Columbia case of Wynne v. William M. Mercer Ltd.,⁶⁹ the actuarial firm was found liable for damages suffered by the plan when the actuaries prepared an erroneous valuation. The court held that the actuaries were not acting in a fiduciary capacity. Instead, the liability was based on the actuary’s negligence.

In the subsequent case of McLaughlin v. Falconbridge,⁷⁰ members of a pension plan alleged they elected a certain option because of the actuary’s aggressive actuarial and economic assumptions. This led to a serious understatement of plan liabilities that artificially increased the plan surplus. These surplus assets were then withdrawn. The claim against the actuary in breach of fiduciary duty was found to be a novel claim—Canadian courts had not previously held that plan actuaries owe a fiduciary duty to plan beneficiaries—but was not a bar to an action and was allowed to proceed.⁷¹

In a criminal prosecution of an actuary pertaining to the preparation of actuarial reports, the Crown looked to both common law and Ontario legislation to find that the meaning of “agent” in the legislation can and does embrace the actions and role of an actuary, vis-à-vis the administrator or trustees, as principal.⁷² As an agent, the actuary is subject to the same fiduciary duty as the trustees.

As noted above, the New Brunswick Court of Appeal in the Fredericton Police Association case found that a plan actuary was subject to the same fiduciary obligations as the plan administrator and was found to have a conflict of interest in giving advice to the employer.⁷³ 

Custodial Trustees

In Froese v. Montreal Trust Co. of Canada,⁷⁴ the British Columbia Court of Appeal imposed liability on the custodial trustee of a pension plan when the trustee failed to recognize and disclose to participants the fact that the fund was in financial trouble. The court reached this conclusion even though the trust agreement excluded any duty for pension fund investments as part of the trustee’s responsibility. The court stated the custodial trustee had a common law duty to inform participants that an employer had failed to make contributions when they were due. Where danger signals exist, the trustee has a duty to make adequate inquiries concerning the health of the plan fund.

Employer-Sponsors

In Anova Inc. Employee Retirement Pension Plan (Administrator of) v. Manufacturers Life Insurance Co.,⁷⁵ the court imposed the fiduciary label on the employer-sponsor of the pension plan with respect to the sponsor’s power to make plan amendments regarding surplus fund usage. The court held that the employer, as an administrator of the plan, owed a fiduciary duty to plan beneficiaries when making amendments regarding a plan surplus. The court concluded that amendments introducing early retirement incentives for some plan members using surplus funds is consistent with the administrator’s fiduciary duty. The rationale of the court is that these early retirement inducements benefit the company and are, therefore, of benefit to the employees. This rationale is clearly questionable in light of the voluminous litigation regarding the issue of surplus ownership where the company’s interest and employee interests are plainly in conflict. The court did hold, however, that Anova’s amendment, to the extent that it was a covert attempt to divert surplus to employees who were shareholders of the company, was a violation of Anova’s fiduciary duties.

Pension Legislation and the Duty of Care

Since 1985, new pension benefits legislation has been introduced in the following Canadian jurisdictions: Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario, Prince Edward Island (not yet proclaimed) and the federal jurisdiction. The legislators in each of these jurisdictions consciously attempted to achieve a degree of uniformity in the statutes.

There has been considerable uniformity in the articulation of the duties of care imposed on plan administrators (i.e., trustees) in legislation. All these jurisdictions provide the standard of care imposed on a trustee is that of “a person of ordinary prudence dealing with the property of another.”

Additionally, legislation in Manitoba, New Brunswick, Nova Scotia, Ontario, Quebec and the federal jurisdiction, as well as the as yet unproclaimed legislation in Prince Edward Island, imposes on trustees with special professional or business skills—the obligation to utilize these skills when managing a fund. This standard coincides with the higher standard of care that courts are beginning to impose on professional trustees. The legislation in these provinces also contains an express prohibition on trustees placing themselves in conflict-of-interest positions.

Although Newfoundland and Saskatchewan also have pension benefits legislation in effect, these statutes do not articulate the standard of care imposed on the plan administrator (i.e., trustees) in the administration of the trust. The Saskatchewan legislation does stipulate a fiduciary relationship exists between the plan administrator and the beneficiaries and that a trustee relationship exists in relation to the fund.⁷⁶ These statutory provisions, therefore, incorporate common law fiduciary duties. Where the fiduciary duties imposed on trustees are not specified in legislation, it is presumed common law standards apply—the one exception is Quebec.

The standard for New Brunswick is identical for all employee benefit plans, at least with respect to investments. The Trustees Act in New Brunswick specifies that in investing trust property, a trustee shall exercise the care, diligence and skill that a person of ordinary prudence would exercise in dealing with the property of another person.⁷⁷

The Duty of Care in the United States

Some assistance respecting the application of the standard of care may also be derived from U.S. jurisprudence under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA is helpful in Canada as it is based largely on common law. The following examples illustrate situations in which benefit plan trustees were found to have violated the prudence standard:

• Trustees entered into a real estate deal they had not properly investigated by obtaining evaluation reports, survey, etc. ⁷⁸
• Trustees purchased whole life insurance rather than group term insurance without knowledge of the differences between the two plans, without the advice of professionals and without securing a competitive bid—the cost of the whole life insurance was three times that of term life insurance.⁷⁹
• Trustees failed to seek outside advice concerning the soundness of a loan.⁸⁰
• Trustees failed to create a system to ascertain the amounts owed to the plan under a reciprocal agreement with another fund and to verify that these amounts were actually remitted.⁸¹
• A plan administrator failed to notify plan members of financial problems arising from insufficient employer contributions when such information would have enabled participants to arrange for other health and welfare coverage.⁸²

These examples suggest trustees are most likely to violate the prudence standard when they fail to adequately investigate and assess the risks associated with a proposed investment or transaction.

There are occasions when trustees investigate before making a decision, yet still make a choice that is disadvantageous to their fund. When this happens, it cannot be assumed the trustees have violated the prudence standard. For instance, trustees of a fund consulted with lawyers, actuaries and other professional advisors before deciding to charge plan participants an interest rate below the prevailing market rate for mortgages. The trustees did not violate the prudence standard since the expert advice revealed this sort of rate would have to be offered by a noninstitutional lender in order to attract borrowers.⁸³

Although plan trustees can act imprudently even while acting honestly,⁸⁴ the question of whether they have observed the prudence standard frequently arises in cases involving self-dealing. The following cases illustrate how closely connected are violations of prudence standards and self-dealing:

• Trustees violated the prudence standard by hiring a consultant at an exorbitant price without checking his qualifications or following accepted standards for hiring. The trustees also violated the conflict-of-interest rule by loaning plan dollars from one plan to another at below-market interest rates.⁸⁵
• Trustees invested all of a plan’s assets in loans to companies affiliated with the plan sponsor in exchange for unsecured promissory notes. This activity violated the prudence standards and the prohibition on self-dealing because the high interest rates paid on the loans did not adequately compensate the fund for the magnitude of risk involved.⁸⁶
• Trustees who loaned trust assets to a former trustee based on inadequate security also violated the fiduciary duty and duty of loyalty owed to the beneficiaries.⁸⁷
• Trustees who purchased an enormous amount of employer stock at an inflated price in order to thwart a corporate takeover also violated both duties.⁸⁸

In the situations just listed, it is sometimes difficult to tell whether the fact that the trustees entered into a transaction with the employer or someone closely identified with the employer would, in itself, have constituted a violation of ERISA, or if it is the combination of an imprudent investment benefiting the party in interest that grounded the finding that ERISA had been violated. There is evidence, however, that a fund and constituting parties to the trust can enter into a transaction where the transaction is beneficial to the participants and is otherwise prudent. In Donovan v. Walton,⁸⁹ it was held to be permissible for the fund to lease a building to the union as a tenant since both the fund, and the union benefited from the transaction—a reasonable rent was charged and it was prudent for the fund to enter into the transaction. This is an important case for multi-employer plan trustees since they often enter into cost-sharing agreements with a union or an employer association.

1. J. C. Traupman, The Bantam New College Latin and English Dictionary (Toronto: Bantam Books, 1995), p. 180.
2. Waters, Gillen and Smith, Waters' Law of Trusts in Canada, Fourth Edition (Toronto: Carswell, 2021) [Waters], pp. 42-47. 
3. The term “administrator” as used in this article is a reference to the defined term used in pension legislation that refers to the entity with the ultimate responsibility for the administration management of a pension fund. For multi-employer pension plans, the administrator is typically a board of trustees and, for single employer plans, the administrator is typically the employer who sponsors the plan. The terms administrator and trustee are used interchangeably as both are subject to fiduciary obligations with respect to the governance of a pension plan.
4. Indalex Ltd. (Re), 2011 ONCA 265, para. 118 [Indalex (ONCA)], rev'd 2013 SCC 6 [Indalex (SCC)] (reversed on other grounds, but the Supreme Court of Canada confirmed that Indalex in its capacity as the pension plan administrator owes a fiduciary obligation to plan members.)
5. Supra note 4, Indalex (ONCA), para. 119.
6. Employment Pension Plans Act, R.S.A. 2012, c.E.-8.1; Pension Benefits Standards Act, R.S.B.C. 1996, c. 352; Pension Benefits Standards Act, 1985, R.S.C. 1985, c. 32; Pension Benefits Act, C.C.S.M. 1987, c. P.32; Pension Benefits Act, S.N.B. 1987, c. P-5.1; Pension Benefits Act, 1997, S.N.L. 1996, c. P-4.01; Pension Benefits Act, R.S.N.S. 1989, c. 340; Pension Benefits Act, R.S.O. 1990, c. P. 8; Pension Benefits Act, S.P.E.I. 1990, c. 41, not proclaimed; Supplemental Pension Plans Act, C.Q.L.R., c. R-15.1; Pension Benefits Act, 1992, S.S. 1992, c. P-6.001.
7. Supra note 4, Indalex (ONCA), para. 117 and Indalex (SCC) paras. 62 and 184.
8. Alberta Labour Relations Code, R.S.A. 2000, c. L-1.
9. Ibid., s. 24.
10. Mark Vincent Ellis, Fiduciary Duties in Canada (Toronto: Carswell, 2023), § 1:4.
11. Cowan v. Scargill, [1984] 2 All E.R. 750 (Ch. D.) [Cowan]; Bathgate v. National Hockey League Pension Society (1992), 98 D.L.R. (4th) 326 at 407 (Ont. Gen. Div.), aff ’d (1994), 110 D.L.R. (4th) 609 (Ont. C.A.).
12. Keech v. Sandford (1726), [1558-1774] All E.R. Rep. 230.
13. Alberta Employment Pension Plans Act, 2012, s. 35(s); B.C. Pension Benefits Standards Act, 1996, ss. 8(9), (10); Federal Pension Benefits Standards Act, 1985, s. 8; New Brunswick Pension Benefits Act, 1985, ss. 17(3) and 18(3); Newfoundland and Labrador Pension Benefits Act, 1996, s. 17; Nova Scotia Pension Benefits Act, s. 29(3); Ontario Pension Benefits Act, 1990, s. 22(4); Quebec Supplemental Pension Plans Act, s. 158.
14. Pension Benefits Standards Act, 1985, R.S.C. 1985, c. 32, s. 8(10).
15. Buschau v. Rogers Communications Inc. (2006), 1 S.C.R. 973.
16. Ibid., para. 38.
17. Supra note 4, Indalex (ONCA), para. 141.
18. Supra note 4, Indalex (SCC), paras. 65-68, 73 and 182-222.
19. Ibid., para. 182.
20. Supra note 11, Cowan, p. 763.
21. Learoyd v. Whiteley (1887), 12 App. Case. 727 (H. L.), p. 733. This standard was explicitly adopted by the Supreme Court of Canada in Fales v. Canada Permanent Trust Co. (1977), 2 S.C.R. 302 at 315.
22. Collins v. Ontario (Pension Commission) (1986), 31 D.L.R. (4th) 86 (Ont. Div. Ct.), para. 40.
23. Fales v. Canada Permanent Trust Co. (1977), 2 S.C.R. 302 at 315.
24. 48 Hals. 4th, para. 817; Hallows v. Lloyd (1988), 39 Ch. D. 686; Harvey v. Olliver (1887), 567 L.T. 239; Ford v. Laidlaw Carriers Inc. (1993), 1 C.C.P.B. 97 (O.C. (G.D.)) rev’d in part (1994), 12 C.C.P.B. 179 (Ont. C.A.), leave to appeal to the S.C.C. ref'd (1995), 191 N.R. 400 (note) [Ford v. Laidlaw Carriers Inc.].
25. Supra note 24, Ford v. Laidlaw Carriers Inc., p. 168, citing Underhill’s Law of Trusts and Trustees, 13th ed., p. 48.
26. Supra note 24, Ford v. Laidlaw Carriers Inc., p. 169.
27. 48 Hals. 4th, para. 818; supra note 24, Ford v. Laidlaw Carriers Inc.
28. 48 Hals. 4th, para. 820; Re: Brogden, Billing v. Brogden (1888), 38 Ch. D. 546 (C.A.).
29. Davies v. Nelson (1928), 1 D.L.R. 254 (Ont. C.A.)29. ; Michipicoten First Nation v. Michipicoten First Nation Community Trust, 2014 ONSC 594. 
30. Davies v. Nelson (1928), 1 D.L.R. 254 (Ont. C.A.).
31. Bartlett v. Barclays Bank Trust Co. Ltd., [1980] 1 All E.R. 139; supra note 24, Ford v. Laidlaw Carriers Inc.; Metropolitan Toronto Pension Plan v. Aetna Life Assurance Co. (1992), 98 D.L.R. (4th) 582 (Ont. Gen. Div.) [Metropolitan Toronto Pension Plan v. Aetna Life Assurance Co.].
32. Froese v. Montreal Trust Co. of Canada (1996), B.C.J. No. 1091 (C.A.), para. 43 [Froese v. Montreal Trust Co. of Canada].
33. Supra note 6, Ontario Pension Benefits Act, 1990, s. 22(2).
34. R. v. Christophe (2009), O.J. No. 5296 (C.J.), para. 75 [Christophe].
35. Ibid.
36. Supra note 31, Metropolitan Toronto Pension Plan v. Aetna Life Assurance Co., p. 597.
37. Wagner v. Van Cleeff (1991), 5 O.R. (3d) 477 (Div. Ct.) at 484 [Wagner v. Van Cleeff].
38. Supra note 34, Christophe, para. 27.
39. Ibid., para. 75.
40. Ibid., para. 183.
41. Supra note 2, Waters, p. 973.
42. Supra note 37, Wagner v. Van Cleeff, p. 485.
43. Metropolitan Toronto Police Services Board v. Ontario Municipal Employees Retirement Board (1994), 20 O.R. (3d) 210 (Div. Ct.)
44. Supra note 2, Waters, p. 969.
45. Re: Partanen (1944), O.J. No. 527 (C.A.).
46. Re: Wilson (1937), O.J. No. 314 (C.A.).
47. See, for example, supra note 37, Wagner v. Van Cleeff.
48. R. v. Blair (1993), 106 D.L.R. (4th) 1 (Ont. Prov. Div.), rev’d on appeal (1995), 129 D.L.R. (4th) (Ont. Gen. Div.).
49. Ibid., paras. 106-107.
50. Eileen E. Gillese, The Law of Trusts, Third Edition (Toronto: Irwin, 2014), p. 160.
51. Fredericton Police Association v. Superintendent of Pensions, 2021 NBCA 30, para. 168 [Fredericton Police Association].
52. Supra note 34, Christophe.
53. Neville v. Wynne (2006), B.C.J. No. 2778 (C.A.).
54. Neville v. Wynne (2005), B.C J. No. 712 (S.C.), para. 43.
55. Neville v. Wynne (2006), B.C.J. No. 2778 (C.A.), para. 9.
56. Ibid., para. 14.
57. Larkin v. Johnson, 2023 BCCA 116, para. 31. 
58. Ibid., para. 94. 
59. Ibid., para. 123. 
60. Ibid., para. 124. 
61. J. C. Shepherd, The Law of Fiduciaries, (Toronto: Carswell, 1981), p. 35.
62. Guerin v. The Queen (1984) 2 S.C.R. 335 at 341 (C.J.C.); Hodgkinson v. Simms (1994), 3 S.C.R. 377 at 462 [Hodgkinson v. Simms].
63. Lac Minerals Ltd. v. International Corona Resources Ltd. (1989), 2 S.C.R. 574 at 598.
64. Ibid., at 599.
65. Supra note 62, Hodgkinson v. Simms at 409.
66. Supra note 22, Collins v. Ontario (Pension Commission).
67. Supra note 62, Hodgkinson v. Simms.
68. Supra note 31, Metropolitan Toronto Pension Plan v. Aetna Life Assurance Co. Also, see Chapter 7, which discusses fiduciary obligations and professional advisors.
69. Wynne v. William M. Mercer Ltd. (1993), 1 C.C.P.B. 301 (B.C.S.C.), aff’d (1995), 11 C.C.P.B. 1 (B.C.C.A.).
70. McLaughlin v. Falconbridge (1999), O.J. No. 2403 (S.C.).
71. Ibid., paras. 25-27.
72. Ontario (Superintendent of Financial Services) v. Norton (2006), O.J. No. 2631 (C.J.), para. 44.
73. Supra note 51, Fredericton Police Association.
74. Supra note 32, Froese v. Montreal Trust Co. of Canada.
75. Anova Inc. Employee Retirement Pension Plan (Administrator of) v. Manufacturers Life Insurance Co. (1994), O.J. No. 2938 (Gen. Div.). 
76. Saskatchewan Pension Benefits Act, 1992, supra note 6, s. 11(2).
77. Trustees Act, S.N.B 2015, c. 21, ss. 30, 37.
78. Brock v. Wells Fargo Bank (1986), N.A., 7 EBC 1221 (N. D. Cal.).
79. Donovan v. Tricario (1984), 5 EBC 2057 (S. D. Fla.).
80. Katsaros v. Cody (1984), 5 EBC 1777 (2d Cir.).
81. Nichols v. Trustees of Asbestos Workers Pension Plan (1982), 3 EBC 1726 (D. C. Cir.).
82. McNeese v. Health Plan Marketing Inc. (1986), 8 EBC 1154 (N. D. Ala.).
83. Brock v. Walton (1986), 7 EBC 1769 (11th Cir.).
84. Brock v. Robbins (1987), 8 EBC 2489 (7th Cir.).
85. Donovan v. Mazzola (1983), 4 EBC 1865 (9th Cir.).
86. Freund v. Marshall & Ilsley Bank (1979), 1 EBC 1898 (W. D. Wis.).
87. Dooley Associates Employees Retirement Plan v. Reynolds (1987), 8 EBC 1785 (E. D. Mo.).
88. Donovan v. Bierwirth (1982), 3 EBC 1417 (2d Cir.).
89. Donovan v. Walton (1985), 6 EBC 1677 (S. D. Fla.).

Roberto Tomassini is a partner and the head of Koskie Minsky’s Pension and Employee Benefits Department and the Koskie Minsky Tax Group.

Mark Zigler is a senior partner in the Pensions and Benefits Group at Koskie Minsky LLP and has over 40 years of experience.