Employers that sponsor defined
benefit (DB) pension plans need to put in place strategies (now) to manage
recent amendments to Ontario pension legislation that will extend “grow-in”
benefits to all involuntarily terminated employees who meet specified
eligibility criteria. Previously, grow-in benefits applied only when a pension
plan was being either fully or partially wound up. These amendments will make
grow-in benefits applicable to all employees terminated after July 1, 2012, but
as discussed below, severance packages negotiated now may have to take these
amendments into account.
What are Grow-In
Grow-in benefits entitle certain employees, who are terminated
before they meet the eligibility requirements for enhanced benefits, to become
entitled or in essence, to “grow into” the enhanced pension benefits even
though their employment is terminated before they meet the eligibility requirements.
Members of DB plans will qualify for grow-in early retirement benefits
if their age plus service equals 55 points at the time of termination of
employment. This means that if the plan
provides enhanced benefits, such as unreduced early retirement to members who
meet certain conditions, members who are terminated before meeting those
conditions, but whose age plus service equals 55 points, can grow into and
qualify for such enhanced pension benefits after their employment is terminated.
In our example, we assume a plan provides for unreduced
pension if the employee completes 30 years of credited service. If an employee is terminated before achieving
30 years of service, but has 55 points, the employee “grows into” the unreduced
pension based on the actual service prior to termination. If the employee had 25 years of service at
termination, then 5 years after termination the employee may receive an
unreduced pension based on 25 years of service.
Grow-In and Pension
Grow-in also applies to eligibility for bridging benefits if
the employee has 55 points and 10 years of continuous employment or plan
membership at termination. Bridging
benefits provide a short term enhanced pension for employees who retire before
the age of 65. Most government
allowances (CPP, OAS, QPP, GIS) do not offer payments
to the retiree until age 65. A pension
“bridge” provides additional funds to the retiree during the time from retirement until the government allowances become
payable, at which time the pension payments are reduced (i.e. the bridge
Grow-In Benefits May
Significantly Impact Severance Costs
With a greater number of employees able to grow into enhanced
benefits, the cost of the benefits paid out of the pension plan increases,
which in turn increases an employer’s funding obligations. Thus, in addition to the cost of the
severance package itself, employers with DB plans will have to consider the
extra cost of grow-in benefits when calculating the total cost of employee
Implications for Severance
Packages Starting Now
While this amendment does not come into force until July 1, 2012,
employers need to consider the impact of these changes now, including how they
may affect severance packages that employers are providing before July 1, 2012. For example, if a dismissed employee is
placed on salary, pension and benefit continuance now, but which continues past
July 1, 2012, he or she may well be entitled to these grow-in benefits if the
55 point test is met at the end of the benefit continuance period. As we move
towards July 1, 2012, grow-in benefits will play an increasingly
important role in severance negotiations.
The amendments eliminate partial wind-ups, but in exchange,
grow-in benefits are being extended to all involuntary employee terminations
(whether mass terminations or individual), unless there is “wilful misconduct,
disobedience or wilful neglect of duty by the member that is not trivial and
has not been condoned by the employer.” It is possible there may be other exceptions
introduced by regulations in the future.
(Jointly-sponsored and multi-employer pension plans may choose to opt
out of grow-in benefits.) Employees who quit
are not entitled to grow-in benefits.
Relying on the Misconduct
Exception May be Tricky
Employers who attempt to rely on the exception for employee
misconduct, should keep in mind that this exclusion is likely somewhat narrower
than the common law definition of cause.
In addition, this exception may make it more costly for an employer to agree
to a “without cause” termination of an employee who is guilty of misconduct.
Across the board, grow-in benefits will directly impact the
negotiation posture for dismissal cases as well as the wording of settlements
Pension Benefits Requires Careful Consideration
In order to eliminate the potential cost of grow-in benefits,
employers may want to consider amending their pension plans to eliminate any enhanced
early retirement benefits or bridging benefits.
Employers with unionized workforces will need to consider
whether the early retirement benefits are collectively bargained. If this is the case, any change will likely
require an amendment to the collective agreement, and accordingly, the consent
of the union.
Although employers of non-unionized workplaces could
unilaterally decide to amend their pension plans, it may still be necessary to
provide advance notice to avoid constructive dismissal claims. Such notice requirements are somewhat
complicated by the Ontario Court of Appeal’s decision in Wronko, which requires the employer to respond to any employee
objections to a significant workplace change.
(For further discussion of the Wronko
case, see our September 2008 Labour & Employment Brief.)
The change to grow-in benefits is one of a number of pension
legislation amendments, which also include requirements for employers to provide
advance notice of pension plan amendments to all plan members; and to support
the development of pension plan advisory committees, that will affect how
employers manage their workplaces. If you would like to learn more about
any of these legislative amendments and how they may impact your specific
workplace, please contact a member of our Employment and Labour Department for further information.