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Fight over reduction of GM retiree benefits not over

General Motors of Canada suffered a blow this summer when an Ontario court held that GM was not entitled to reduce benefits it had promised to its retired workers. The decision can be found here.

GM informed non-union retirees in 2009 that as a cost-cutting measure, GM had to reduce benefits that it had promised to certain retirees while they were employed. The reductions included significantly lower amounts of life insurance, and the elimination of semi-private hospital coverage. The retirees responded with a class action claiming that they were “stunned” by GM’s actions, and that GM’s actions were illegal. GM’s position was that language in employee booklets allowed it to make such changes. GM’s employee booklets had typical language that purported to give GM the right to make changes to all benefits, “at any time”. The Ontario Superior Court of Justice disagreed with GM’s position. The language in GM’s employee booklets wasn’t sufficiently clear, said the Court, to allow GM to impose the unilateral changes on retirees following their retirement. The Court made very helpful comments about exactly what wording in employee booklets may be effective to give an employer the legal right to reduce retiree benefits.

It is common for employers to change employee benefits promised to current, non-union employees. The considerations for terminated or retired employees are very different. The recent GM case confirms the reality that Canadian courts will likely not allow employers to unilaterally change the benefits of non-union retirees, unless the employer has communicated that possibility very clearly to the employees while they were employed.

GM has not given up the fight. It has announced that it will appeal the Court’s decision. Meanwhile, employers would be well-advised to take a look at the wording in their employee booklets and other benefit communications that says benefits can be changed in future. Will that language withstand a court challenge that it isn’t sufficiently broad or clear to allow changes to be made? The answer may lie in the reasons for judgment in the GM case and pending appeal.

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Fight over reduction of GM retiree benefits not over

Obligations to Pensioners in an Insolvency: Supreme Court Clarifies the Law

The Supreme Court of Canada overturned the Ontario Court of Appeal today in what is one of the most highly-anticipated cases for the pension and insolvency bars pending before the courts. In Indalex (Re) 2013 SCC 6, the court provided clarity regarding some key questions relating to the governance of an employer-administered pension plan during a proceeding under the Companies’ Creditors Arrangement Act (CCAA). The judges split on some of the issues, but here is our brief round-up:

  1. Priority. The full amount of a deficit in an Ontario pension plan will rank ahead of secured creditors (as a deemed trust), provided that the plan is wound up and the employer is not in bankruptcy. The SCC upheld the Court of Appeal on this issue.
  2. DIP Facilities Can Come First. A judge may order that court-approved debtor-in-possession financing in a CCAA proceeding ranks ahead of pension deficit deemed trusts. The SCC upheld the Court of Appeal on this issue.
  3. Fiduciary Duties Owed. Employers who administer pension plans owe a “fiduciary duty” to the members of the plans. This means that such employers must manage conflicts of interest. These conflicts will arise when there is a substantial risk that the employer-administrator’s representation of the plan members would be materially and adversely affected by the employer-administrator’s duties to the corporation. In these circumstances, separate representation (among other things) might be appropriate to protect plan members. The SCC narrowed the scope and content of the fiduciary duty that the Court of Appeal had imposed.
  4. Remedies. Any remedy for a breach of fiduciary duty must be tailored to the nature of the breach. The remedy of a “constructive trust”, which provides the plan members with a proprietary interest in specific assets of the employer corporation, will only be available if there is a direct link between the breach of fiduciary duty and the specific assets. The breach must have resulted in the assets being in the corporation’s hands. The SCC overturned the Court of Appeal on this issue.

Lawyers will be picking through the lengthy judgments in this decision for months to come. It has significant implications for Canadian corporate lending, insolvencies and restructurings.

Look for FMC Law’s in-depth analysis of this case in the coming days.

This post was co-authored by Jane Dietrich and Timothy Banks.

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Obligations to Pensioners in an Insolvency: Supreme Court Clarifies the Law

Division of Pensions on Marriage Breakdown: New Rules

Significant changes came into effect on January 1, 2012, regarding the treatment of pension benefits of Ontario members who go through a breakdown of their spousal relationships. The new regime is a big improvement over the old regime. There are now detailed, clear rules as to exactly what has to happen when a plan member’s former spouse wants to receive the value of the pension he or she is entitled to.

Plan sponsors should consider whether they need to amend their pension plan texts to comply with the new regime in Ontario. The significant features of the new rules are:

  • the non-member former spouse can get a lump sum payout from the pension plan, even if the employee is continuing to accrue a pension;
  • the plan administrator is required by law to calculate the value of the non-member former spouse’s entitlement, in accordance with formulas set out in new regulations under Ontario pension law; and
  • specific request forms must be used by the plan member and former spouse, in order to request that the plan administrator calculate the value of the former spouse’s entitlement.

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Division of Pensions on Marriage Breakdown: New Rules

Extension of Grow-in Benefits – The Rules have Changed

Plan sponsors with certain types of defined benefit pension (DB) plans must familiarize themselves with the new grow-in rules which came into effect on July 1, 2012. They may entitle terminating employees to surprisingly, valuable benefits from the pension plan.

The grow-in rules apply to DB pension plans that have “early retirement enhancements”. These are plans that say, for example, that employees who meet certain types of age and service criteria (such as a “rule of 80”) are entitled to start collecting their pensions prior to age 65, with little or no reduction in the amount of their monthly pension.

The new rules extend the pre-July 2012 grow-in rules. If a DB pension plan has never had to provide grow-in benefits on plant closures or other partial wind-up events, the new rules will have no effect.

The pre-July 2012 grow-in rules stated, generally, that if there was a partial wind-up event, such as a plant closure, a terminated plan member had the right to receive his early retirement pension under the same terms as if he had continued as an employee and plan member until reaching the early retirement eligibility age set out in the plan text (as long as the member’s age plus service as at the date he actually terminates employment is 55 or more – this is the “55 points” requirement). The grow-in rules are complicated, so plan sponsors should obtain expert advice on how they work.

The new extended grow-in rules will say that all terminating plan members get grow-in (if they have “55 points”), whenever they terminate employment, even if it’s not a plant closure or other partial wind-up event. The reason for this change is that partial wind-ups no longer exist under Ontario pension law, which is good news for plan sponsors. The bad news is that for some DB plan sponsors, the extension of grow-in to all employee terminations is potentially very expensive. It could result in a large increase in the value of a terminating employee’s benefit. Employers with DB plans should make sure they’re aware of this valuable benefit when they structure severance packages.

The new grow-in rules will apply to all employee terminations after June 30, 2012. Terminating employees will not be entitled to the grow-in benefit, however, if they:

• quit;
• were terminated due to willful misconduct, disobedience or willful neglect of duty that was not trivial and was not condoned by the employer;
• were hired for a defined period of time, or for the completion of a specific task;
• are a “construction employee” as defined under Ontario employment law; or
• are on a temporary lay-off as defined under Ontario employment law.

The grow-in rules will continue to apply to full plan wind-ups. It is possible for certain types of plans (multi-employer pension plans and jointly-sponsored pension plans) to opt out of the grow-in rules.

FMC Law recommends that plan sponsors affected by these new rules consider whether they can, and should, change the terms of their pension plans to remove the early retirement enhancement provisions. If that is done, the grow-in rules will not apply.

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Extension of Grow-in Benefits – The Rules have Changed

Cashing-out of Small Pension Benefits: The Rules have Changed

The rules for cashing-out or “unlocking” small pension benefit amounts have been overhauled. Effective July 1, 2012, it will be a lot easier to pay cash to a departing plan member who has a small benefit. In summary:

  • The threshold amount for cashing-out has been increased such that administrators can pay a terminating employee a lump sum amount in cash from the pension plan, if the amount of the employee’s annual pension is less than 4% (rather than the previous 2%) of the year’s maximum pension earnings (YMPE) amount. The 2012 YMPE is $50,100; it increases annually. For 2012 that annual pension amount is $1,002 under the old rules, and $2,004 under the new rules.
  • DC plan administrators will no longer have to convert a departing employee’s individual DC account into an annual pension amount in order to determine if the cash-out threshold is met. Under the new rules, the benefit can be cashed-out if the DC account is less than 20% of the YMPE (in 2012, that’s $10,020).

Many defined benefit and defined contribution pension plan texts set out the current small benefit payout threshold of 2% of the YMPE. There is no legal requirement to change plan texts to adopt the higher thresholds. However, we recommend that plan sponsors amend their plan texts so that they can adopt these higher cash-out thresholds. Doing so will significantly lessen the administration costs of dealing with employees who terminate plan membership with small pension benefit amounts.

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Cashing-out of Small Pension Benefits: The Rules have Changed

Immediate vesting and locking-in

Ontario pension rules prior to July 1st, 2012 allowed employers to require Ontario members of pension plans to wait two years after joining a pension plan, to “vest.” In other words, if an employee terminated employment within the first two years of joining a pension plan, it was permissible for plan texts to state that he is not entitled to receive anything (other than a refund of employee contributions, if any).

Commencing July 1, 2012, the two-year vesting rule will no longer be permitted. Ontario is adopting the approach that has long been in place in Quebec: as soon as an Ontario employee becomes a member of a pension plan, he is immediately vested and his benefit is locked-in. There will no longer be any forfeiture amounts in pension plans with respect to Ontario members.

In reaction to this change, plan sponsors may want to consider lengthening the eligibility period for joining the plan, if it is currently less than two years. Ontario pension law will continue to permit employers to impose a two-year waiting period to join a pension plan.

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Immediate vesting and locking-in

Severance packages for employees in defined benefit pension plans are about to get a lot more expensive

Effective July 1, 2012 , the Ontario Pension Benefits Act will require employers to pay higher pension benefits to many terminated employees. In some cases, the change will double the value of the employees’ pension benefits.  This expensive benefit is called “grow in”, and while it used to apply only in cases of pension plan wind-ups, the benefit has now been expanded.   

The enhanced (“grow in”) benefit will now apply to any Ontario employee whose employment is terminated, if the employee:

  • has at least 55 age + service “points”; and
  • is a member of a defined benefit pension plan which contains “early retirement enhancements” (i.e. plans that say that the employees who meet certain age/service criteria get an enhanced early retirement pension).

The enhanced (“grow in”) benefit will not apply to employees who resign or employees whose employment is terminated for wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.

As a result, if an employer is seeking to terminate the employment of an Ontario employee, the employer should review the considerations set out above to determine if the enhanced “grow in” benefit is applicable to the particular employee.

It is also important to note that this new requirement can be avoided if employers amend their pension plan texts to remove any early retirement enhancement provisions. However, such amendments require careful drafting and employers should obtain advice from counsel in order to assist with any such amendments.

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Severance packages for employees in defined benefit pension plans are about to get a lot more expensive