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Get ready for the new Ontario Retirement Pension Plan

Now that the 2014-2015 Ontario budget has been passed by the Ontario legislature, Ontario employers should think about how the new Ontario Retirement Pension Plan (ORPP) could affect them.

The ORPP is part of the Ontario government’s solution to help individuals save for retirement. It’s a new “made-in-Ontario” solution to the federal government’s inaction on expanding the CPP. The ORPP will be a defined benefit pension plan, similar to the CPP, that will be publicly administered at arm’s length from the Ontario government.

Mandatory participation in the ORPP is set to begin in 2017, with enrolment occurring in stages starting with the largest employers. Contributions will be split equally between employers and employees, up to 1.9% each (3.8% total) on an employee’s earnings above a yet-to-be-determined minimum threshold and up to a maximum annual earnings threshold of $90,000. The ORPP aims to provide individuals with retirement benefits that replace 15% of the individual’s pre-retirement earnings (up to $90,000).

The question that employers should be asking is simple: Will I have to participate in the ORPP? The answer, however, is not so simple.

The Ontario government has stated that employers with a “comparable workplace pension plan” will be exempt from participating in the ORPP. But what does “comparable” mean? Does it mean a registered defined benefit pension plan? Probably. What about a registered defined contribution pension plan (DCPP)? Maybe. How about a group Registered Retirement Savings Plan (group RRSP) or a Pooled Registered Pension Plan or even a Tax-Free Savings Account? I don’t know.

To date, the government has not offered any details on what would constitute a “comparable” plan.
If the intent is to require employers to help contribute to their employees’ retirement savings, offering a group RRSP where employer contributions are optional may not suffice. It also might not be enough for an employer to provide a DCPP to its employees since the minimum employer contribution in a DCPP is 1% of an employee’s earnings, almost half of the maximum 1.9% required under the ORPP.

Employers need to start thinking about how the ORPP could affect their business. Employers who aren’t exempt will certainly have increased payroll costs. In addition to that fact, an employer offering a comparable pension plan to its employees may want to consider whether to integrate its current plans with the ORPP, to offload some responsibility, costs and future risk. An employer wishing to wind up a registered pension plan and replace it with a group RRSP in order to save costs may want to wait and see if a group RRSP counts as a comparable pension plan before making changes. Until more details about the ORPP are released, any Ontario employer who doesn’t have a defined benefit pension plan should be monitoring this since we can’t be sure how the ORPP will affect them.

If you’d like more information on the ORPP and its impact on your business, contact one of the pension and benefit experts at Dentons.

For more information on the ORPP from the Ontario government, click here.

Get ready for the new Ontario Retirement Pension Plan

Benefits for Employees over Age 65

As of December 2006, the Ontario Human Rights Code was amended to abolish mandatory retirement. However, the provincial government intentionally did not make corresponding revisions to the Employment Standards Act or the Workplace Safety and Insurance Act. As a result, the law prohibits employer-initiated termination of employment because an employee has reached the age of 65. Voluntary retirement remains acceptable and common. However, employees who work past age 65 are not covered for work-related injuries and need not be covered by group benefit plans. The maximum period for which loss of earnings benefits will be paid under the workers’ compensation system is two years after the date of injury if the employee was age 63 or older on the date of injury. While some employers have arranged for benefit plans to cover employees over age 65, given the increased premium costs, this can lead to a decrease in benefit coverage for all employees or other types of trade-offs. In addition, some unionized employers have been required to provide group health benefits to employees over age 65 due to the wording of a collective agreement – typically a benefits clause which describes the benefits for all members of the bargaining unit.

It was foreseeable that this hybrid status of a worker over age 65 – legally protected from mandatory retirement but not legally protected to receive continued benefits – would lead to litigation. Such an employee would face difficulty succeeding with a complaint under the Employment Standards Act, Human Rights Code or Workplace Safety and Insurance Act since these provincial laws all permit this differentiation.

The Human Rights Tribunal of Ontario (HRTO) is currently hearing such a case. The employee is a unionized teacher who is representing himself. His union cannot bring forward a grievance because it has reached an agreement with the school board in exchange for lump sum payments to teachers over age 65. Nor is the union appearing at the HRTO proceedings. So far, there have been a number of Interim Decisions and Case Assessment Directions issued in the case and the teacher has been unsuccessful in alleging unlawful age discrimination. The final argument, which continues to proceed through the HRTO process, is whether the Human Rights Code of Ontario contravenes the equality rights provisions of the Canadian Charter of Rights and Freedoms, a significant legal challenge for a lone, unrepresented employee.

We will be following this important case as it continues to unfold.

Talos v. Grand Erie District School Board, 2013 HRTO 1949; 2014 HRTO 529

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Benefits for Employees over Age 65

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

Who Needs “Reservations”? Court Rules on Employer’s Ability to Reduce Retiree Benefits

In an era where finding efficiencies and cost-cutting are often important tools for business, a question faced by business is how and whether benefits in place for current employees and retirees can be changed.

A recent decision of the Ontario Superior Court, O’Neill v. General Motors of Canada, 2013 ONSC 4654, provides significant guidance to employers on this question.

In the face of severe economic pressures facing its business, the employer, General Motors (GM), sought to reduce the retiree benefits available to its employees. There were three groups of individuals affected by GM’s attempted reduction:

  • Current salaried employees, who were eligible to retire but who had not yet done so;
  • Retired salaried employees; and
  • Retired executive employees.

The Court approached the issue from a contractual standpoint, considering the reasonable expectations of both GM and the employees in each class, and examining whether, with respect to each group of employees, GM had contractually “reserved the right” to make changes pursuant to a reservation of rights (“ROR”) clause in its contracts. The Court accepted that if GM had made it clear in its contractual documents (such as benefit booklets, benefit summaries and other communications to employees) that it could make changes in future, then it had the right to do so. The Court also made clear, however, that the ability to make changes had to be explicit – clear and unambiguous – and that any ambiguity would be resolved in favour of the employees, since GM was the drafter of the documents.

In looking at the reasonable expectations of the parties, the Court started out by examining the booklets that GM had distributed to the salaried employees over the years, and in particular the representations that GM had made in those booklets. The booklets contained statements that the benefits being provided “should be of interest to your family and a useful tool for your own financial planning”, that they “are an important factor in making your life more enjoyable and the future of yourself and your family more secure”, and that “basic life insurance will be continued for you for your lifetime”, and the Court concluded that these statements were “representations” made by GM that the salaried employees could “rely on a core of health care and life insurance post-retirement benefits that would continue unchanged for the remainder of their life”, and that this was a form of deferred compensation and not a gratuitous benefit.

The Court also referred to the ROR clause introduced by GM in 2012 (after the commencement of the litigation), which contained the following language (the “2012 ROR clause”):

“General Motors of Canada Limited (“General Motors”) reserves the right to amend, modify, suspend or terminate any of its programs (including benefits) and policies covering employees and former employees, including retirees, at any time, including after employees’ retirements.” (emphasis in original)

The Court held that this clause was “clear and unambiguous”, and suggested that had it been in place during the retirees’ employment, it would have allowed GM to make changes to the benefits of retirees, even after retirement. While strictly speaking these comments are “obiter” (i.e. they were not necessary to the actual decision and therefore are not legal precedent), these comments are extremely helpful to employers in designing effective ROR clauses in benefit plans, particularly retiree benefit plans.

The Court then considered the ROR clauses that GM had in existence prior to the salaried employees’ retirements. Although various ROR clauses had been used over the years, for the purpose of the decision the Court focused on what it concluded was the most explicit clause that had been in existence during the salaried employees’ employment:

“General Motors reserves the right to amend, modify, suspend or terminate any of its programs (including benefits) and policies by action of its Board of Directors or other committee expressly authorized by the Board to take such action. The Programs, benefits and policies to which a salaried employee is entitled are determined solely by the provisions of the applicable program, benefits or policy.”

The Court found that this ROR clause did not allow GM to make changes to retirement benefits after the salaried employees retired. The Court relied on the fact that the ROR clause referred only to “salaried employees”, and did not suggest that GM reserved the right to make changes after employment ended (i.e. when the individual was no longer a “salaried employee”, but rather a “retiree”). Given the fact that ambiguities in these clauses are interpreted against the drafter (the employer), and the need to be explicit when limiting benefit entitlements, the Court found that the ROR clause in existence did not apply to enable GM to reduce retiree benefits after retirement. The Court specifically referred to the 2012 ROR clause (outlined above), and indicated that this modification suggested that prior to 2012 GM had not intended to reserve its right to make changes post-retirement.

Ultimately, therefore, the Court found that salaried employees who retired prior to 2012 had the right to have their existing retiree benefits maintained unchanged through their retirement, and GM did not have the right to make any changes to the retirement benefits in respect of this group, because until 2012, GM only retained the right to make changes to retiree benefits before an individual retired. That said, given the terms of the ROR clause in existence before 2012, GM could make changes to retiree benefits that would be applicable to existing salaried employees (including those eligible to retire but who had not yet actually done so) once they retired.

The Court came to a different conclusion with respect to the retired GM executives, who were subject to a different program, being the “Canadian Supplemental Executive Retirement Program (“CSERP”). The Court relied on the fact that different representations were made in the documents issued to executives to conclude that GM had sufficiently reserved its rights to make post-retirement changes to the benefits that the executives had been promised. The Court relied in particular on the following differences between the CSERP documentation and the salaried employee documentation:

  1. It was clear that the CSERP was not “pre-funded”, and that benefits were provided from GM’s current earnings;
  2. The statements to the executives made clear that the benefits were “not guaranteed” and could be “reduced or eliminated with the prior approval of the Board of Directors”;
  3. Upon retirement, the executive was required to sign a document specifically including a statement that “benefits paid under this Program may be reduced or eliminated with the prior approval of the Board of Directors”.

The Court held that these facts, in combination, made it sufficiently clear to the executives when they retired that the CSERP could be changed by GM in future, which was different from the understanding of the salaried employees. The Court therefore concluded that GM was entitled to reduce the benefits provided to the executives, even after their retirement.

This decision underscores the need to take care when drafting ROR clauses, to ensure that any right to make changes in future is clear and explicitly includes a right to make changes after retirement. Although GM was unsuccessful in certain respects, the case provides a very useful guide to be used in drafting such clauses, and should be reviewed closely when preparing or revising a benefit plan.

O’Neill v. General Motors of Canada, 2013 ONSC 4654 (CanLII)

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Who Needs “Reservations”? Court Rules on Employer’s Ability to Reduce Retiree Benefits

B.C. Introduces Pooled Registered Pension Plan Legislation

The British Columbia government introduced legislation on February 28, 2013 that once passed will make Pooled Registered Pension Plans (“PRPPs”) available to employees in the province. Features of the PRPP structure that may offer significant appeal to B.C. employers include:

  • Reduced administrative requirements – PRPPs will not be administered by B.C. employers, but rather by licensed entities, such as insurance companies
  • Low-costs realized through the pooled nature of the investments and central administration
  • Employer choices – PRPPs are not mandatory for B.C. employers, and once a PRPP is offered employer contributions are optional
  • Tax advantages for employers that are not available for other forms of workplace retirement savings plans
  • Employers not exposed to underfunding issues – the PRPP will function on a defined contribution basis, which limits employers’ funding obligations
  • Recruitment and retention advantages of providing a new option for retirement savings

The PRPP legislation is aimed to enhance pension coverage in B.C., where according to the Ministry of Finance News Release, approximately two-thirds of the workforce has no access to a registered pension plan.

Information about the federal government’s rules regarding PRPPs can be found here.

FMC will continue to monitor the legislation and provide updates on the implementation of PRPPs in British Columbia and across Canada. For more information please contact Colin Galinski at 604-443-7133 or colin.galinski@fmc-law.com.

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B.C. Introduces Pooled Registered Pension Plan Legislation

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

Welcome guidance on pension plan fees & expenses

The subject of what can and can’t be charged to a pension plan has always been an important one for employers because of the often high costs related to administering a pension plan.

On January 23, 2013, the Ontario pension regulator (the Financial Services Commission of Ontario), issued a new policy regarding administrative fees and expenses payable from a pension fund. The new policy, Policy A200-101, replaces four existing policies on the topic and is accessible at http://www.fsco.gov.on.ca/en/pensions/policies/active/Documents/A200-101.pdf.

Although clarification regarding expenses chargeable to pension funds was provided in late 2010 with the addition of a new section 22.1 in the Ontario Pension Benefits Act (“PBA”), Policy A200-101 provides additional guidance that is welcome.

Policy A200-101 reiterates that fees and expenses payable from a pension fund must:

  1. be reasonable;
  2. relate to the administration of the pension plan or the administration and investment of the pension fund; and
  3. not be prohibited or otherwise provided for under the documents that create and support the plan or the fund, or under the PBA or related regulations.

It is the plan administrator’s responsibility to determine whether or not an expense fits the criteria to be properly charged to a pension fund. So it is up to the plan administrator to decide whether amounts are appropriate and reasonable, and to find out whether there are provisions in the pension plan documentation that restrict the charging of expenses.

Since each pension plan is unique, the PBA and regulations do not set out the specific nature or type of administrative expenses that can be paid from a pension fund. However, Policy A200-101 provides examples of the types of expenses that would usually be considered appropriate administrative expenses, such as certain actuarial fees, trustee and custodial fees, and investment management fees. It also provides examples of expenses incurred that would not usually be properly chargeable to a pension fund. These typically include fees incurred by a person acting in the role of plan sponsor, collective bargaining agent or employer.

Many types of fees and expenses incurred by a plan sponsor or administrator can be complex and difficult to categorize. FMC can help you identify proper fees and expenses that can be charged to your pension fund. Please feel free to contact one of our Pension & Benefit experts and we would be pleased to assist.

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Welcome guidance on pension plan fees & expenses

Terminated Employee who signed Release Still Entitled to Accumulated Sick Leave Benefits

Employers are often concerned about whether terminated employees can claim entitlement to accumulated sick leave credits. This case shows how important it is to scrutinize every word in termination agreements; unclear language can come back to haunt the employer.

The employee had been employed for 29 years with the County of Haldimand and its predecessor municipalities. He was presented with and accepted a severance package. He signed a Release and in essence retired.

The severance agreement was incorporated into the Release and allowed for a claim for “usual retiree benefits.” The employee relied on that language to claim payment of accumulated sick leave pursuant to a section of the employer’s Policy Manual which stated:

“An employee hired prior March 12, 1981 and who has a minimum of five (5) years of continuous service will be entitled to a payment equal to the value of one-half (.5) of the balance of the employee’s accumulated sick leave credits to a maximum of one hundred thirty (130) days pay at current salary, upon termination of employment for any reason.”

At trial, judgment was awarded to the plaintiff for payment of accumulated sick leave credits. The employer appealed and argued that the severance agreement did not specifically give entitlement to sick leave credits, and the Release barred the employee’s lawsuit.

The court decided that the only “retiree benefit” that the employee had was the payment of accumulated sick leave pursuant to the Policy Manual. As such, the severance agreement’s reference to “retiree benefits” must mean the accumulated sick leave credits.

The court also held that the Release did not bar the claim because the severance agreement was incorporated into the Release.

Lastly, the court rejected the employer’s argument that the two-year limitation period started when the employee signed the severance agreement. Instead, because sick leave credits are part of retiree benefits, the court decided that the limitation period should begin May 31, 2008, the day when he “retired”.

Daniel John Burgener v. Corporation of Haldimand County, 2012 ONSC 5230

The author gratefully acknowledges the assistance of Simmy Yu in the writing of this article.

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Terminated Employee who signed Release Still Entitled to Accumulated Sick Leave Benefits

New Q&A on the Payment of Small Benefits from Pension Plans

The Ontario pension regulator recently posted new questions and answers on its website regarding the “small benefit” payout rules for Ontario-registered pension plans (accessible at: http://www.fsco.gov.on.ca/en/pensions/legislative/Pages/Smallamount.aspx).

The following is a description of the new Ontario rules about cashing out small pension benefits, which we wrote about in our blog dated July 9, 2012.  You can view that blog entry at http://www.employmentandlabour.com/cashing-out-of-small-pension-benefits-the-rules-have-changed.

Effective July 1, 2012, section 50(1) of the Ontario Pension Benefits Act was changed to increase the maximum amount that can be unlocked (i.e. paid in cash) from a pension plan as a “small benefit”.  The change allows a pension plan administrator to provide individuals with their pension benefit as a lump sum cash payment if the amount of the benefit is considered small.  This is good for plan administrators because it can assist in situations where a monthly pension benefit would be administratively burdensome to administer (e.g. an individual is entitled to only receive a few dollars each month).  Also, it could assist in situations where an annuity cannot be purchased for a former member because the amount of his or her benefit is too small.

Prior to the change and subject to the plan terms, a individual who terminated his or her membership in a pension plan was able to unlock his or her benefit if the annual benefit payable at normal retirement was not more than 2% of the YMPE in the year that he or she terminated employment.  The amended section now allows a former member of a pension plan to receive a lump sum equivalent of his or her benefit, provided the plan terms permit it, if:

a)      the annual benefit payable at normal retirement is not more than 4% of the YMPE in the year that he or she terminated employment; or

b)      the commuted value of the benefit is less than 20% of the YMPE in the year that he or she terminated employment.

For example, since the YMPE for 2012 is $50,100, if an individual terminates employment in 2012, he or she may be entitled to a cash payment of his or her pension benefit if the total annual benefit to be provided under the pension plan is not more than $2,004 per year, or the total value of the pension benefit is less than $10,200.

The questions and answers on FSCO’s website provide clarity to a number of issues and confirm the following:

  • A pension plan administrator can only apply the new higher “small benefit” thresholds if the plan text provides for it.  If the plan text still refers to the old thresholds, the old thresholds must be applied unless the plan text is amended.  Note that a plan text does not need to provide for the unlocking of “small benefits” at all; it is up to the plan sponsor to decide whether to provide this additional benefit to plan members.
  • It is fine for a pension plan text to use generic wording to allow the payment of small amounts, instead of referring to the exact percentages that are set out in the legislation.
  • The new “small benefit” thresholds can apply to former members who terminated their employment prior to July 1, 2012.  However, the plan administrator must use the YMPE for the year in which the former member terminated employment.
  • Only the YMPE in the year the member terminated employment is relevant for the purposes of determine whether a benefit is small.

As many changes to the Ontario Pension Benefits Act came into effect this summer, we will let you know if additional guidance is released by the Ontario pension regulator regarding these changes.

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New Q&A on the Payment of Small Benefits from Pension Plans

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