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Ontario Pension Plan Members Will Soon Have Significant New Rights

Ontario is on the verge of implementing new rights for members of registered pension plans. Members will have the right to form committees that will have broad rights to review information about all aspects of plan administration including investments.  Employers who sponsor or administer a registered pension plan should familiarize themselves with these new Ontario legal requirements.  They are not yet law, but likely will be in a matter of months.

Last week the Ontario government released revised draft regulations about these new legal requirements, seeking comments by September 12th, 2016.  The new requirements have been kicking around in draft for the past six years and will replace current Ontario legislation regarding member advisory committees.  Most employers probably haven’t heard of the current requirements regarding such committees, because the current rules have no teeth.  The new ones will.  You can find the new requirements here.

The new requirements will apply to pension plans that have at least 50 members (including retirees). For those plans, if 10 members (or their union) notify their plan administrator of their desire to form a member advisory committee, a process must be launched to inform all plan members and conduct a vote.  If a majority of members vote in favour of establishing an advisory committee, it should be established in a matter of months.  The plan administrator will have no right to representation on the committee.  Reasonable expenses of the committee are payable from the pension fund.

Once a new committee is formed, the plan administrator must:

  • arrange for the plan actuary (for defined benefit plans) to meet with the committee at least annually;
  • give the committee access, at least annually, to an individual who can report on the plan’s investments; and
  • give information to the committee, and allow it to examine the plan records.

These new legal requirements will not give plan members a say on how their plan should be administered, but they certainly will change the landscape of members’ access to information about their pension plan. The new requirements will come into play only where there is sufficient interest among members, or unions, in forming a member advisory committee.

These new Ontario rules will create an entirely new type of scrutiny of pension plan administration. Prepare now.

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Ontario Pension Plan Members Will Soon Have Significant New Rights

Double Check those Bonus Plans!

The Ontario Court of Appeal’s decision in the case of Paquette v. TeraGo Networks Inc. should have all employers running to double-check and possibly amend their bonus plans.  A further case released on the same day by the same panel of judges further confirmed the law set out in the Paquette decision.

Trevor Paquette had been employed by TeraGo Networks for approximately 14 years at the time of termination.  He brought a motion for summary judgment and his common law notice period was found to be 17 months.  The motions judge also determined that he was entitled to damages in lieu of his remuneration for the entire notice period, although he denied entitlement to damages in lieu of bonus entitlement over the notice period.  The matter proceeded to appeal solely on the basis of whether or not Paquette was entitled to damages in lieu of bonus during his 17 month notice period.

Paquette’s bonus plan stated that he had to be “actively employed” at the time the bonus was paid in order to receive same.  The Court of Appeal reviewed a number of similar bonus and stock option plan cases, and confirmed that the following is the state of the law in Ontario:

  • Subject to contractual terms, a terminated employee is entitled to compensation for all losses arising from the employer’s failure to give proper notice, and the damages award should place the employee in the same financial position he or she would have been in had such notice been given.  In Paquette’s case, since he would have earned a bonus had he been given working notice, the use of the words “active employment” could not be used as an end-run around his claim for the bonus over the pay in lieu of notice period.
  • The test to be followed is two-fold: (i) the first step is to determine an employee’s common law rights and whether a bonus forms an integral part of the employee’s compensation; and (ii) the second step is to determine whether there is something in the bonus plan that would specifically remove that common law entitlement.
  • An “active employment” requirement does not preclude the employee from receiving damages representing compensation for the bonuses which the employee would have received if employment had continued through the reasonable notice period.

The key for employers then, is to ensure that the language of any bonus plan is sufficiently clear that the common law entitlement to damages in lieu of bonus is expressly removed.  As every bonus plan is different and as the drafting of this sort of exclusionary language is obviously complex, legal advice should always be sought by employers when it comes to limitations set out in bonus plans.

The Court of Appeal’s decision in Paquette v. TeraGo Networks Inc. can be found here:  http://www.canlii.org/en/on/onca/doc/2016/2016onca618/2016onca618.html.

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Double Check those Bonus Plans!

Environmental, Social and Governance Factors: Does Failure to Consider ESG Issues Constitute a Breach of Fiduciary Duty?

Changes made to the Ontario Pension Benefits Act and Regulation (the “Ontario PBA”), which came into force on January 1, 2016, now require a pension plan’s statement of investment policies and procedures (“SIPP”) to include information as to whether environmental, social and governance (“ESG”) factors are incorporated into the plan’s SIPP and, if so, how those factors are incorporated.  The changes have raised more questions than there are answers for plan administrators.  The primary question is whether there is a legal requirement to take ESG into account or must the administrator simply consider whether, or not, to incorporate ESG?

Ontario is not the only jurisdiction to introduce ESG into the SIPP equation. In 2005, Manitoba indicated that fiduciaries could consider ESG factors provided administrators otherwise complied with statutory fiduciary duties.  Not taking ESG factors into account is not a breach of any statutory law (at least not yet), but Ontario’s recent move has certainly added to the not-so-old debate:  Is a failure to consider ESG factors in your pension plan’s SIPP a breach of fiduciary duty?

On a basic level, it is the fiduciary’s role as plan administrator to be responsible for investing the pension fund in accordance with the administrator’s standard of care, in a prudent manner and always in the best interest of plan beneficiaries. Pursuant to section 22 of the Ontario PBA, prudent investing entails understanding, monitoring and investigating risk.  The administrator is responsible for determining what prudence requires within the context of the plan in question.

North American investors have in general been slow to incorporate ESG factors into their investment research, analysis and decision making, whereas European investors have been doing so for many years.

Canada’s large public sector pension funds, including CPP, Ontario Teachers’, HOOPP, OMERS, bcIMC and others, have now incorporated ESG into their investment policies. CPP Investment Board has stated:

“We believe that organizations that manage Environmental, Social and Governance (ESG) factors effectively are more likely to create sustainable value over the long term than those that do not. As we work to fulfill our mandate, we consider and integrate ESG risks and opportunities into our investment decisions.”

The link between ESG issues and bottom line profits and share prices was illustrated late in 2015 when BHP Billiton and Vale’s horrific mine disaster in Brazil resulted in the deaths of 17 people as well as hundreds of individuals losing their homes due to a massive dam burst. In February 2016, BHP recognized a US$1.12 billion provision related to the disaster.

The questions for administrators include:

  • How should you balance your primary objective to achieve optimal rates of return within an acceptable level of risk?
  • Should an investment target company’s ESG record take precedence over its increase in share price?

Administrators face significant hurdles in gathering relevant non-financial (or extra-financial) data if they wish to take ESG factors into account. Independent ESG research and analysis firms are available to help pension fund administrators gather materially relevant information on potential investments and their respective corporate ESG performance as well as information on external managers, many of whom are already integrating ESG factors into their investment processes.

Bottom line for administrators, if ESG factors are determined to be of importance in their investment policies and procedures, their first step is to separate the identifiable legal implications that will arise from incorporating ESG information into their SIPP and how their governance committee is expected to assess ESG analytics into their overall risk management policies. Does ESG act as a tie breaker when other financial considerations appear equal?  How should administrators communicate (and document) their ESG factors and decision-making processes to the plan beneficiaries?

Plan administrators should seek legal advice to ensure their fiduciary duties are fulfilled if (and more likely when) they begin to embark on considering ESG factors into their investment decision-making process.

 

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Environmental, Social and Governance Factors: Does Failure to Consider ESG Issues Constitute a Breach of Fiduciary Duty?

U.S. employers targeted by lawsuits claiming excessive fees in employee retirement and savings plans: Could it happen in Canada?

I recently wrote about the legal risks regarding plan fees that should be considered by Canadian employers who sponsor group registered retirement savings plans and defined contribution pension plans (that article can be found here).  These risks have been emphasized by several lawsuits filed against U.S. employers in the last few months.  The following is a brief update on litigation activity in the U.S. which should give pause to Canadian employers who sponsor capital accumulation plans for their employees.

This week, no fewer than seven high-profile U.S. universities were sued regarding fees charged in their defined contribution retirement plans.  Plaintiffs are seeking class-action status against these U.S. educational institutions alleging, among other things, that their employers acted imprudently by selecting high-cost funds for the plans when lower-cost alternatives were available.  These lawsuits are part of a trend that has emerged in the last decade: claims against large and small U.S. employers which allege that fees haven’t been adequately disclosed, service providers are being paid unreasonable fees for the services they provide, and insufficient diligence has been carried out to properly select reasonably-priced funds and monitor whether fees remain competitive for years after funds are selected.

Some commentators have referred to this trend as a gold rush for lawyers. Several very large, respected U.S. companies have settled claims for tens of millions of dollars, while at the same time asserting that they have acted prudently in charging plan fees for administration, record-keeping and investment services.

The spate of U.S. litigation should prompt Canadian employers to mull over the following obvious questions: Do plan fees hold up against a benchmark of fees charged by other plans?  Could the same services be provided at a lower price?  Has the employer conducted, and kept records of, regular reviews of fee options?  Was expert advice obtained in selecting funds and negotiating with service providers and investment managers?  Consider this wording in a very recent claim against a small U.S. employer:

“Defendants had a flawed process – or no process at all – for soliciting competitive bids, evaluating proposals with respect to services offered and reasonableness of fees for those services, actively monitoring the reasonableness of fees assessed to Plan participants, and choosing a service provider on a periodic, competitive basis.”

Could all Canadian employers defend such allegations – especially those who have not paid attention to the fees charged in their plans for a few years? They may mistakenly think that their trusted service provider will inform them if fees could be reduced.  That may not be the legal obligation of a service provider.  And it may not be in the financial best interests of service providers to do so.

The Ontario pension regulator has formally encouraged pension plan administrators to shine a light on fees. It stated in a 2016 guideline that it expects employers who sponsor defined contribution pension plans to give “due consideration” to including wording in statements of investment policies and procedures that sets out “expectations, ranges, or limits on total plan expenses and fees; and guidelines for monitoring expenses and fees”. Good advice, especially in light of the litigation on this topic in the U.S.

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U.S. employers targeted by lawsuits claiming excessive fees in employee retirement and savings plans: Could it happen in Canada?

How should employers deal with pensions in a severance package?

HR professionals often ask us how to deal with pension issues when they structure severance packages for non-union employees. Should employees continue to earn pension benefits after termination of employment?  If so, for how long?

Here are some legal principles that will help the puzzled professional approach these questions. See the article by Taylor Buckley here [http://www.employmentandlabour.com/limiting-liability-incentives-and-benefits-on-termination-of-employment] that describes in a general way the treatment of a variety of employee benefits on termination of employment.  This article will focus on the treatment of pensions.

Is there anything in writing?  Is there a written employment contract, collective agreement, plant closure agreement or other document that clearly describes what will happen to pension benefits when the employee is dismissed?  If the answer is yes, follow the written document.  If the answer is no, read on.

The statutory notice period?  Easy. In Ontario, employment standards legislation requires pension accruals to continue during the period of statutory notice.  For both defined benefit and defined contribution pension plans, the employee should be given credit and contributions in the pension plan for that period.  The challenge is what pension treatment should apply at the end of the statutory notice period.  Read on.

What about pension benefits during the period of common law notice?  A period of common law notice could extend for several months after a statutory notice period ends.  Courts have said that long-service, highly-paid employees who are terminated without legal “just cause”, could be entitled to a period of common law notice as long as two years.  The general rule is that an employee who is dismissed without cause is entitled to the value of the pension benefit that he/she would have received if he/she had worked for the entire period of common law notice.  The general rule won’t apply if there’s something in writing that provides for some different treatment – an employment contract, collective agreement, binding policy, etc.

If the general rule applies, the dismissed employee’s entitlement is to the value of the pension that he or she would have earned in the pension plan during the period of common-law notice. When dealing with a defined benefit pension plan, the amount of contributions is not the same as the value.  Advice of an actuary may be required to determine the value of a defined benefit pension accrual during a common law notice period.  It could be easier and less expensive for an employer to set up severance arrangements so that pension accruals continue in the pension plan, rather than pay a separate cash amount equal to the value of the pension accrual.

Are employers required by law to continue pension benefits through the entire period of common law notice?  If the general rule applies, that doesn’t mean that the dismissed employee must receive the value of pension benefits for the entire period of common law notice.  Employees can agree to some other deal.  A dismissed employee could sign a release and accept a severance arrangement that doesn’t include the accrual of pension benefits through the period of common law notice (as long as all statutory obligations are met).  That is legally acceptable, as long as the treatment of pension benefits is clear in the documentation, and the employer has acted appropriately in disclosing the pension issues to the employee.

How should an employer disclose pension issues when negotiating a severance deal?  Carefully.  Pension legislation requires an administrator of a pension plan to act as a fiduciary when explaining pension entitlements under the plan.  That includes a situation where a dismissed employee is considering pension issues in the context of a severance package.  Severance letters often say something like, “you will receive pension information under separate cover”.  If the employer is seeking a release at that point, the release may be challenged in future if the dismissed employee later says that he or she didn’t understand how his pension was being handled under the severance arrangement.  The better approach is to deal with the treatment of pensions up front, in the initial severance letter that sets out all payment terms.

Exactly what are the options in dealing with pensions during a severance period?  The easy point is that in Ontario accruals continue, without exception, during the statutory notice period.  The more difficult point is what should happen with pensions after the end of the statutory notice period.  There are two basic choices.  Pension accruals could cease at the end of the statutory notice period, in which case the dismissed employee simply receives his or her pension termination option statement.  Alternatively, pension accruals could continue for the period of time when the dismissed employee is still considered to be an employee for tax purposes.  The key here is that the status of being employed for pension accrual purposes can continue even if the individual does not report to work.  A severance deal can be structured so that for tax purposes, the individual’s employment has not terminated at the end of the statutory notice period.  Such arrangements are commonly referred to as “salary continuance arrangements”.  The individual’s salary and some benefits continue during the salary continuance period, without interruption, even though the employee no longer comes to work.  The employer doesn’t provide a Record of Employment until the end of the salary continuance period.  Documentation must be clear in confirming with the dismissed employee exactly what is happening with his/her benefits.  And the employer should be aware of what is permitted regarding benefit accruals/continuation in the relevant benefit plan text.

It is often simpler, and less expensive, to provide for continuing pension plan accrual within the pension plan during a period of salary continuance, rather than wrestle with the issue of a cash payment to compensate the dismissed employee for loss of pension accruals during a severance period.

The bottom line for employers with pension plans is that a proper structuring of a severance package requires thought beyond the question of “how many months is this employee entitled to?” There could be an expensive pension issue that employers should address at the outset.  Should the pension accruals continue throughout the salary continuance period?  Would it be easier and less expensive to simply provide a cash payment in lieu of pension accruals?  Has the dismissed employee been given clear and complete information about what his/her pension rights are in connection with his/her severance deal?  Employers should have solid answers to these pension questions before terminating employees.

Get legal advice.  We strongly recommend that employers get legal advice when dismissing employees.  Circumstances can vary, and there may be important exceptions and unique approaches to the principles described in this article.

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How should employers deal with pensions in a severance package?

New Court Decisions Reinforce Need for Benefit Communications Policy

In my last post to this blog I extolled the virtues of a benefit communications policy for HR professionals who communicate pensions and benefits to fellow employees. I pointed out that years of benefit miscommunication has an overwhelming impact on an organization’s potential legal liability. I also highlighted the fact that court decisions demonstrate time and again that important cost-savings measures, such as reducing post-retirement benefits or eliminating future pension accruals, can be derailed by ambiguous communications.

Canadian case law demonstrates how widely courts and arbitrators are prepared to cast their nets when awarding damages for benefit miscommunication. Cases involving negligent misrepresentation, for example, have resulted in awards for retiring employees, terminated employees, spouses of deceased employees and future employees. Two recent cases dealing with employee benefits and pensions demonstrate how a benefit communications policy can make a difference to employers.

In Feldstein v. 364 Northern Development Corporation, the B.C. Supreme Court awarded more than $93,000 in damages to a 364 employee, Feldstein, in respect to inaccurate information provided to him about the company’s long term disability (LTD) program during the hiring process.

During pre-employment interviews Feldstein disclosed that he suffered from a condition that could require him to apply for LTD benefits at some future date and, understandably, asked pointed questions about 364’s LTD program. The hiring manager misrepresented how the program operated and when Feldstein ultimately applied for benefits, he was denied full coverage. The court confirmed that the law required 364 to ensure that representations made to Feldstein about the LTD program were accurate and not misleading.  It concluded that Feldstein, to his detriment, had accepted employment on the strength of the company’s negligent misrepresentation and was entitled to recover damages.

Among the features of a benefit communications policy is the thorough vetting of all communications that may be relied upon by potential and current employees to make important decisions. With Feldstein’s disclosure of a pre-existing medical condition and pointed questions about 364’s LTD program, it would have been obvious to even the most casual observer that he intended to rely on the company’s explanation in making his employment decision. That alone should have spurred the hiring manager to refer to 364’s benefit communications policy (assuming it had one) which, one hopes, would have required the explanation to be thoroughly vetted before being delivered to Feldstein.

While the Feldstein case addresses communications to future employees, a more recent Quebec Superior Court decision deals with communications to current employees.

In Samoisette v. IBM Canada the employer amended its defined benefit (DB) pension plan to eliminated bridge benefit entitlements for its employees in respect of their future retirement benefits and unilaterally terminated health insurance coverage for certain employees over age 65. Affected employees challenged IBM’s right to make those changes.

The court upheld IBM’s right to unilaterally modify its health plan on the basis that all benefit communications to employees had clearly reserved to IBM the right to amend those benefits at any time. However, the bridge benefit amendment was held to be invalid on the basis that employees had relied on IBM’s unqualified representations about that benefit, which said nothing about possible future changes, when making the important decision to remain in the DB plan when an alternate (defined contribution) plan was introduced by the company. The court found that most employees who chose to remain in the DB plan did so to take advantage of the bridge benefit and, hence, IBM was prohibited from amending the bridge benefit notwithstanding that it had reserved the right to amend its pension plan in the future.

IBM was ordered to pay more than $23 million plus interest to active and retired employees a decade after the original bridge benefit amendment. Keep in mind that the Quebec court’s decision may be appealed.

While IBM effectively reserved the right to amend or terminate its health insurance coverage, it appears that its pension communications were not sufficiently explicit to overcome the expectations of employees who elected to remain in the DB plan to take advantage of the bridge benefit feature. An effective benefit communications policy will recognize when representations will be relied upon by employees to make important decisions and, among other things, will ensure that such representations include language highlighting the employer’s right to implement future changes to benefit programs.

As noted in my earlier post, a benefit communications policy should become an integral part of an organization’s risk management strategy and be aligned with existing procedures and human resource capabilities. There is no guarantee that phantoms of past benefit communications will not haunt an employer in the future.  Nevertheless, a benefit communications policy can significantly decrease the risk of future legal claims against an employer and increase the likelihood that upcoming cost-saving measures, which include changes to pension and benefit programs, will not be derailed by ambiguous employee communications.

Ensure that your organization adopts a benefit communications policy as soon as possible. If you require assistance, speak with one of our experienced pension and benefits lawyers.

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New Court Decisions Reinforce Need for Benefit Communications Policy

Pension Plan Governance Policies: Have You Reviewed Yours Lately?

When was the last time you thought about pension plan governance? Or reviewed your pension governance policies? It would be great if your answer is “recently”. However, if you’re like many organizations whose answer is “I can’t remember” or “a while ago”, then you need to be aware of the potential risks of not regularly reviewing your pension plan governance structure.

Pension governance is often referred to as the decision-making structure and supporting policies and processes for overseeing, managing and administering a pension plan to ensure that fiduciary and other obligations of the plan are met.

Under pension standards legislation, the plan administrator is ultimately responsible for the governance of the pension plan. Plan administrators have a statutory fiduciary obligation to ensure that the plan is administered in accordance with the best interests of the plan members. Using “best efforts” is not sufficient. Fostering good governance practices, including having a written pension governance policy, will help you discharge this obligation. Without them, the likelihood of breaching your fiduciary standard of care increases. This could lead to claims and litigation against the pension plan and those responsible for plan administration, and even offences under pension standards legislation. It was only a few years ago that the trustees of a large multi-employer pension plan, who were responsible for plan administration, were charged and convicted under the Ontario Pension Benefits Act for breaching their fiduciary duty with respect to the plan’s investments, and fined a record-setting amount.

As a result, if you already have a written pension governance policy in place, now is a good time to review it. Conducting periodic reviews will assist you in making sure any required changes to that policy are made, and that your governance framework as a whole continues to be relevant and adequate to discharge your fiduciary duty. This in turn will ensure that there is proper oversight of the plan’s day-to-day operations, plan member interests are protected, and the risk of member complaints and claims against the pension plan are reduced.

If you don’t already have a written pension governance policy in place, now is the time to create one! A written pension governance policy can be an effective tool for improving your pension governance system. It’s also something that most regulators will ask for when conducting an examination of your pension plan.

As a starting point, any person involved in pension governance should be familiar with the guidelines published by the Canadian Association of Pension Supervisory Authorities (CAPSA) and in particular, Guideline No. 4. Originally released in 2004, CAPSA is currently updating Guideline No. 4, which sets out guiding principles and established best practices for pension plan governance. CAPSA has also developed several other guidelines that will assist plan administrators in developing good governance policies such as Guideline No. 3 on Capital Accumulation Plans, Guideline No. 5 on Fund Holder Arrangements, Guideline No. 6 on Pension Plan Prudent Investment Practices, and Guideline No. 8 on Defined Contribution Pension Plans. For a link to all of CAPSA’s guidelines, click here.

Although the CAPSA guidelines are not legally binding, pension regulators and most (if not all) pension practitioners expect plan administrators to follow them as industry standard. For that reason, establishing a written pension governance policy that takes into account the principles from the guidelines, after consultation with legal counsel, is recommended.

So if you haven’t reviewed your pension governance structure lately, or you don’t have a pension governance policy, now is the time to take action. Doing so will help ensure your plan is administered in accordance with applicable legislation (including your fiduciary obligation), and help avoid potential claims and deficiencies in the event of pension plan examinations.

Pension Plan Governance Policies: Have You Reviewed Yours Lately?

CPP Expansion

Retirement savings in this country has been a hot topic of late, and yesterday evening in Vancouver the federal government and (most of) the provinces announced that they have reached a deal to expand the Canada Pension Plan. The deal must be approved by July 15 of this year.

The proposed changes will roll out over seven years, beginning in 2019, and mean both a bigger benefit to retirees and bigger monthly contributions by employers and employees.

Under the current CPP, employers and employees each contribute 4.95% of income between $3,500 and $54,900. The proposed plan would see that annual pensionable income increase up to $82,700 by 2025. For example, contributions for a typical worker earning about $55,000 would initially increase by $7 a month in 2019, eventually increasing to $34 a month in 2025. Employers would match those contributions.

The current CPP replaces 25% of earnings up to $54,900, with a maximum CPP benefit of $13,110. The average annual payment is $7,974.84. The expanded CPP would aim to replace one third of income up to the new $82,700 ceiling. The maximum annual payout would increase by about one third to $17,478.

CPP reform requires the approval of the federal government and seven of the provinces containing two thirds of Canada’s population. All of the provinces except Manitoba and Quebec have signed on to the agreement announced yesterday. Quebec Finance Minister Carlos Leitao said he supported the agreement but that Quebec would be proposing an alternate version of the expansion in Quebec.

What about the ORPP?

Ontario’s Finance Minister, Charles Sousa, has announced that this new deal will signal the end of his government’s proposed Ontario Retirement Pension Plan.

What does this mean for you?

These changes raise many important issues for unionized and non-union employers across Canada. We will be providing further insights as things develop and more details become available. In the meantime, if you have any questions about what an expanded CPP means for you, please contact us.

CPP Expansion

Why HR Professionals Should Demand A Benefit Communications Policy

If your job description includes responsibility for communicating pensions and benefits to fellow employees, then you must already know that with each new communication comes increased potential legal liability for your organization. However, unlike the production of a defective widget, where each new sale increases potential liability by one, each defective benefit communication increases potential liability by a multiple equal to the number of recipient beneficiaries.  Hence, years of benefit miscommunication has an overwhelming impact on an organization’s potential legal liability.

Canadian courts and arbitrators have shown an increasing propensity to award damages, or provide restitution, to employees where it can be shown that employer communications are untrue, inaccurate, misleading, ambiguous or omit important details otherwise relevant to those being asked to make important (often irrevocable) decisions related to health, welfare or retirement.

Benefit miscommunications can cost your organization in other ways too. Numerous court decisions in Canada demonstrate time and again how employer cost-savings programs, based on reducing post-retirement benefits, can be derailed by ambiguous communications about the employer’s right to change those benefits following retirement from employment.

While eliminating all benefit communications might appear to be a logical means of reducing potential legal liability, there are many sound business and legal reasons for regular communications to employees about their benefits. Your employer’s pension and benefit programs are expensive and were implemented, in part, to attract and retain valuable employees. If you don’t tell employees about your excellent programs, why bother having them in the first place?  In some cases you have no choice and must issue benefits-related communications.  For example, the law imposes on pension plan administrators an obligation to provide on-going and ad hoc communications to plan members about their entitlements.

The challenge for employers, therefore, is how best to effectively communicate the excellent pension and benefit programs available to employees while minimizing potential legal liability and ensuring that proposed future changes to those programs won’t be hampered by the phantoms of past communications.

While there is no single step that will cure all past benefit miscommunications, the path to overcome the benefit communication challenge must first be paved with a comprehensive Benefit Communications Policy (BCP) based, in part, on past court decisions which highlight the legal hurdles to be surmounted.

An effective BCP must ensure that future benefit communications that may be relied upon by employees to make important decisions:

  • are thoroughly vetted so as to eliminate any untrue, inaccurate or misleading statements (or omissions);
  • are clearly written and devoid of ambiguous or vague terminology;
  • do not predict future events, unless thoroughly qualified;
  • do not project future investment outcomes, unless thoroughly qualified; and
  • where appropriate, include customized language, unique to each organization, reserving to the employer the right to make future changes to its benefit programs, even following retirement.

A BCP should become an integral part of your organization’s risk management strategy and should align with existing procedures and human resource capabilities. Of course, your BCP will not be worth the paper it’s written on if there is no C-suite buy-in. A Board of Directors stamp-of-approval may, therefore, be essential to the success of your policy and a single executive should be made accountable for the BCP to ensure that necessary resources are allocated to its implementation and adherence.

While a well-designed, successfully implemented and strictly enforced BCP will not cure past benefit miscommunications, it should significantly decrease the risk of future legal claims against your organization and increase the likelihood that upcoming cost-saving measures, which include changes to pension and benefit programs, will not be derailed by ambiguous employee communications.

Why HR Professionals Should Demand A Benefit Communications Policy

A Quick Guide to the Taxation of Retiring Allowances

When an employee’s employment is terminated without cause, the employee will typically receive some form of a termination/severance payment. All or part of this termination/severance payment may be considered a “retiring allowance” under the Income Tax Act, providing the employee with additional options in respect of the allocation of the payment.

Whether a payment qualifies as a “retiring allowance” will depend on the reason for the payment. Under the Income Tax Act, a retiring allowance is an amount paid to an employee on or after the date his or her employment terminates for the purpose of recognizing long service, or for the loss of employment. As a result of the definition of “retiring allowance”, a payment made pursuant to the applicable employment standards legislation may or may not qualify as a retiring allowance, depending on the circumstances.

Employees with service prior to 1996 may be able to take advantage of preferential tax treatment by transferring part of their retiring allowance to a registered retirement savings plan (RRSP) or registered pension plan (RPP) regardless of their “contribution room”, up to certain limits.

The portion that can be transferred directly to a RRSP or RPP regardless of the contribution room is commonly referred to as the ‘eligible portion’ of the retiring allowance.

Here is how to calculate the eligible portion of a retiring allowance:

  • $2,000 for each year or part of a year of service before 1996 that the employee or former employee worked for the employer (or a person related to the employer); plus
  • $1,500 for each year or part of a year of service prior to 1989 of that employment in which none of the employer’s contributions to a RPP or deferred profit sharing plan were vested in the employee’s name when the employer paid the retiring allowance.

Eligible portion of a retiring allowance:

The eligible portion of a retiring allowance must be transferred directly into the employee’s RRSP or RPP on a tax-free basis. It is not determined by, nor does it affect, the employee’s regular RRSP contribution room. The direct transfer of the retiring allowance to an RPP may result in a pension adjustment (PA) that will affect the employee’s RRSP deduction limit in subsequent years. Note that an employee cannot transfer any part of an eligible retiring allowance directly to a spousal or common-law partner RRSP.

Ineligible portion of a retiring allowance:

The non-eligible portion of a retiring allowance (i.e. amounts over and above the eligible portion) may also be transferred directly into the employee’s RRSP, or a spousal or common-law partner’s RRSP, if the employee has the available RRSP contribution room. If the transfer is made directly to the RRSP, tax need not be withheld.

Things to keep in mind:

  • Contributions to an employee’s RRSP can only be made until the end of the year in which he or she turns age 71.
  • Employers contributing remuneration directly to an employee’s RRSP on his or her behalf should have reasonable grounds to believe that the employee has sufficient RRSP contribution room and can deduct the contribution for the year.

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A Quick Guide to the Taxation of Retiring Allowances