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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

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

Pension Benefit Statements: New Rules

Recent Ontario pension reforms have created additional disclosure statement obligations that administrators should consider when they work with their third-party service providers to create annual, termination and death benefit statements.

Regulations that came into force in May 2011 require that annual member statements include the transfer ratio of the pension plan as calculated in the most recent two valuations reports and an explanation of what the transfer ratio means. Basically, the transfer ratio describes the funded status of the plan on a solvency basis. For example, if the transfer ratio is 0.85, then the plan is 85% funded. The Financial Services Commission of Ontario has indicated to some plan administrators that this requirement will not be applied to annual statements covering periods ending on or before December 31, 2011.

The reforms also indicate that retired members will be entitled to receive periodic benefit statements. The Ontario government has not yet released details specifying the frequency and content of what must be communicated to retirees.

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Pension Benefit Statements: New Rules

New Expanded Rights of Pension Plan Members Regarding Advisory Committees

Ontario pension law has always permitted active members, deferred vested members and retired members of a pension plan to establish an “advisory committee.” They were toothless committees. Ontario pension reforms has changed the rules regarding the membership and administrative burden of advisory committees. Advisory committees will continue to have no real power to direct the administration of pension plans.

Retired members have always been permitted to participate in advisory committees; however the pension reforms have guaranteed retired member participation in these committees.

The reforms also empower advisory committees to (i) charge their costs to pension funds; (ii) force pension plan administrators to meet with them; and (iii) force administrators to provide the committee with wide array of information. The regulations detailing these new financial and documentary powers have not been released by the Ontario government.

We will keep an eye out for the creation of broad rights that may give advisory committees the right to ask for an employer’s sensitive financial or legal documents under the guise of monitoring the pension plan.

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New Expanded Rights of Pension Plan Members Regarding Advisory Committees

Superintendent’s Power to Order a Pension Plan to be Wound Up: New Rules

Effective July 1, 2012, the Ontario Superintendent of Financial Services’ powers to order the wind-up of a pension plan has been expanded to include instances where the plan has no active members, or the plan members are no longer accruing pension benefits.

A wind-up order will not be automatic; the Superintendent must take action for a wind-up order to be effective.

It is possible that the Superintendent will not exercise his authority to order a wind-up unless he believes that the security of the members’ benefits is in jeopardy. This will be a sensitive issue for pension plan sponsors who have ceased accruals in defined benefit pension plans, who do not wish to carry out a wind-up in the current environment where solvency deficiencies are at an all-time high.

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Superintendent’s Power to Order a Pension Plan to be Wound Up: New Rules

Interest on Employee Pension Contributions and Lump Sum Payouts: New Rules

We recommend that pension plan sponsors check what their plan texts say about the crediting of interest on contributions made by employees to the plan and lump sums payable to terminated members.

New rules were recently introduced to clarify the interest that should be applied to those amounts. For defined benefit pension plans that are not insured, if the plan text is silent on this issue, the interest rate must be at least the prescribed bank deposit rate. A plan sponsor may be able to credit employee contributions with interest equal to the pension fund rate of return; however, this must be expressly provided for in the plan text for DB plans.

For defined contribution pension plans that are not insured, the new rules require that the interest rate be at least equal to the pension fund rate of return. These new rules were effective July 1, 2012.

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Interest on Employee Pension Contributions and Lump Sum Payouts: New Rules

Pension Plan Mergers and Asset Transfers: The Rules are Changing

Two years ago Ontario pension legislation was changed to provide for new rules that will make asset transfers and the merger of two or more pension plans much simpler. These are welcome changes since it has been expensive, and sometimes legally impossible, to merge pension plans under the current rules.

Unfortunately, employers cannot proceed under the new rules yet. Specific regulations are required to implement them. The Ontario government announced in its 2012 budget that these regulations would be released this spring, but we haven’t seen anything yet. Plan sponsors wishing to take advantage of the simpler asset transfer and plan merger rules will have to wait a bit longer.

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Pension Plan Mergers and Asset Transfers: The Rules are Changing

Pension Surplus Rules Have Changed

In December of 2010, changes were made to Ontario pension laws to make it easier for employers to withdraw surplus. Employers no longer have to conduct tedious and expensive historical plan reviews in order to implement a surplus-sharing deal. Rules were also introduced to create a new arbitration process in cases of disputes with pension plan members. Employers are now allowed to receive surplus if:

  • the employer is entitled to the surplus according to the pension plan documents;
  • there is a written surplus sharing agreement with pension plan members (and possibly other persons); or
  • a court order or arbitration award provides for the payment.

Additional changes to the surplus withdrawal rules were recently released and came into force on July 1, 2012. The recent pension reforms further simplify the surplus withdrawal rules by removing the requirements that employers provide information relating to surplus attribution and contractual authority in the written surplus notice to the plan members. In addition, the recent changes make it clear that if an employer is funding a wind-up deficiency and has contributed to the plan more than the amount required to fund the deficiency, the remaining assets in the plan may be refunded to the employer as an overpayment, rather than be treated as surplus.

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Pension Surplus Rules Have Changed

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

Les prestations de retraite devraient-elles être prises en compte dans l’évaluation des dommages-intérêts accordés pour congédiement injustifié?

La Cour suprême du Canada a accepté d’entendre l’affaire Richard Waterman c. IBM Canada Limitée, 2011 BCCA 337 portant sur la question à savoir si le montant des prestations de retraite d’un régime capitalisé par l’employeur qu’un employé a reçues après la cessation d’emploi aurait dû être déduit du montant des dommages-intérêts qu’il a obtenus pour congédiement injustifié. La Cour suprême et la Cour d’appel de la Colombie-Britannique ont toutes deux conclu que les prestations de retraite versées pendant la période de préavis ne devaient pas être déduites du montant des dommages-intérêts accordés par le tribunal.

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Les prestations de retraite devraient-elles être prises en compte dans l’évaluation des dommages-intérêts accordés pour congédiement injustifié?

Are Pension Benefits Deductible from Damages for Wrongful Dismissal?

The Supreme Court of Canada has granted leave to hear the case of Richard Waterman v. IBM Canada Limited,2011 BCCA 337, on whether employer-funded pension benefits that were paid after an employee’s termination should have been deducted from damages resulting from a wrongful dismissal. Both the British Columbia Supreme Court and Court of Appeal held that pension benefits paid during the notice period were not to be deducted from the damages awarded by the Court.

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Are Pension Benefits Deductible from Damages for Wrongful Dismissal?

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