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:
• 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.