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

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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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