Canada: Ontario Employment Terminations: Implications of New Pension "Grow-In" Rules

Employers that sponsor defined benefit (DB) pension plans need to put in place strategies (now) to manage recent amendments to Ontario pension legislation that will extend "grow-in" benefits to all involuntarily terminated employees who meet specified eligibility criteria. Previously, grow-in benefits applied only when a pension plan was being either fully or partially wound up. These amendments will make grow-in benefits applicable to all employees terminated after July 1, 2012, but as discussed below, severance packages negotiated now may have to take these amendments into account.

What are Grow-In Benefits?

Grow-in benefits entitle certain employees, who are terminated before they meet the eligibility requirements for enhanced benefits, to become entitled or in essence, to "grow into" the enhanced pension benefits even though their employment is terminated before they meet the eligibility requirements.

Members of DB plans will qualify for grow-in early retirement benefits if their age plus service equals 55 points at the time of termination of employment. This means that if the plan provides enhanced benefits, such as unreduced early retirement to members who meet certain conditions, members who are terminated before meeting those conditions, but whose age plus service equals 55 points, can grow into and qualify for such enhanced pension benefits after their employment is terminated.

An Example

In our example, we assume a plan provides for unreduced pension if the employee completes 30 years of credited service. If an employee is terminated before achieving 30 years of service, but has 55 points, the employee "grows into" the unreduced pension based on the actual service prior to termination. If the employee had 25 years of service at termination, then 5 years after termination the employee may receive an unreduced pension based on 25 years of service.

Grow-In and Pension "Bridges"

Grow-in also applies to eligibility for bridging benefits if the employee has 55 points and 10 years of continuous employment or plan membership at termination. Bridging benefits provide a short term enhanced pension for employees who retire before the age of 65. Most government allowances (CPP, OAS, QPP, GIS) do not offer payments to the retiree until age 65. A pension "bridge" provides additional funds to the retiree during the time from retirement until the government allowances become payable, at which time the pension payments are reduced (i.e. the bridge ceases).

Grow-In Benefits May Significantly Impact Severance Costs

With a greater number of employees able to grow into enhanced benefits, the cost of the benefits paid out of the pension plan increases, which in turn increases an employer's funding obligations. Thus, in addition to the cost of the severance package itself, employers with DB plans will have to consider the extra cost of grow-in benefits when calculating the total cost of employee terminations.

Implications for Severance Packages Starting Now

While this amendment does not come into force until July 1, 2012, employers need to consider the impact of these changes now, including how they may affect severance packages that employers are providing before July 1, 2012. For example, if a dismissed employee is placed on salary, pension and benefit continuance now, but which continues past July 1, 2012, he or she may well be entitled to these grow-in benefits if the 55 point test is met at the end of the benefit continuance period. As we move towards July 1, 2012, grow-in benefits will play an increasingly important role in severance negotiations.

"Wilful Misconduct" Exception

The amendments eliminate partial wind-ups, but in exchange, grow-in benefits are being extended to all involuntary employee terminations (whether mass terminations or individual), unless there is "wilful misconduct, disobedience or wilful neglect of duty by the member that is not trivial and has not been condoned by the employer." It is possible there may be other exceptions introduced by regulations in the future. (Jointly-sponsored and multi-employer pension plans may choose to opt out of grow-in benefits.) Employees who quit are not entitled to grow-in benefits.

Relying on the Misconduct Exception May be Tricky

Employers who attempt to rely on the exception for employee misconduct, should keep in mind that this exclusion is likely somewhat narrower than the common law definition of cause. In addition, this exception may make it more costly for an employer to agree to a "without cause" termination of an employee who is guilty of misconduct.

Across the board, grow-in benefits will directly impact the negotiation posture for dismissal cases as well as the wording of settlements and releases.

Eliminating Enhanced Pension Benefits Requires Careful Consideration

In order to eliminate the potential cost of grow-in benefits, employers may want to consider amending their pension plans to eliminate any enhanced early retirement benefits or bridging benefits.

Employers with unionized workforces will need to consider whether the early retirement benefits are collectively bargained. If this is the case, any change will likely require an amendment to the collective agreement, and accordingly, the consent of the union.

Although employers of non-unionized workplaces could unilaterally decide to amend their pension plans, it may still be necessary to provide advance notice to avoid constructive dismissal claims. Such notice requirements are somewhat complicated by the Ontario Court of Appeal's decision in Wronko, which requires the employer to respond to any employee objections to a significant workplace change. (For further discussion of the Wronko case, see our September 2008 Labour & Employment Brief.)

The change to grow-in benefits is one of a number of pension legislation amendments, which also include requirements for employers to provide advance notice of pension plan amendments to all plan members; and to support the development of pension plan advisory committees, that will affect how employers manage their workplaces. If you would like to learn more about any of these legislative amendments and how they may impact your specific workplace, please contact a member of our Employment and Labour Department for further information.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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