Pension grow-in benefits could mean policy changes

Ontario legislation scheduled to come into effect July 1
By Melissa Mancini
|Canadian HR Reporter|Last Updated: 03/27/2012

A legislative change to pension rules in Ontario slated to come into effect July 1 could impact the terminations employers are making now.

Pension grow-in benefit rules — which currently only apply to employees affected by a plan windup — will start applying to more employees.

“A grow-in benefit, as it’s known, in essence grants certain benefits to employees who might not have met the eligibility criteria for those benefits,” said Paul Litner, a lawyer at Osler, Hoskin and Harcourt in Toronto.

“Mainly, they should be thought of as an ancillary benefit, like a bridge benefit or enhanced early retirement benefit, a subsidized, early retirement benefit.”

All involuntarily terminated employees enrolled in defined benefit (DB) pension plans who have 55 service points (the sum of their age and years of service) will have access to pension grow-in as of July 1.

This only applies to employees terminated by the employer, not those who resign voluntarily, said Litner. The only exceptions to the new rules will be employees who are fired for willful misconduct, disobedience or willful neglect of duty, which is a different test than termination for cause.

While the change is scheduled to come into effect July 1, the provision has not yet been enacted — it had not been proclaimed as of press time — but the legislation states the changes apply to terminations of employment on or after July 1.

“(This) leads us to believe that even if this is enacted, let’s say, Sept. 1, it will still be effective retroactively to July 1, 2012, because that date has been baked into the legislation ever since Bill 236 was released back in 2010,” said Litner.

Although the expected date of effect isn’t until July 1, an employee who is terminated today, but whose notice period extends past July 1, will arguably be entitled to grow-in benefits, said Litner.

“I think (employers) need to be taking this into account because this could have an effect on the severance package that you’re giving an employee,” he said.

“What you want to avoid is effectively double paying someone — giving them severance and accruals for a period and then also giving them an enhanced early retirement or other ancillary benefit under your pension plan.”

To avoid this, employers could negotiate packages that would result in a voluntary exit by the employee, which wouldn’t trigger grow-in benefits, or offer a plan that factors grow-in benefits into the severance package, he said. Employers should also keep in mind the changes go hand-in-hand with the partial windup rules being phased out July 1.

Firms thinking about restructuring or downsizing need to rethink if they want to declare a partial windup or if it would be better to deal with grow-in benefits and avoid the prospect of a partial windup altogether, said Litner.

How HR can prepare

Organizations need to have a strategy and policy around grow-in benefits, said Ofelia Isabel, director of talent and rewards at Towers Watson, based in Toronto.

“That means making sure that everyone that’s going to be involved in these decisions understands the rules and the implications,” she said. “That probably means HR and finance talking to each other, because it impacts both.”

Normally, when an employee is terminated prior to retirement, there are conversations about what kind of compensation — a lump sum, a salary continuance — should be used to bridge the employee to the point where he would be retirement-eligible, said Isabel.

“What this is going to do is just force those discussions earlier on,” she said, emphasizing the new benchmark will be when an employee reaches 55 points instead of age 55.

HR needs to review policies for dealing with terminating employees in light of these changes to ensure consistency in how employees are treated, said Gavin Benjamin, senior consultant in the retirement practice at Towers Watson.

“The one thing that, of course, is important is to ensure that where grow-in has significant value is to factor that in when determining how much it costs to terminate an employee,” he said.

In some cases, whether a person is leaving a company on a voluntary or involuntary basis is a grey area, said Benjamin. The new rules mean there is a greater need to define the voluntary or involuntary status of a termination, he said.

More careful attention should also be paid to who is representing HR at termination talks. Although HR is always involved when an involuntary termination takes place, the pension expert in the department is not always at the table, said Isabel. Now, it is important the pension expert is brought into those discussions.

These changes should be top-of-mind for employers and individuals who deal with severance, said Litner.

“Every termination now going forward should be taking into account these benefits and the impact on the employee and the overall severance package,” he said.

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