One of the more significant changes contained in the reform of Ontario’s pension system is the elimination, effective July 1, 2012, of partial windups.
This is good news for employers, who will no longer need to worry that a business reorganization or downsizing could trigger a partial plan windup —along with all of its associated uncertainty, costs, administrative delays and potential surplus distribution issues.
However, the elimination of partial wind-ups does come with a price. Effective July 1, 2012, the following legislated benefits, which previously were only required in the case of a full or partial wind-up, must now be granted as part of the ongoing operation of Ontario pension plans:
- Immediate vesting: Currently, Ontario legislation requires that the accrued pension of a member must vest no later than two years after the member joins the plan. Effective July 1, 2012, an accrued pension will vest immediately upon the employee becoming a plan member.
- Grow-in: A plan member employed in Ontario who is terminated involuntarily, without cause, and the sum of whose age and service is 55 or more (“55 points”) must be provided with “grow-in” to the plan’s early retirement subsidies. Jointly sponsored pension plans and multi-employer pension plans can elect to opt out of the requirement to provide grow-in.
“Grow-in” means that any reduction to a former employee’s pension due to retirement prior to the plan’s normal retirement age is determined as if the employee had continued to be employed with the employer until retirement. If the former employee elects to transfer the commuted value of his or her pension to a locked-in retirement account, the value of the grow-in entitlement must be reflected in the calculation of the commuted value.
DB plan sponsors with Ontario members need to prepare themselves for the implications of providing grow-in to terminated employees in the future.
Pension administration implications
When an employee who has attained 55 points leaves the employer, the employer must classify the termination as voluntary, involuntary without cause or involuntary with cause. The classification of the termination will need to be communicated to the individual or third party responsible for preparing the former employee’s pension option forms. Employers should keep in mind that inaccurate classification of terminations may lead to legal claims from former employees for grow-in benefits to be provided, particularly in cases where the added value of grow-in is substantial.
Administration systems will need to be modified to include grow-in when calculating the pension benefits of Ontario members terminated involuntarily with 55 or more points.
It should be recognized that the grow-in requirements may also affect situations where notice of termination was provided prior to July 1, 2012, but the employee’s final day of employment falls on or after July 1, 2012, due to salary continuance or a reasonable notice period awarded by a court.
Plan documentation and communications will need to be updated to reflect the new grow-in requirements. At present, it is not known how much time plan administrators will be given to amend their plans to reflect the changes resulting from Ontario pension reform.
HR considerations
Employers will need to factor in the value of grow-in when determining the total cost associated with terminating an employee. Depending on the pension plan provisions and the employee’s particular circumstances, the value of the grow-in entitlement can be significant.
The details of an employee’s termination package, such as the length of any salary continuance or notice period provided, may determine whether or not the employee qualifies for grow-in. HR should therefore consider whether an obligation exists to disclose any potential entitlement for grow-in to an employee when negotiating a severance package.
When terminating an employee who is close to attaining 55 points, an employer will need to decide whether it is appropriate in the circumstances to “bridge” the employee to his or her 55 point date through the use of salary continuance.
Some low-performing employees, who would otherwise quit voluntarily, may wait for their employer to terminate them, so that they qualify to receive grow-in.
Financial implications
The requirement to provide grow-in may affect the cost of a pension plan on both a funding and accounting basis. Plan sponsors should discuss these implications with the plan actuary.
When a decision is being made to terminate employees, it will be more important than ever that the lines of communication between HR and finance are open. Open communications will ensure that both parties understand the magnitude and timing of any pension funding and accounting effects resulting from the terminations.
Pension plan design
The new grow-in rules raise the following pension plan design questions:
- Since it is not always clear whether an employee’s resignation is truly voluntary, or whether an involuntary termination is for cause, is there merit in extending grow-in to all terminations?
- If a pension plan has members employed in multiple provinces, should grow-in be extended to employees outside of Ontario so that all members are treated equally?
- If the employer sponsors a supplementary executive retirement plan (“SERP”) for high-income earners, should grow-in be extended to the SERP?
- Should pension plan early retirement subsidies be reduced or removed? An employer considering reducing a plan’s early retirement benefits should understand any limitations on changing these benefits, and member notice requirements that may be imposed by applicable pension standards legislation.
Conclusion
With the effective date for mandatory grow-in just weeks away, DB plan sponsors with Ontario employees should review the implications for their plans, make any required decisions, and implement the necessary administrative and plan design changes.