New pension rules could be costly for employers

Employers who run defined-benefit pension plans can expect greater costs through the Ontario government’s first substantive changes to the province’s pension rules in more than two decades, say lawyers in the field.

Pension and benefits lawyer Mark Dunsmuir, a Fraser Milner Casgrain LLP associate, there are a large number of amendments. As for the quality, he says the proposed changes, including extension of the grow-in benefit in DB plans and immediate vesting, could mean greater costs to employers.

“Amending pension legislation is a political minefield,” says Dunsmuir. “You are either drawing up something that is going to hurt the employers or employees. It is probably impossible to sort of carve out a middle line and you have to satisfy both parties because the politicians have constituents on both sides, both the employer and employee.”

Under the proposed legislation employees would be given immediate vesting, which means they would keep all the contributions made in their name from the start of the plan.
Companies offering plans would still be allowed to wait two years before enrolling an employee, however, under the new rules the employer could not wait an additional two years to vest the employee.

Grow-in rights refer to plans providing enhanced early retirement benefits, often an unreduced pension, even though an employee doesn’t meet age or service requirements when the plan winds up.

Elizabeth Brown, head of the Hicks Morley Hamilton Stewart Storie LLP pension and benefits practice group, says grow-in rights only apply to “employees whose employment is terminated under a wind up, a partial wind up, or a full-plan wind up.”

However, the new rules would apply to everyone who is terminated, without cause, regardless of the reason why, as long as they meet the “rule of 55.”

“Extending grow-in rights to everybody who has 55 age and service points is definitely going to be a cost for employers, no question about it,” she says. “Employers already have to fund their pension plans on a solvency basis, which does take into account grow in rights.”

The new rules do not address hot-button issues of pension law. These include new rules around pensions for employees of bankrupt companies, a public retirement program, or a relaxation of funding requirements.

Following the announcement of the amending legislation Ontario Finance Minister Dwight Duncan told the Globe and Mail the changes are not intended to be all encompassing, and a second wave of changes is expected in 2010.
“We want to get the easier things done and out of the way and then focus on the more contentious issues,” he said.

James Pierlot a lawyer with the employment-consulting firm Towers Perrin and executive on the Ontario Bar Association’s pension and benefits section says the current proposals are consistent with recommendations made in the Ontario Expert Commissions of Pensions’s report. However, the changes do not take into account  submissions given following the report.

Pierlot agrees the grow-in provisions will mean greater costs for employers who run DB plans. He questions legislation that considers the need for a pension regardless of how an employee involuntarily leaves a company, yet still operate on arbitrary service and age requirements to be eligible.

“If I am involuntarily terminated and I have 55 points I will grow into these early retirement benefits,” he says. “But what if I terminate with 54 points or 54.9 I don’t get [grow-in benefits]. So you get these bright-line tests with a threshold of 55 points whereas you cross over it your benefit can be very significantly greater, and if you are not lucky enough it is very significantly less.”

Pierlot says such an arbitrary pension system not desirable.
Specific amendments being proposed include:

•    Clarify the benefits of plan members affected by lay-offs and eliminate partial wind-ups. A partial wind-up occurs when only part of a pension plan is closed;