In response to the economic slowdown, many employers will look for ways to reduce pension and benefits costs, or at least to offset increases in those costs. Lower profitability and, in the public sector, reduced funding will force renewed focus on cost containment.
Defined Benefit Pension Plan Changes
Some of the changes to defined benefit pension (“DB”) plans that employers may consider include:
- Reduce, defer or eliminate ancillary benefits such as early retirement subsidies, subsidized survivor benefits and cost-of-living increases.
- Close the DB plan to new participants and instead offer a defined contribution (“DC”) plan or other benefits to new hires.
- Freeze accrual of defined benefits and offer a DC plan for future service. Conversion of accrued defined benefits involves costs and legal risks that need to be carefully considered, as well as member consent.
- Wind up the plan. However, this will crystallize liabilities and impose a five year funding schedule on any deficit.
The amount or accrued value of most pension benefits cannot be reduced retroactively, although reductions in ancillary benefits (such as bridging benefits and some early retirement benefits) are permitted if a member has not yet met all eligibility requirements. Some plan changes might be expected to reduce contribution requirements in the long run, but have little impact in the short term. Actuarial advice is needed to assess the short and longer term funding impacts, as well as the accounting impact.
Changes to pension and benefit plans need to be considered and planned in light of the legal challenges that can flow from them. The law is continuing to evolve with respect to major changes to a plan (see, for example, Kerry (Canada) Inc. v. DCA Employees Pension Committee, 86 O.R. (3d) 1 (C.A.)).
Defined Contribution Plan Changes
Employers that want to tie the cost of their DC programs to profitability might consider using a deferred profit sharing plan (“DPSP”) in which the employer contribution is determined as a percentage of profit in the current year. Those employers who currently provide a DPSP merely as a means of making employer DC contributions may want to revisit the basis for determining contributions.
Apart from reducing costs, it is prudent to review investment options offered to participants, particularly as many employees have discovered that they have little appetite for volatility and downside risk. Some employers may wish to consider offering investment funds that provide capital guarantees.
Other Benefit Changes
To reduce costs of health and welfare plans, some employers might revisit the selection of health and welfare benefits provided to employees or the costsharing arrangements with employees. Employers that provide flexible benefit plans might change the price tags for benefits and, depending on the change, reduce the employer portion of the cost of the plan.
Retiree benefits can be particularly costly, both in accounting treatment and cash outlay. Reductions in these benefits will have differing accounting and cash impacts; the employer needs to be clear about which issue is of greater concern. Some retiree groups may be willing to accept the introduction of higher deductibles and co-payments, or even premiums, if it means that the underlying insurance coverage remains. Whether benefits can be reduced for current retirees requires determination of whether the benefits are “vested”, which depends on the terms of the benefit grant.
There might also be changes that have no direct impact on the benefits that are provided. There may be cost savings in changing to an administrative services only basis for some benefits. Money may be available in an unrestricted deposit account which, depending on who has equitable ownership of the account, might be used for benefit costs or be refunded directly to the employer.
Labour and Employment Law Implications
Pensions and benefits are part of the terms and conditions of employment. It is important to obtain a labour and employment law perspective before making material changes to them. Changes for unionized employees (and former employees in some cases) may require bargaining. Changes for non-unionized employees should be considered in light of notice requirements at common law and possible claims for constructive dismissal. For a discussion of a recent Ontario Court of Appeal decision that may be relevant to these issues, see Wronko and Changes to Pensions and Other Post- Employment Benefits.