The Pension Benefits Amendment Act, 2009 (Bill 236) proposes to extend “grow-in rights” to all Ontario pension plan members whose employment is involuntarily terminated (other than for cause). While this measure was recommended in the Report of the Expert Commission on Pensions (the OECP Report) and comes as no surprise, it is one of the more controversial aspects of the Bill.

Currently, grow-in benefits are only available to members affected by a full or partial wind-up whose age plus years of total service equal at least 55. Such persons are entitled to any early retirement benefits provided under the plan that they would have “grown into” had both the plan and their employment continued until their early retirement date.

The Bill proposes to extend these benefits to all members who are involuntarily terminated by an employer (other than for cause) on and after January 1, 2012. Jointly sponsored pension plans and multi-employer pension plans may elect to opt out of this requirement.

This proposed change is part of a general initiative in the Bill to treat plan members uniformly regardless of the circumstances of their termination (i.e., whether they are terminated in the normal course or as part of a broader program). Such consistency is a worthwhile goal, since it makes little policy sense to provide this benefit to employees terminated in a special situation (e.g., plant shut down or other reorganization) but not those terminated in the normal course. But consistency of treatment among plan members could also have been achieved by abolishing mandatory grow-in rights (for those who had not yet met the eligibility requirements).

Abolishing mandatory grow-in rights would achieve uniformity with other provinces, none of which (except Nova Scotia) require grow-in rights. Even Nova Scotia appears to be moving away from mandatory grow-in rights. Since 2004 Nova Scotia has not required that grow-in rights be funded and the Nova Scotia Pension Review Panel (PDF) recommended in its recent report that mandatory grow-in rights be abolished. However, based on the OECP Report, Ontario ultimately determined that grow-in rights are desirable as a way to provide a bridge to early retirement for terminated middle age and older workers who typically face difficulties finding re-employment.

The expansion of grow-in rights could ultimately hurt the people it is intended to help. Grow-in rights only apply to plans that provide subsidized early retirement and other ancillary benefits, and there is no legislative requirement to provide these benefits. The expansion of grow-in rights forces sponsors wishing to provide these benefits to make them more widely available than they intended. I expect that the additional costs resulting from the expansion of grow-in rights will persuade some plan sponsors to eliminate these early retirements subsidy benefits altogether.

Furthermore, the expansion of grow-in rights raises certain administrative difficulties. First, disputes will no doubt arise between employers, employees and the Financial Services Commission of Ontario over whether a termination was for cause such that the member is not entitled to grow-in rights. Second, the expansion of grow-in rights further complicates the administration of multi-jurisdictional pension plans since, as noted above, none of the other provinces (except Nova Scotia) require grow-in rights.

If Bill 236 is passed with the current grow-in rights provisions, plan sponsors ought to look at the cost impact that these expanded rights will have on their plans well in advance of the January 1, 2012 effective date, so that they have ample time to consider whether or not they wish to make resulting changes to their plans (i.e., eliminate early retirement subsidy benefits). There may be legal obstacles to eliminating early retirement subsidy benefits that need to be considered, such as the removal of vested benefits, the requirements of collective bargaining agreements and employment law requirements.

Given the cost implications, plan sponsors will want to take steps to proactively manage any PBA mandated expansion of grow-in rights.