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Defined Benefit Pension Plans And Lump Sum Severance Packages

Defined Benefit Pension Plans and Lump Sum Severance Packages

An employee may be a member of a Defined Benefit Pension Plan (“DB Pension Plan”) as part of his/her remuneration package. The DB Pension Plan is a significant term of the employee’s remuneration package. If an employee is terminated and paid severance in a lump sum amount, he/she ceases to accrue credited service in the DB Pension Plan which effects its value.  Given that the employee is not continuing to accrue credited service in the DB Pension Plan during the reasonable notice period, the employee has incurred a pension loss for which he/she is entitled to be compensated for as part of his/her claim for wrongful dismissal damages.

Some Issues that an Employee may want to consider in the Negotiation of a Severance Package

What is the amount of the pension loss incurred in the DB Pension Plan on account of not accruing credited service during the reasonable notice period?  What are the tax implications for receiving a payment today (given that the employee’s income is higher today than it will be during retirement) as compensation for the pension loss in the DB Pension Plan and how are the tax consequences dealt with in the actual determination of the  pension loss? Alternatively, should the employee consider proposing that the severance package be paid on a salary continuance basis (not subject to mitigation) with the term that he/she will continue to accrue credited service in the DB Pension Plan so long as he/she is paid salary continuance.

 

The amount of the pension loss is relevant to assessing the true value of the Company’s severance offer.

 

This is for informational purposes only and does not constitute legal advice. Readers are cautioned against making any decisions based on this material. Rather specific legal advice should be obtained.

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