Hospital exec’s retention bonuses ruled not pensionable

Hospital exec’s retention bonuses ruled not pensionable
Had the retention bonuses been pensionable, the pension benefit would have been much higher than the value of the contributions. Photo: Shutterstock
In-house counsel and pension plan administrators may want to review how retention bonuses are treated when it comes to employee’s pensionable earnings following a case involving a hospital executive in Ontario.

In Shaw v. Healthcare of Ontario Pension Plan, the question at issue was whether retention bonuses promised to an employee should be considered pensionable earnings under his pension plan.

“The interesting thing in this case is that in interpreting the plan the court looked at the effect on all plan members, not just between Mr. Shaw and HOOPP,” said Christopher Mayer, an associate with Blake Cassels & Graydon LLP, who was presenting at a Nov. 8 seminar on recent developments on pensions and benefits law.

Over his career, Gregory Shaw worked with four Ontario hospitals and the Ontario Hospital Association as a senior human resources executive. He had been accruing pension benefits in the HOOPP since 1983.

In 2008, Shaw and the OHA negotiated an employment agreement in which severance provisions were replaced with non-discretionary retention bonuses paid in addition to his salary. During the negotiations, the OHA retained an actuary to provide the OHA with estimates of the effect of Shaw’s pension benefit entitlements, but HOOPP was not involved.

Shaw said he agreed to the retention bonus amendment because the actuarial valuations indicated he would have a higher pension benefit than with the original agreement that included a severance.

Towards the end of his employment, Shaw was entitled to receive three retention bonuses, one year apart. The bonuses were to be $100,000 paid on Nov. 1 2009, $150,000 on Oct. 31 2010, and $225,000 on Oct. 21, 2011.

The bonuses were not discretionary — they were to be paid even if employment ended in accordance with his employment contract.

Shaw received the first bonus of $100,000 minus $9,600 deducted as his required contribution to the plan, which was sent by OHA to HOOPP for deposit. HOOPP took the position at trial that the purpose of the $9,600 remittance at the time it was paid was misrepresented, or at least incomplete.

Shaw’s employment was terminated by the OHA in May 2010 without cause. He argued the retention bonuses should be included in his pensionable earnings, which would have increased his pension entitlement significantly when factoring in his best five years earnings.

In July 2010, he brought an application for a declaration that the retention bonuses were pensionable earnings. At trial, the pension plan argued the bonuses should be excluded from calculating Shaw’s pension entitlement. To decide the issue the Superior Court of Justice looked at the HOOPP plan and Shaw’s employment contract.

The HOOPP plan indicated that “pensionable earnings included wages, salary and other amounts paid in relation to hours, weeks or other specific periods of time in which a member is employed, and that form a regular and integral part of the member’s remuneration.”

“The court didn’t have much trouble with the first part of that definition,” said Mayer. “The bonuses were other amounts paid in relation to specific periods of time. But what it did get caught up on was whether the bonuses were a ‘regular and integral’ part of Mr. Shaw’s remuneration.”

According to Mayer, the interesting aspect of the case is in interpreting what “regular remuneration” meant. The court looked at the funding effect on the plan of having these bonus payments included as part of pensionable earnings. Had the retention bonuses been considered pensionable, they would have resulted in a pension benefit much higher than the value of the contributions, resulting in a funding deficit.

The court decision states: “The three payments to Mr. Shaw have a combined value of $475,000. If those payments were considered to be pensionable, Mr. Shaw would contribute 9.6 per cent, or $45,600, to the Plan. Those contributions, however, would give rise to a pension benefit the present value of which is $1.275 million, nearly 28 times the value of the contributions themselves. OHA would also be required to make contributions, and while there is no evidence as to what amount would have to be paid by OHA resulting from the total payments of $475,000, it would be some fraction of that, with the result that the bulk of the present value of $1.275 million would have been unfunded.”

“It didn’t just look at frequency, or how often they were paid, it looked at the pension Mr. Shaw would have obtained from having these bonuses included and noted that it would be several times higher than the contribution amount made by Mr. Shaw and the OHA regarding the bonuses,” he said.

The court decided the bonus amount was not covered by the contribution amount, and indicated a pension plan must be interpreted according to its main purpose which is to provide a pension funded on actuarial assumptions fair to all employee beneficiaries under the plan.

The actuarial assumptions include long-term earnings assumptions which require payments by the employee which should reflect those assumptions, the court said.

“So part of what is regular is part of what we assume in our long-term earnings assumptions and as a result the bonuses were not regular and not included in pensionable earnings,” said Mayer.

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