June 2009 Employee Benefits and Discrimination: Pitfalls and Best Practices by Rosanne Guindon, Legal Advisor, Julie Paquet, Senior Legal Advisor, and Marc-Hugo Petitclerc, Legal Advisor Managing employees and employee benefits involves applying standards that may impact employees rights and freedoms. Employers must be cognizant of that fact and ensure that all employees are treated equitably when standards are applied. This article is not intended to be a comprehensive study of discrimination in employment in Canada, as the legislation varies widely across jurisdictions. However, it does contain information that will assist employers who sponsor employee benefits plans in differentiating between acceptable practices and discriminatory practices with respect to those plans. In Canada, there are both federal and provincial laws governing human rights. One of the common objectives of these laws is the protection of each individual s right to be treated equally. The right to equality is understood as the right of a person to be treated without distinction, exclusion or preference based on any characteristic specified in the applicable legislation, such as race, colour, sex, family status, sexual orientation, age, religion, ethnic origin or disability. These characteristics are referred to as protected grounds. It is recognized that employee benefits are part of an employee's terms of employment and a component of total compensation. When exercising managerial rights and applying working conditions, an employer must act in a uniform fashion and avoid situations in which one individual is treated differently, whether intentionally or not, on the basis of any protected ground. Although an employer is not legally required to provide certain benefits, such as group insurance or a pension plan, if a benefit is offered to employees by an employer, it must be done so without discrimination. While granting different benefits to different groups of employees is not automatically discriminatory, there is a risk that such a practice will be considered discriminatory if the difference in treatment between groups of employees is based on a protected ground. Protection against discrimination has resulted in many legal decisions. In the course of these decisions, several guiding principles applicable to human rights in the employee benefit context have developed. The right to equality of treatment does not affect the general principle that an employer may require work to be performed in exchange for compensation and that such compensation may not be claimed by an employee who does not perform the requisite work. The courts have often recognized the distinction between employment-related benefits and benefits related to the performance of work. For example, an employee on parental or disability leave may be entitled to be considered for a promotion, but not necessarily for payment of a bonus. Furthermore, a standard which appears to be non-discriminatory, in that it does not specifically refer to a protected ground, may have a discriminatory effect; it is the result, not the intention, that is the determining factor. For example, a retail store's practice of periodically requiring its employees to work on weekends does not, on its face, appear discriminatory. However, the Supreme Court of Canada has ruled that the practice has a discriminatory effect on an employee whose religion requires strict observance of the Sabbath from sundown Friday to sundown Saturday. page 1
Working Conditions Many provinces have adopted employment standards legislation that contains provisions prohibiting discrimination in working conditions, including employee benefit plans. Most Canadian provinces have adopted legislative provisions prohibiting mandatory retirement unless there are bona fide or justifiable occupational requirements, given the nature of the employment. Further, case law indicates that occupational requirements may be invoked with respect to a specific job as long as it can be demonstrated that it would be impossible for the employer to accommodate employees without the employer suffering undue hardship. For example, the Supreme Court of Canada found, in a case involving police officers employed by an Ontario city, that an age 60 mandatory retirement policy for police officers is justified as a bona fide occupational requirement. It is interesting to note that, in several court and human rights tribunal decisions, age seems to have been treated slightly differently than other protected grounds, such as gender, race or religion. The courts, including the Supreme Court of Canada, have adopted a position that age seems to be less of a cause of discrimination and arbitrary denial of privileges than the other protected grounds. With respect to the delicate issue of absences, an employer must also be careful with respect to treating different types of employee absences or leaves in different ways. It has been considered discriminatory for an employer to give less vacation to an employee who is absent on parental leave than to an employee who is absent for another reason. Granting greater benefits to adoptive fathers than those offered to biological fathers is a distinction which has been considered discriminatory by the courts in some circumstances. On the other hand, treating biological mothers and adoptive mothers differently with respect to benefits has been considered not to be discriminatory. This is because, in some jurisdictions, pregnancy leave is viewed as time for a mother to recover from childbirth, whereas parental leave is viewed as time for all new parents, whether birth or adoptive parents, to spend time with their child. As well, different leaves of absence have been treated differently by their very nature. For example, it has been recognized that parental leave or paternity leave cannot be treated like pregnancy leave, which has enabled employers to offer certain benefits during pregnancy leave but to not offer those benefits during paternity leave or parental leave. Layoff policies must be applied uniformly to employees. In one case, where an employee complained that he was not able to receive layoff pay because he was on sick leave when the employer ceased business, a human rights tribunal ruled that the policy was discriminatory against the employee and sustained his claim for pay under the policy. In a unionized environment, if the union, as the employees' exclusive representative, plays a role in establishing discriminatory working conditions, both the employer and the union may be held responsible for discrimination experienced by an employee or group of employees as a consequence of such conditions. Insurance Plans In general terms, it is discriminatory to exclude people from insurance coverage or limit their benefits based either directly or indirectly on a protected ground. Accordingly, an exclusion from disability coverage during periods of pregnancy, regardless of whether the disability is pregnancy-related, is discriminatory. Likewise, a plan to insure employees against loss of income following incapacity because of disability will be discriminatory if the benefits are limited when an employee suffers from a mental disability but not when an employee suffers from a physical disability. However, it is standard under and expressly provided in some provincial laws that distinctions based on certain protected grounds, such as age and sex, may be made for purposes of administering an insurance plan when justifiable from an actuarial perspective. Aon Consulting Ready June 2009 page 2
The purpose of insurance coverage must be taken into consideration. For example, an insurance plan in which payments were reduced annually based on age was considered to be non-discriminatory because, for older employees, the objective of the insurance benefit was to cover death-related expenses, whereas for younger people the aim was to provide income for the surviving partner. Pension Plans A pension plan is also an important term of employment and component of an employee's overall compensation package. One of the basic tenets of pension plans is the use of age, years of service or other criteria related to protected grounds of discrimination as the criterion or criteria for determining eligibility for and the value of benefits paid from the plan. Provincial laws inherently allow for these forms of discrimination in allowing pension plans to exist and be administered in this manner. For example, an arbitrator considered that it was not discriminatory for an employer to stop contributing to a pension plan with respect to an employee when the employee reached age 65. As well, in the Gill case, the Federal Court recently concluded that it was not discriminatory to stop participants from accruing pensionable service after attaining age 71. Implementing Non-Discriminatory Employment Policies Regardless of an employer's intentions, it could be faced with a potentially discriminatory situation if it is not careful when creating new policies and implementing existing policies. Given the many court and human rights tribunal decisions made with respect to the right to equality, it is advisable for an employer and any applicable union to put safeguards in place to ensure fair treatment of all employees. The objective of all policies adopted by an employer must be reasonable and not discriminatory. To make certain that a policy does not have an illegal, discriminatory effect, its impact on employees who might be included under one of the protected grounds must be evaluated. This is done by comparing the effect of the policy on a subgroup of employees who are potentially victims of discrimination on the basis of a protected ground and a subgroup comprising the rest of the employees in the category. An employer should create policies that enable it to achieve its objectives without being discriminatory based on any of the protected grounds. A discriminatory policy will generally not be valid unless it can be demonstrated that the standard is related to a bona fide occupational requirement. Conclusion The establishment and administration of employee benefits are complex tasks for many employers because of the obligations imposed by legislation and the courts. Contact your Aon consultant for help in identifying and avoiding potential pitfalls. Aon Consulting Ready June 2009 page 3
What Returns Do the Markets have in Store Over the Next Few Years? by Robert Auger, Senior Consultant At the start of each year, Aon prepares long-term return assumptions and determines the inherent risk for each major asset class typically found in pension funds. The long-term horizon covers a period of 10 years. These assumptions are generally used in all Aon asset/liability and asset optimization studies. The assumptions are set by the Economic Assumptions Committee (Assumptions Committee), which is composed of members of Aon s Canadian Investment Consulting practice. The methodology used to determine the assumptions is more precise when it comes to predicting long-term returns, as compared to short-term returns. Due to the nature of the long-term predictions, the assumptions change very little from one year to the next. However, the long-term expectations are adjusted according to market conditions. For example, the performance expectations for stock markets are raised when the market has experienced a sharp price correction, lower profits and a more favourable valuation. In 2008, all of these market conditions existed and therefore allowed us to raise the stock market expectations over a 10-year period. It is also possible, however, that stock markets will deteriorate in the short-term. Current conditions, with low interest rates and wide credit spreads, are also included in the predictions. The risk assumptions are based on historical long-term returns. Ten-Year Annual Return Assumptions Asset Class Expected Returns Volatility Value at Risk (Standard Deviation) (95%) Value at Risk (99%) Universe Bonds 3.9% 6.3% -6.0% -9.7% Canadian Equities 8.5% 15.6% -23.0% -40.8% Global Equities 8.6% 14.0% -15.1% -28.7% Real Estate 6.2% 7.5% -5.6% -10.1% Hedge Funds 6.9% 8.3% -6.0% -11.1% Diversified Funds 6.7% 8.4% -9.0% -19.2% Simulations for Annualized Returns Over a 10-Year Period Asset Class Expected Returns Volatility Value at Risk (Standard Deviation) (95%) Value at Risk (99%) Universe Bonds 3.7% 0.8% 2.4% 1.9% Canadian Equities 7.4% 5.9% -3.1% -7.8% Global Equities 7.8% 4.7% -0.2% -4.5% Real Estate 6.0% 2.4% 2.1% 0.6% Hedge Funds 6.6% 2.5% 2.4% 0.9% Diversified Funds 6.4% 2.8% 1.5% -0.9% Based on the assumptions, the expected average annual return over the next 10 years for a diversified portfolio consisting of 40% bonds, 30% Canadian equities and 30% global equities, is 6.7%. When annualized over a 10-year period, this return would be 6.4%. Projected annualized returns are always lower than projected average annual returns because they take into consideration the effect of compounding, including negative returns for certain years. The return assumption models used by Aon are based on a passive management style. However, active management parameters may be considered in a context of risk budgeting and management structure optimization. Value at risk represents the risk of a probable loss over one year based on a given probability. For example, it is estimated that, for Canadian equities, there is a 5% chance that the return will be less than -23% in a given year. In 2008, the Canadian equity market posted a return of -33%, confirming that this risk has materialized. Meanwhile, the median for the Aon Universe balanced fund was -16.5% in 2008, which is closer to the 99% value at risk measured in the assumptions of -19.2%. Aon Consulting Ready June 2009 page 4
Pension Fund Management Aon Survey on the Performance of Institutional Pooled Funds We are pleased to present the results of the Aon quarterly survey on the performance of institutional pooled funds. The survey covers more than 350 pooled funds which are actively managed by over 100 Canadian pension fund managers. The following table illustrates the performance of the funds by asset class for various periods ending March 31, 2009. (1) (2) Average annual returns for the periods ending March 31, 2009 5 Yrs 3 Yrs 1 Yr 3 months Balanced Q1 3.0-2.1-13.8-1.6 Median 2.3-3.2-16.6-2.5 Q3 1.8-4.2-18.5-3.7 Fixed income securities Q1 5.2 5.3 4.5 1.9 Median 4.7 4.8 3.2 1.6 Q3 4.3 4.0 1.9 1.3 DEX - Universe 5.2 5.4 4.9 1.5 Canadian Equity Q1 4.3-6.2-28.3-1.1 Median 3.0-7.5-30.9-2.3 Q3 2.0-9.5-33.6-4.0 S&P/TSX Composite 2.8-7.8-32.4-2.0 S&P/TSX Capped Composite 2.8-7.8-32.4-2.0 US Equity Q1-4.1-8.8-19.5-6.1 Median -4.9-11.0-23.3-7.6 Q3-5.9-12.3-25.9-9.4 S&P500 (CA $) -5.6-10.8-24.1-9.3 International Equity Q1-1.7-10.3-31.6-9.2 Median -2.9-11.6-33.5-10.4 Q3-3.9-13.4-35.5-12.5 MSCI - EAFE (CA $) -2.6-11.9-34.0-12.2 (1) With the exception of the three-month and one-year periods for which returns have not been annualized. (2) Returns before management fees. Source: Presented results combine pooled funds returns coming from Aon survey and Morningstar Direct database. Aon Consulting Ready June 2009 page 5
Aon Consulting publishes Ready for the purpose of providing general information. The information in Ready does not constitute financial, legal or any specific advice and should not be used as a basis for formulating business decisions. For information tailored to your organization s specific needs, please contact your consultant at Aon Consulting. This issue of Ready contains information that is proprietary to Aon Consulting and may not be distributed, reproduced, copied or amended without Aon Consulting's prior written consent. Aon Consulting Ready June 2009 page 6