Canadian HR Reporter

CANADIAN HR REPORTER CANADIAN HR REPORTER May 19, 2014 May 19, 2014 FEATUR FEATURES 15 BENEFITS It's time for a rethink around LTD coverage for older employees Plans that only pay benefi ts for workers under 65 could face age-discrimination claims By Jeremy Bell E mployers and unions should re-think long-term disability (LTD) benefits for employees over age 65 be- cause a common provision — only paying benefits to those younger than 65 — may be sus- ceptible to age-discrimination claims. Sponsors and unions should proactively consider plan options to avoid reacting later. Many health and welfare ben- efi ts, as well as defi ned benefi t (DB) pensions, have elements of age discrimination — in favour of older workers. For example: Likelihood of death increases with age: With a fi xed-death ben- efi t, a 64-year-old receives about 10 times the value a 25-year-old would from a group life plan. Drug usage increases with age: Again, employees around age 65 will get about 10 times the value from an extended health plan, largely through drug cover- age, compared to a 25-year-old employee. e value of DB pensions in- creases similarly over time: Credit for a 25-year-old is worth far less than credit for a 65-year-old. e 25-year-old needs to wait 40 years before she starts to receive the pension. is waiting time means the pension credit is fi ve to 10 times more valuable for the older employee than the younger one. e value of LTD benefi ts in- creases over time, but only to a point: Older employees are more likely to become disabled and more likely to stay disabled. For employees aged 55 to 59, the cost of one year of standard LTD coverage — based on the expect- ed value an insurance company would be required to pay — is about 10 times that for employees aged 25 to 29. Put these factors together and employees approaching retire- ment — even those doing the same job at the same salary — will receive thousands of dollars more value each year through many benefi t plans than those at the be- ginning of their careers. Much of this type of discrimina- tion is accepted because the ben- efi ts are defi ned and all employees have the same access to benefi ts, regardless of age. e value diff er- ence occurs because of how em- ployees of diff erent ages interact with the same benefi t provisions. e vast majority of LTD plans limit coverage so benefi ts are not paid after age 65. Benefi ts in pay- ment cease at age 65 and benefi ts do not commence for anyone who becomes disabled after age 65. ere are many reasons why someone may want, or need, to receive income benefi ts after age 65. ey may not have suffi cient fi nancial assets or pension income to simply retire at 65. Younger col- leagues doing the same job would be eligible for signifi cant income replacement on disability. This type of discrimination is more diffi cult to justify than many of those discussed above. The benefit is non-existent for employees older than 65 and very low for those approaching 65. Justifi cation for age limit Presumably, employers require some valid justifi cation for the age 65 limit. To some extent, the limit has been around for so long and is so commonplace, many employers have not considered that justifi cation. Arguments in support of the age 65 limit include: •It's standard in the industry. •Canada Pension Plan (CPP) dis- ability benefi ts are payable to 65. •Pensions generally provide for normal retirement at 65. • ere is limited or no ability to purchase LTD insurance extend- ing beyond 65. •Insurance companies have de- veloped offerings around this age limit. • ere is a societal contract for employment and retirement built around retirement at 65. • e cost of increasing the age limit would be prohibitive. •An increased age limit would re- sult in similar age discrimination cases. If the age limit was removed, there would be a host of adminis- trative issues in determining how long LTD coverage would con- tinue for each person. Some of these arguments can be dismissed fairly easily, such as the lack of a marketplace for in- surance products. e market is thin and expensive as a result of limited demand, but the insur- ance industry is capable of insur- ing earnings in case of disability for those past age 65. Weakened justifi cation Some arguments, though, have more merit. e justifi cation for an age 65 limit on LTD benefi ts has become weaker in recent years, given that: •People are living longer and are healthier in their later years. In 1961, the Canadian life expec- tancy at birth was 68.4 years for males and 74.3 years for females. In 2011, the life expectancy at birth was 79.3 years for males and 83.6 years for females, ac- cording to Statistics Canada. •More Canadians are working beyond age 65 — 24 per cent of people 65 to 70 are still working, up from 11 per cent in 2000, ac- cording to the government. •DB pension plan coverage has decreased. In 1992, 38 per cent of Canadian workers were cov- ered by a DB plan. In 2008, 29 per cent were covered by such a plan, according to Statistics Canada. For the 71 per cent of workers without a DB pension plan, the employment-pension link to an age 65 retirement date is weak and oftentimes non-existent. •Mandatory retirement rules — those allowing employers and unions to compel retirement at age 65 — have been essentially eliminated. •In the federal budget in 2012, the eligibility age for Old Age Secu- rity (OAS) was increased from 65 to 67. is change is being imple- mented gradually, reaching full implementation by 2029. •Some workers' compensation schemes, in British Columbia for example, are now provid- ing limited income replacement starting after 65 and extending beyond 65. Putting it together e age 65 limit is extremely con- venient for the group benefi t in- dustry — it is easy to apply and it limits liability and thus employ er and employee costs. For a signifi cant majority of par- ticipants, existing LTD plans ef- fectively replace income over working lives: In other words, the plans do what they are supposed to do. But the policy does not serve those over age 65 at all. It invali- dates their need for employment income in spite of the strong in- dicator that many still require employment income — they are still working. Because of demo- graphics, workforce participation, mandatory retirement removal and OAS changes, the age 65 limit has started to look arbitrary and, thus, susceptible to renewed challenges. e age 65 limit may remain in place for some time. Inevitably, though, it will change. ere will come a time when enough people are working past 65 that it will be impossible to continue to deem their income unnecessary. ere are many implications to removing the age limit but the cost, regardless of who bears it, could be signifi cant. Employ- ers and unions would be wise to consider possible implications for their plans. Jeremy Bell is a partner at pension, benefits and investment consult- ing fi rm George & Bell Consulting in Vancouver. He can be reached at (604) 802-0959, (888) 800-1450 or jbell@ georgeandbell.com. Expert Training for Human Resources Professionals At RT Workplace Training Inc., Learn practical, hands-on skills to manage workplace investigation and employment law problems from RT's employment lawyers and training experts. RT Training Curriculum July 22 & 23, 2014 in Toronto The Employment Law Bootcamp This highly interactive course will provide participants with the skills they need to successfully navigate the employment relationship. Participants will walk away able to tackle challenging employment law issues in their workplaces. 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Once people have the neces- sary information and are not be- ing bombarded with sales pitches, they can relax and make good, in- formed decisions and concentrate on the service itself, says Duff ey. And since it's the insurance company that pays the fee to the funeral concierge service, em- ployees pay nothing for the em- ployer-provided benefi t. " is is something that, even though it never really existed out there, if you describe it to some- body, they go, 'Oh yeah, we need that,'" he says. That's especially true when people are snowed under with work and family obligations — from children and spouses to parents and in-laws. "Services for individuals which might not have been available or even wanted 20 years ago are now at the forefront of what people are thinking about. at's a lot to do with people (being) much more transient, they're busier, they're working… people are now look- ing for more services that'll help a very, very busy consumer," says Duff ey. " ey're under a fair amount of stress just trying to keep up with everything and they're looking for solutions." FUNERALS < pg. 13 Solutions provided Solutions provided

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