Employers cut costs at termination, but overlooked pension thresholds drive the biggest liabilities
A single missed pension “magic number” at termination can erase hundreds of thousands of dollars in lifetime income — and Canadian courts increasingly treat that as a severance problem, not just a pension design issue.
According to an opinion piece in the Financial Post by employment lawyers Howard Levitt and Jack Powles, when an employee is terminated without cause, the law aims to put them in the same financial position they would have been in had they worked through the full reasonable notice period.
That means severance must reflect 12 months of employment, monetized, not just 12 months of base pay.
Levitt and Powles say reasonable notice has to cover the entire compensation ecosystem: health and dental benefits, bonuses, commissions, stock plans, car allowances and, critically, pension accrual.
They argue that employees and even their lawyers still focus too narrowly on salary, leaving substantial value on the table, while employers are “delighted” when that happens.
They describe a settled principle: benefit plans must either continue during the notice period or be compensated in cash.
Bonuses that would have vested may be payable, commissions must be included and pension contributions must be addressed.
Anything else is, in their view, a risky legal shortcut.
In Financial Post's piece, Levitt and Powles say pensions are often a long‑service employee’s largest asset after their home.
Both employment standards legislation and the common law protect pension entitlements through the notice period, and the statutory minimums are only a floor.
At common law, they say, employers must compensate for the pension value that would have accrued if the employee had worked through the full reasonable notice period.
Practically, that means severance must include pension growth over the notice period.
As Levitt and Powles explain, for defined contribution plans this usually means missed employer contributions plus investment growth.
The exposure can be “dramatically more expensive” because valuing one or two extra years of credited service often requires an actuary and can produce a present value that exceeds the employee’s annual salary.
The most explosive issues, they say, arise where plans have thresholds — the “magic numbers” — that confer unreduced pensions once age plus service reaches a set total.
They describe a common rule: unreduced retirement when age plus years of service equals 90.
A 63‑year‑old with 27 years of service crosses the line; a 62‑year‑old with the same service does not.
According to the Financial Post opinion piece, that one‑year difference can mean hundreds of thousands of dollars over a lifetime.
In their example, the older worker can retire on an unreduced pension, while the younger sits just short of entitlement and is uniquely exposed.
A termination “at the wrong moment,” they say, can wipe out decades of accumulated pension value.
Levitt and Powles argue that some employers understand this arithmetic and see an obvious temptation: terminate just before the pension milestone to avoid crystallizing a costly benefit.
They state that the law does not reward such timing and point to Ontario case law that treats proximity to major pension entitlements as a factor in setting reasonable notice.
They highlight Arnone v. Best Theratronics Ltd. as a leading illustration.
As they recount it, a 53‑year‑old manager with 31 years of service was 16.8 months short of an unreduced pension. The employer provided only minimum termination pay.
The court, according to Levitt and Powles, found it unfair and unrealistic to ignore the imminent pension milestone.
The judge awarded damages equal to the salary the employee would have earned over the remaining 16.8 months plus a lump sum for the permanent enhancement in pension value he lost.
In effect, the court bridged him to the pension date and paid the pension difference in cash.
Levitt and Powles say the message for employers is clear: if a worker is only months away from a major pension entitlement, reasonable notice may extend to that milestone, whatever it does to the balance sheet.
They conclude that severance “is not about salary alone. It never was,” and urge employees nearing retirement or service thresholds to scrutinize pensions as closely as base pay.
In their view, employers who fail to factor pensions and other benefits into severance “invite litigation — and will lose.”
