Module 4: Complying With Pension Standards Legislation

Question 1

Compare the focus of pension standards legislation with that of income tax regulations.

Answer 1

The terms and operations of a registered pension plan are governed primarily by pension standards legislation. Under pension standards legislation, the operation of a pension plan is guided by a comprehensive set of rules. Pension regulators have the duty and remedial authority to enforce compliance with these rules.

Pension plans are regulated from two perspectives—the control of the terms and operations of the plan and maximum limits on the tax deferral available. Improving benefit security by the terms and operations is the primary focus of pension standards legislation. The federal government controls the tax shelter provided for pension plans through the Income Tax Act (ITA).

Question 2

Explain the function of the Agreement Respecting Multi-Jurisdictional Pension Plans (MJPP Agreement).

Answer 2

The MJPP Agreement replaced the 1968 Memorandum of Reciprocal Agreement, which was the first attempt to help determine the jurisdiction in which a pension plan is to be registered. Finalized in 2011, and amended since that time, the MJPP Agreement has since been adopted by a majority of Canadian jurisdictions. The original Memorandum of Reciprocal Agreement continues to apply to Manitoba and Newfoundland and Labrador, who have not adopted the MJPP Agreement.

The rules for determining where a plan is registered are set out in the MJPP Agreement. Additional functions of the MJPP Agreement include the following.

(a) It identifies provisions that are subject to the jurisdiction where the plan is registered (the “major authority”), such as plan registration, administrators’ duties, plan records, funding, investments and provision of information to members. Member rights (except for annual statement requirements) are mostly reserved to the province of employment.

(b) It provides a mechanism for transferring jurisdiction from one province to another.

(c) Finally, it provides rules for the enforcement of rules by the “major authority” and transition provisions as well as for asset allocation between jurisdictions on the wind-up of a multi-jurisdictional pension plan.

Question 3

Describe how pension standards legislation applies to a pension plan that operates in more than one jurisdiction.

Answer 3

Pension plans are generally registered in, and supervised by, the jurisdiction in which the plurality of active members is employed. A plan operating in more than one jurisdiction must comply with the funding standards of the jurisdiction of plan registration and must apply to each individual member the particular benefit standards rules of that member’s jurisdiction. The regulator of the jurisdiction in which the pension plan is registered is expected to enforce all applicable benefit standards, including those of other jurisdictions. The rules for determining where a plan is registered are set out in the MJPP Agreement.

Question 4

Describe the progress made by the Canadian governments and the Canadian Association of Pension Supervisory Authorities (CAPSA) in moving toward uniform pension legislation.

Answer 4

One of CAPSA’s prime objectives was to work toward uniformity in pension legislation across jurisdictions, and two major efforts were made in this area. The first, the 1993 “Multilateral Agreement Among Canadian Jurisdictions Respecting Pension Plan Regulation and Supervision,” suggested that a pension plan would generally be governed entirely by the pension legislation of the jurisdiction in which the plan is registered. This proved problematic for governments to accept, and the draft agreement was never adopted.

Various attempts were made by CAPSA to harmonize Canadian pension legislation after that time, culminating with the 2008 “Report on CAPSA’s Work on Regulatory Principles for a Model Pension Law.” The Report noted CAPSA’s decision to cease work on principles viewed as contentious, since it would be difficult to achieve stakeholder consensus in light of strong disagreements.

CAPSA’s mandate has since shifted to facilitate an efficient and effective pension regulatory system in Canada.

A degree of harmonization appears to be emerging as pension regulators and government officials share information and agree on best practices in pension regulation. Nova Scotia pension legislation tracks Ontario legislation quite closely, and Alberta and British Columbia adopted nearly identical pension benefits standards legislation in 2014 and 2015.

Question 5

Identify minimum eligibility and membership requirements for membership in a pension plan generally required by pension standards legislation.

Answer 5

Pension standards legislation generally requires that every full-time employee who belongs to the class of employees for whom the plan was established must be allowed to join the plan after two years of employment.

In most jurisdictions, part-time employees who are in the same class as eligible full- time employees and who have earned at least 35% of the year’s maximum pensionable earnings (YMPE), as defined under the Canada Pension Plan (CPP), for two consecutive years must be allowed to join the pension plan. Alternatively, the employer may set up a separate plan for part-time employees if it provides reasonably equivalent benefits.

An employer can make plan membership optional or mandatory for its employees, except in Manitoba where membership is always mandatory once the eligibility condition has been met, with certain exceptions. In addition, Alberta and British Columbia legislation explicitly permits “auto-enrollment,” in which employees are automatically enrolled if they do not opt out within a specific time limit.

Question 6

Describe the criteria within pension standards legislation used to establish the general minimum vesting and locking-in requirements in a pension plan.

Answer 6

The completion of a specified period of employment or plan membership is the criteria used to establish the general minimum vesting requirement in a pension plan. These are also the criteria for the locking-in of a member’s pension.

Question 7

Outline the general requirements of pension standards legislation about normal retirement date or normal retirement age. Provide three examples of established rules.

Answer 7

All jurisdictions require that a pension plan contain rules concerning the earliest age, or normal retirement date, at which a pension is paid without reduction, or the normal retirement age for the plan. In Ontario, Nova Scotia and New Brunswick, normal retirement age cannot be later than one year after age 65. In Quebec, this age cannot be later than the first of the month following the month in which age 65 is reached. Some jurisdictions leave the normal retirement age to the discretion of the employer.

Question 8

Identify employers’ options generally allowed by pension standards legislation regarding plan rules for pension plan members who remain employed beyond normal retirement age (NRA).

Answer 8

Generally, the plan can provide that such a plan member can either:

(a) Delay receipt of pension and continue to earn benefits, subject to any plan rules concerning maximum service or benefit amounts or, as an alternative,

(b) Commence receiving the pension at NRA even though employment continues.

Question 9

Identify the most common minimum requirement of pension standards legislation concerning death benefits before pension commencement from a pension plan.

Answer 9

For a defined benefit pension plan, the most common minimum requirement concerning death benefits before pension commencement is that 100% of the commuted value of the vested pension earned by the member must be paid as a death benefit.

For a defined contribution pension plan, the most common minimum requirement for a preretirement death benefit is 100% of the member’s defined contribution account.

Question 10

Identify the most common minimum requirement concerning death benefits after pension commencement from a pension plan under pension standards legislation.

Answer 10

In all jurisdictions, for a plan member who has an eligible spouse (as defined by pension standards legislation) at the time of pension commencement, the form of pension that must be paid is a joint and survivor pension, unless a waiver is signed by the spouse. The amount of pension payable to the spouse after a plan member’s death cannot be less than 60% of the pension the plan member was receiving.

Question 11

Explain how the requirement for nondiscrimination by gender affects pension plans regulated by pension standards legislation.

Answer 11

Pension standards legislation in all jurisdictions, with the exception of Newfoundland and Labrador and Quebec, prohibit the use of different eligibility rules for plan membership, different employee contribution rates and different pension benefits based on the sex of an employee. Generally, this restriction applies only to benefits earned after the effective date of pension reform. Quebec mandates the use of a sex-distinct mortality table for benefit calculations.

Question 12

Describe the locked-in vehicles generally available to terminating pension plan members who wish to exercise the portability rights provided under pension standards legislation.

Answer 12

Portability refers to the ability of a DB plan member to transfer the commuted value of their deferred pension, or the value of their defined contribution account, for members of DC plans, to another retirement savings arrangement upon termination of employment.

The locked-in retirement savings arrangements to which a terminating member is entitled to transfer their benefits include:

(a) Another pension plan if that other plan permits or a Pooled Registered Pension Plan (PRPP) or Voluntary Retirement Savings Plan (VRSP), depending on the jurisdiction

(b) A locked-in RRSP or Locked-In Retirement Account (LIRA), depending on the jurisdiction

(c) A Life Income Fund (LIF) or Locked-In Retirement Income Fund (LRIF), depending upon the jurisdiction

(d) A Registered Retirement Income Fund (RRIF)

(e) An insurance company for the purchase of an immediate or deferred life annuity.

Question 13

Identify the general exceptions to the locking-in rule under pension standards legislation that permit a pension plan to pay a cash sum to terminating employees.

Answer 13

Exceptions to locking-in rules apply to:

(a) Employees who terminate before meeting the vesting requirement of a contributory pension plan

(b) Terminating employees whose life expectancy is shortened

(c) Additional voluntary contributions

(d) Prereform pensions (amounts differ by jurisdiction)

(e) Excess amounts under cost sharing (50% rule), in most jurisdictions

(f) Pension amounts under the small benefit thresholds set by various jurisdictions.

Note that in nearly all cases, if there is a spouse, spousal consent is a precondition to unlocking pension funds.

Question 14

Describe how individuals in some jurisdictions may be able to access funds in locked-in vehicles in the case of financial hardship. Provide some examples of circumstances that may qualify for unlocking.

Answer 14

It is not possible for an active member of a pension plan to access benefits under the plan (that is, to “unlock” the monies). However, a pension plan member who has terminated membership in the pension plan and subsequently transferred their DB pension plan benefit—or the value of their defined contribution account, for members of DC plans—to a locked-in vehicle, such as a LIRA or locked-in RRSP, may apply to the administrator of that vehicle for reasons of financial hardship. A locked-in account holder can apply to the pension regulatory authorities in the jurisdiction for permission to unlock the funds.

The account holder must meet specific qualifying circumstances set out in the applicable legislation. Qualifying circumstances include such things as the necessity to pay first and last month’s rent, to pay for medical treatment, to renovate property, to accommodate for illness or disability, or low income below a specified threshold, etc.

Question 15

Outline the portability rights of plan members who have attained retirement age under pension standards legislation.

Answer 15

In all jurisdictions it is permissible, but not mandatory, for a pension plan to provide portability rights to plan members who have attained early or NRA for a DB plan.

Some jurisdictions require a plan to provide portability rights to DC plan members who have reached early retirement age but not NRA. Alberta, British Columbia, Manitoba, New Brunswick and Quebec give portability rights to a DC plan member upon termination of employment at any age. In practice, plan sponsors typically allow portability out of a DC plan at any age, since in most cases the only alternative for a DC account is the purchase of an annuity.

Question 16

Describe the options available to DC plan members when retiring from those types of plans.

Answer 16

The pension benefit provided under a DC pension plan is comprised of a life annuity purchased from an insurer using the member’s account. In reality, most DC members transfer their benefits to a LIRA or a locked-in Registered Retirement Savings Plan (RRSP), and then to a Life Income Fund (LIF).

ITA and some jurisdictions’ pension standards legislation also allow a DC pension plan to make LIF-style payments directly from the member’s account within the pension plan. This allows members to keep their accounts within the plan through retirement.

While the majority of jurisdictions allow for variable benefit payments from DC pension plans, few DC pension plans actually offer this type of option for a retiring member. There is a clear benefit for the retiring member, who should be able to access lower investment fees through their employer-sponsored plan than through a retail investment product. However, governance requirements associated with continued membership of retirees can be seen as onerous by plan sponsors, and even if this is not the case, service providers (primarily insurers) must be willing to establish variable benefit accounts within the pension plan. For smaller DC pension plans, these two matters may impede members’ access to variable benefit accounts.

Question 17

Explain how pension standards legislation imposes minimum cost sharing requirements within contributory DB pension plans.

Answer 17

Cost sharing is a minimum standard applicable to contributory DB pension plans. It is commonly referred to as the “50% rule.” It requires the employer to pay for a minimum percentage equal to 50% of a member’s pension entitlement. All jurisdictions require contributory DB plans to provide employer cost sharing. The 50% rule is applied at the time of an employee’s death or termination of service.

There are a few exceptions to the 50% rule. In New Brunswick, the 50% minimum limit applies unless the pension plan specifies a different percentage. Plans subject to the federal Pension Benefits Standards Act (PBSA) do not have to apply the 50% rule if the pension plan provides for the annual indexation of deferred pensions (to payment date) at a rate that is at least 75% of the increase in the consumer price index (CPI), less 1%, or an equivalent rate acceptable to the federal authorities. Plans registered in British Columbia can be exempted from the 50% rule if they provide indexing as described in the federal PBSA.

Question 18

Identify the options available to a DB pension plan member who has excess contributions as determined by the minimum employer contribution rule (50% rule) under pension standards legislation.

Answer 18

If a DB plan member has excess contributions as determined by the minimum employer contribution rule (50% rule) contained in pension standards legislation, when the member terminates service (including retirement) or dies, the excess contributions may, depending on the jurisdiction, either be:

(a) Refunded

(b) Used to increase pensions

(c) Used to purchase an annuity

(d) Transferred to another pension plan, if that plan permits

(e) Transferred to an RRSP

(f) Transferred to a prescribed registered income fund (e.g., Life Income Fund).

Question 19

Outline the approach to providing inflation protection to DB pension plan members under pension standards legislation.

Answer 19

In most jurisdictions, it is not necessary to provide inflation protection. In Quebec, partial indexation is required under certain conditions. In Ontario, pension standards legislation contains provisions that appear to mandate inflation protection. However, the legislation stipulates that the inflation protection be provided according to a prescribed formula. Ontario has not prescribed the formula for such indexation and so the requirement is treated as having no force or effect. A federally regulated pension plan must provide either employer cost sharing or inflation protection for pensions at the rate of 75% of increases in the CPI minus 1%. British Columbia pension standards legislation also uses the federal approach for inflation protection.

Question 20

Describe protections provided under pension standards legislation to employee contributions made to a pension plan.

Answer 20

Employee required and voluntary contributions to a pension plan that are received by an employer from the member or deducted directly from an employee’s pay are deemed to be held in trust until deposited to the pension fund. Each jurisdiction requires the employer to remit employee contributions to the pension fund within certain time frames.

Question 21

Outline the general minimum requirement concerning interest on employee contributions under pension standards legislation.

Answer 21

All jurisdictions require that a prescribed minimum rate of interest be credited to employee-required and voluntary contributions.

Generally, the annual rate of interest credited to employee contributions made to a DC pension plan is the investment rate of return earned by the pension fund, or if the plan allows members to choose between two or more investment choices, the investment rate of return earned by their DC pension account, less administration expenses if the plan so provides.

For employee-required contributions to a DB pension plan, most jurisdictions permit the pension plan to provide a rate based on five-year, personal fixed-term, chartered bank deposit rates averaged over a period not exceeding 12 months, or the rate of return earned by the pension fund less administration expenses.

Question 22

Explain how pension credits are treated on marriage breakdown under pension standards legislation.

Answer 22

Pension benefits are matrimonial assets and are subject to division unless the legislation specifically states otherwise. As such, all provinces treat pension benefits as family property.

Question 23

Outline the general approach to pension credit splitting within Canadian jurisdictions.

Answer 23

Regulations concerning the splitting of pension credits differ considerably among jurisdictions. The federal jurisdiction adopts pension division rules based generally on the member’s province of residence. In most cases, the former spouse will be eligible for an immediate transfer of benefits. The primary exception is for a retired member in receipt of a pension from a DB plan, where often the former spouse is only entitled to a share of the member’s ongoing pension benefits.

All jurisdictions permit separating spouses to offset the value of pension benefits against other matrimonial assets, as opposed to dividing actual pension benefits. Manitoba requires specific procedures where a spouse intends to opt out of otherwise mandatory pension splitting.

Question 24

Describe how pension standards legislation deals with marriagelike relationships and same-sex marriages.

Answer 24

The provinces regulate spousal status under pension benefits standards legislation. Each jurisdiction, including the federal jurisdiction, specifies which spousal relationships are recognized for the purposes of pension plan entitlements. The definition of spouse is important in determining entitlements to preretirement death benefits as well as survivor pensions after retirement. In addition, the unlocking of pension benefits is typically subject to the spouse’s consent, where applicable.

Spousal status “at the relevant time” is the determining factor for benefit determination. In some jurisdictions, a survivor pension or preretirement death benefit is not payable to a spouse who is living separate and apart from the member “at the relevant time.” Other provinces require a minimum separation period or provide benefits to separated but married spouses.

Pension standards legislation varies in a number of ways across jurisdictions, including the definition of “spouse” and similar terms, the period of cohabitation required for recognition of a common-law relationship, the entitlements of married but separated spouses and the period of separation, if any, required for the termination of spousal status.

Question 25

Identify the reason that pension standards legislation includes requirements relating to the funding of defined benefit (DB) pension plans and describe those requirements in general terms.

Answer 25

Pension standards legislation requires that a DB pension plan must be prefunded or be in the process of becoming fully prefunded. The reason for the prefunding requirement is to provide security for the benefits the employer has promised to the members and that have accrued to their credit.

Pension standards legislation generally requires that a plan be valued at least every three years. This is a review completed by a qualified actuary who identifies and then reports on certain financial information about the plan. The report must contain prescribed financial information and it must be filed with the applicable pension regulator.

Pension standards legislation in all jurisdictions requires that the actuarial report describe the results of the valuation and include a recommendation by the actuary that the employer make contributions to the plan as required by the legislation.

The actuarial valuation is the mechanism that identifies the two basic types of payments that must be made by an employer to a DB pension plan.

Question 26

Describe the basic difference between the “ongoing” and “solvency” bases in the context of a valuation of a DB pension plan.

Answer 26

An ongoing valuation focuses on the ability of the plan to meet its obligations assuming that it continues to operate. The ongoing valuation attempts to show whether the funding of the plan is on course.

A solvency valuation focuses on the ability of the plan to meet its obligations if it is terminated as of the review date.

Question 27

Outline the two basic types of payments that must be made by an employer to a DB pension plan and the reasons why a “contribution holiday” might arise.

Answer 27

There are two basic types of payments that must be made by an employer to a DB pension plan: current service cost (or normal cost) and special payments. The actuarial valuation is the mechanism that identifies the two basic types of payments that must be made.

The current service cost is the employer’s obligation to contribute to the plan in respect of benefits expected to accrue to members in each year of the valuation period.

Special payments are required if actuarial liabilities exceed the value of pension fund assets. “Special payments” is a catch-all term encompassing payments that must be made to fund the plan as a result of certain triggering events such an amendment that increases accrued benefits, a change in actuarial methods or assumptions, or plan experience that is less or more favourable than anticipated.

A “contribution holiday” occurs when the employer decides not to make new contributions to the pension plan because an actuary has determined that the plan is more than fully funded, having assets in excess of its liabilities. All pension standards legislation now permits the employer to take a contribution holiday, if the plan permits, for as long as the actuary determines that the plan will remain fully funded without further contributions. The actuary must take into consideration the requirements of the applicable jurisdiction relating to when a contribution holiday can be implemented.

Question 28

Differentiate between “buy-in” and “buy-out” annuities purchased from DB pension plan assets and describe the primary reason such annuities might be attractive to an employer sponsoring a DB pension plan.

Answer 28

An employer may purchase an annuity contract from an insurance company in order to reduce or eliminate the risk associated with maintaining a DB pension plan. The annuities may fund or pay the benefits of DB members and beneficiaries.

“Buy-in” annuities are, in effect, an investment of the pension plan that matches the liability of the underlying pension. The employer retains the liability for the underlying benefit although it has transferred the financial risk to the annuity provider.

The plan administrator remains responsible for making monthly benefit payments but is reimbursed by the insurance company for the amount it pays each month.
The employer retains its legal obligation to ensure the benefits are paid as promised under the plan, and if the annuity contract cannot satisfy the pension obligation, the employer remains responsible for the pension payments.

In the case of “buy-out” annuities, the insurance company becomes responsible for paying the benefits under the pension plan. Pension payments are made directly to the member or beneficiary by the insurer.

Some jurisdictions have adopted legislative provisions enabling an administrator of a DB pension plan to obtain a statutory discharge of the obligation to pay a pension through the purchase of a buy-out annuity, provided the purchase meets certain requirements.