RPP Consultation Session - Questions from the Industry November 22, 2000
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Questions and Answers
- Receiving a maximum pension benefit from two different defined benefit provisions
- Allocation of Surplus in a flexible pension plan
- Proportionality condition and the 50/50 test
- Distribution of Surplus to a terminated employee
- Amending a pension plan when the plan is winding up due to bankruptcy
- Periodic distribution of an actuarial surplus to retired members
- Retroactive contributions to a defined contribution pension plan
- Return of a member's contribution that was transferred from another defined benefit plan
- Actuarial increase after age 60, instead of age 65, for public safety occupations
- Use of "banked hours" to increase benefits
- Amendment to subparagraph 8502(d)(iv) of the Regulations
- The payment of related fees or reimbursement to the employer
Question 4 - Can a member who participates in two defined benefit provisions receive a maximum pension benefit from each of the two provisions?
Subsection 8504(8) of the Regulations ensures that the benefit limit in subsection 8504(5) applies to the total pre-age 65 benefits provided to the member under associated defined benefit provisions. This limit on pre-age 65 retirement benefits is equal to the defined benefit limit times years of service plus 25% of YMPE prorated if the member has less than 35 years. Therefore, a member would not, at least for benefits payable before age 65, be permitted to receive two maximum pensions.
Furthermore, subsection 147.1(8) of the Act deems a plan to be a revocable plan where the pension adjustment (PA) limits are exceeded. The PA limits the pension credits for a member in respect of an employer. The total of the pension credits for the two provisions is limited to the money purchase limit for the year and 18% of the member's compensation from the employer for the year. Therefore, a member who participates in two defined benefit provisions of the same employer is unlikely to receive a maximum pension benefit from each provision.
However, subsection 8504(1) of the Regulations limits "the lifetime retirement benefits provided to a member under a defined benefit provision of a pension plan". This limit does not apply to lifetime retirement benefits payable under a combination of provisions of the same plan or under a combination of plans. As a result, a member who participates in two separate (not associated as determined by subsections 8504(8) & (9)) defined benefit provisions can receive a maximum pension benefit from each of the two provisions.
Question 5 - In a flexible pension plan, can a surplus be allocated to provide optional ancillary benefits (OAB)?
Allocating surplus toward the purchase of OABs while respecting defined benefit rules is somewhat problematic. Direct allocations of surplus to OAB accounts would result in the creation of a money purchase provision that would take the plan outside of the flexible pension plan rules. To retain their defined benefit character, surplus allocations have to be based on plan liabilities with respect to the additional OABs that are to be paid. These additional liabilities have to be determined by taking into account all of the plan's assets (including optional ancillary contributions) and all of the provision's other liabilities. However, plan actuaries will have difficulty determining exact liabilities with respect to OABs, given that in some types of flexible pension plans members do not elect their OABs until retirement, and given that members can adjust the level of their optional ancillary contributions from year to year. For funding purposes, liabilities with respect to the OABs have to be tied to the actual value of OABs and not to the maximum value of OABs that could be provided under the provision. Otherwise, the provision would be assuming liabilities without regard to the OABs actually to be paid which violates subparagraph 147.2(2)(a)(ii) and the plan would enjoy excessive tax sheltering. We also understand your need for a practical mechanism to arrive at the liability that would keep actuarial costs to a minimum.
Question 7 - The proportionality newsletter restricts the rate at which lifetime retirement benefits can accrue. Does the 50/50 test apply each time the employer wants approval for contributions to the plan?
Not each time. The 50/50 test only applies when benefits in respect of pre-reform service are purchased for (or accrued to) connected persons.
Benefits provided for pre-reform years must be acceptable to the Minister. The proportionality condition (announced on March 31, 1999) is an additional test that must be performed before lifetime retirement benefits (LRBs) in respect of pre-1990 service can be credited. This new condition does not eliminate any of the previous requirements applicable to pre-reform benefits.
To better coordinate the administration of these rules, a plan administrator could send us the following documents together:
- the triennial actuarial valuation report, submitted when requesting the approval of the actuary's recommendation for the employer's contributions;
- the detailed calculations specifically identifying the years of service for which the LRBs are provided, and clearly demonstrating compliance with the present-value test in view of satisfying the proportionality condition;
- the 50/50 demonstration, taking into account only the present value of benefits provided for pre-reform service based on pre-reform earnings.
Our approval of the 50/50 demonstration, the actuary's recommendation and the crediting of pre-1990 LRBs (for each of the 3 years) will be given at the same time.
Question 8 - When an employee terminates from a pension plan, can the employee receive a portion of a surplus that is distributed at a later date?
Under a defined benefit provision, if the plan terms provide for it, a terminated employee may receive a distribution of surplus at a later date since it is a permissible distribution permitted under subparagraph 8502(d)(vi) of the Regulations. Such a distribution would be considered to be a taxable benefit and could not be transferred on a tax-free basis.
Rather than distributing the surplus as cash, the surplus could be used to improve member benefits. This could take the form of increased ancillary benefits, lifetime retirement benefits, or a combination of both.
The improved benefits may be commuted and transferred subject to subsection 147.3(4) of the Act and subsection 8517(1) of the Regulations. In the case where only ancillary benefits are improved, a tax-free transfer is not permitted since the prescribed limit is nil.
Subsection 8517(3.1) of the Regulations does allow an additional prescribed amount to be determined only if the benefit includes ancillary benefits that are permitted solely because of subsection 8501(7) of the Regulations. However, in addition to other conditions under subsection 8501(7), paragraph (b) requires that the benefits be provided as a consequence of an allocation of surplus on full or partial wind-up of the plan.
Consequently, subsection 8501(7) has no application if there is no partial or full wind-up of the plan, and therefore an allocation that includes only ancillary benefits cannot be transferred under subsection 147.3(4) since the prescribed limit would be nil.
Question 11 - What is the procedure for amending a pension plan when the plan is winding up due to bankruptcy and the plan administrator is appointed by the courts?
In most bankruptcy cases, the pension supervisory authority appoints an independent firm to act as the plan administrator for the purposes of winding up the plan.
If the plan is basically acceptable and there are outstanding minor amendments, we would accept a statement from the appointed plan administrator confirming that the registered pension plan has been administered in accordance with the Act. We would also accept a statement in respect of upgraded ancillary benefits such as CPI for all pensions in pay.
If lifetime retirement benefits are upgraded due to surplus allocation, we will require the plan to be formally amended. This would result in a past service pension adjustment (PSPA) and affect the prescribed amount described in section 8517 of the Regulations. In this case we may require a copy of the formal agreement or court order regarding the surplus allocation. We would review situations on a case-by-case basis where the appointed administrator does not have the legal authority to amend the plan.
Question 15 - Subparagraph 8502(d)(vi) of the Regulations allows the payment to any person of the person's share of an actuarial surplus. If an individual already receives the maximum level of lifetime retirement benefits permissible under the Act, could the employer use subparagraph 8502(d)(vi) to add an amount to the regular pension payable to those retired members by way of a periodic distribution (annual or monthly) of part of the actuarial surplus?
If surplus is paid out as periodic payments, this by definition is a retirement benefit and therefore must comply with the rules and regulations of the Act. Please refer to the definition of "retirement benefit" in subsection 8500(1) of the Regulations. Since the individual's lifetime retirement benefits are already at the maximum, it is unlikely that these additional retirement benefits would be a permissible benefit. If the employer wishes to pay the surplus to the retired members, the employer could withdraw the surplus and contribute to a Retirement Compensation Arrangement or make payments from the plan to the employees in the form of a single lump sum payment.
Question 16 - An employer sets up a defined contribution pension plan for its employees. Membership is mandatory. After three years, for example, the administrator of the defined contribution plan realizes that some employees were not informed that they had to join the defined contribution plan and contributions were not withheld from their salary. Under a defined contribution plan it is not permissible to make contributions for past service. Assume that contributions for current service are already at the maximum level permissible under the Act. Would it be acceptable to the Agency if the employer were to issue revised pension adjustments (PA) for those three years and allow the employees to pay the contributions they would have paid had they joined the defined contribution plan at the time they were required to do so?
It would not be acceptable for an employer to issue revised PAs for the members and make past service contributions for the previous years. Revised PAs are appropriate only where a PA has been reported incorrectly. In this case, there was no error in the PA calculation, since no contributions were made to the plan in respect of these members.
Subsection 8502(b) of the Regulations permits contributions to a defined contribution pension plan if they are in accordance with the plan as registered. Past service contributions are not permitted. In addition, the member would have additional RRSP room for those three years. If the plan permits additional voluntary contributions, the member may be able to make additional contributions in future years when not at the maximum contribution level.
Question 17 - Subparagraph 8502(d)(iv) of the Regulations permits, under certain circumstances, the return of all or a portion of a member's contributions made to the provision. Does this subparagraph also permit the return of member contributions that were made to another defined benefit plan but subsequently transferred to the current plan?
Paragraph 8502(d)(iv) of the Regulations is very specific in that it provides for a return of contributions made by a member of the plan under a defined benefit provision of the plan where the defined benefit provision is amended to reduce future contributions by a member. This would exclude amounts that were contributed to a prior plan and transferred to the current plan.
Although the Department of Finance has confirmed that this is an accurate interpretation of the Regulations, we are both of the view that this will not produce an appropriate result in all cases. As a result, the Department of Finance has agreed to examine this issue further and may make legislative changes if required.
Question 21 - For public safety occupations can an actuarial increase occur after age 60 instead of age 65 for regular defined benefit plans if the resulting pension benefit would exceed the maximum pension limit of $1,722.22 per year? This question applies to both postponed retirement and delayed pension commencement.
Subsection 8504(10) of the Regulations excludes certain benefits from lifetime retirement benefits for the purpose of the maximum pension rule in subsection 8504(1). Paragraph 8504(10)(b) excludes additional benefits payable as a consequence of an actuarial increase in the pension to reflect the postponement of payment of the pension after age 65. The regulation clearly refers to age 65 and does not refer to an exception for public safety occupations.
Question 22 - Is it possible to use "banked hours" to increase an individual's retirement benefits in a defined benefit plan?
For purposes of this response, banked hours reflect an individual's working hours in a given year, which are in excess of the normal full time working hours (must be reasonable). The employer maintains a record of these banked hours.
The concept of banked hours can be used to increase benefits in the following manner.
On-going basis while employment continues
- The hours debited from the banked hours are used to provide current service.
- When the hours are used to increase current service, the period meets the definition of a qualifying period under subsection 8507(3) of the Regulations.
- The prescribed amount limits under section 8507 of the Regulations are respected.
- Determine the increased benefit rate (or flat benefit) that the member's banked hours would support.
- Amend the plan to reflect this increase.
- Apply PSPA when appropriate.
Question 23 - Will subparagraph 8502(d)(iv) of the Regulations be amended so that a reduction in future contributions is not required if the contribution rate is currently at 0%. For example, a plan was contributory until 1997 and then became non-contributory. In 2000, the company decides to make the plan retroactively non-contributory. Subparagraph 8502(d)(iv) presently requires that there will be a corresponding reduction in future required contributions in order to refund past contributions. It is not possible to reduce the future contributions when they are already at 0%, so the past contributions cannot be refunded under the present wording.
As there are no future contributions that would otherwise be required, we would accept the amendment that permitted the return of the prior contributions. As a result, we are of the opinion that no legislative change is required at this time.
Question 24 - Does paragraph 8502(d) of the Regulations permit the payment of related fees or the reimbursement of the employer for the payment of fees?
The Explanatory Notes of July 31, 1991 for subsection 8502(d) of the Regulations state that a plan may provide for the payment of all reasonable administrative, investment and similar expenses incurred in connection with the plan.
Expenses can be paid:
- directly by the employer (with no impact on the plan at all or to be refunded to the employer out of the plan funds where the plan provides that such expenses are to be paid by the fund but were paid by the employer);
- out of the plan's investment earnings;
- if it is a DB plan, out of the plan's funds;
- if it is a money purchase plan
- out of the member's accounts
- on or before April 5, 1994, out of an unallocated forfeited amount or related earnings
- after April 5, 1994, out of forfeited amounts or related earnings
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