RPP Practitioners' Forum - Questions from the Industry June 3, 2008

Important notice

As part of an effort to update and clean up our website, we are reviewing the consultation sessions questions and answers to make sure that we give you quality information. We have deleted and will continue to delete redundant, outdated and trivial content. The relevant questions and answers will keep their original numbering. Eventually these will also be deleted as we incorporate this information into our other publications, such as our Technical Manual and Newsletters.  

Question 5 - Segregated Accounts within a Pension Fund

In answer to Question 22 of the 2005 Consultation Session, the Registered Plans Directorate (RPD) replied that in order to segregate accounts within a registered pension plan the provincial regulator must sanction the segregation or there must be a court order requiring such segregation.

The Financial Services Commission of Ontario's (FSCO's) published position is that it will not approve a merger of defined benefit assets, involving a trusteed plan, unless it can be proven that the plan documentation allows for it. This involves a time consuming and costly review of all historical plan texts and funding agreements including any predecessor plans from which funds originate. However, when a plan administrator wants to voluntarily segregate assets, FSCO has been slow to provide a written response confirming the need for segregation; yet this, or in the alternative a court order, is what is required by RPD.

The response to Question 22 states that RPD would review its policy to determine if its processes could be streamlined. Given FSCO's published position on merging plan assets, and the costs and time involved in preparing a merger application, it's time for such a review. Permission to segregate assets should be granted in all mergers when a provincial regulator has a published position similar to FSCO's.

Answer 5:

The requirement for segregated accounts, typically occurring in situations when a purchase and sale or merger occurs, is a relatively recent development. Requests for permission for this segregation are granted on an administrative, case-by-case basis since it is not otherwise permissible under the Income Tax Act. Our present policy requires that, in order for a request to be considered, there must be written evidence of the provincial regulator requirement to segregate accounts in the particular circumstances. We will also consider such requests when there is a specific court order requiring segregation of funds.

There is presently no plan to expand the criteria under which we will consider such requests. Therefore, voluntary segregation of funds, when there is no corresponding provincial requirement or court order in the particular circumstances, is not permitted. We will continue, however, to monitor the nature and number of such cases. Once we have more real-life situations to study, we will consider developing new policies and procedures if warranted.

Question 6 - Pension guarantee in Pension Adjustment Reversal and Past Service Pension Adjustment calculations

Two defined benefit pension plans, Plan A and Plan B, are sponsored separately by two affiliated companies. The lifetime pension formula in each plan is based on final average earnings, with an offset for the Canada Pension Plan (CPP). The percentage offset for CPP in Plan B is slightly greater than in the Plan A, otherwise the plans and formulae are identical.

The two companies entered into a reciprocal agreement to facilitate the transfer of employees between employers. The agreement provides for the transfer of pensionable service between Plan A and Plan B, with the following conditions:

  • compensation under the exporting plan is deemed to be recognized in the importing plan for final average earnings calculation as of the date of transfer; and
  • pension guarantee: lifetime pension provided for the transferred service in the importing plan must be not less than the pension accrued for the same service in the exporting plan.

A post-1989 transfer of an employee from Plan A to Plan B under the reciprocal transfer agreement is a past service event that requires calculating and certifying a past service pension adjustment (PSPA).

What are the PSPA/pension adjustment reversal (PAR) implications in this situation?

Answer 6:

Go to the Past Service Pension Adjustment Guide, 5.15 Modified calculation method and the Pension Adjustment Reversal Guide, 5.3 Defined benefit provision.

Question 7 - Retroactive application of Monsanto

The retroactive application of the Monsanto case will require the distribution of surplus from plans that currently do not have surplus or have an insufficient amount of surplus. Will the Registered Plans Directorate allow additional amounts to be contributed to the plan so that these amounts can then be paid through benefit enhancements or lump-sum distributions? Consider the following alternative scenarios:

  • The Superintendent, Financial Services Tribunal, or a court has issued an order requiring the employer to distribute surplus based on the amount of surplus that would have been available if the surplus that existed at the effective date of the partial windup had been preserved and grown with a fund rate of return.
  • No order has been issued but the employer wants to contribute the funds and distribute the surplus, in expectation that the Superintendent is likely to require it anyway.

Answer 7:

As indicated in our answer to Question 12 of the 2005 Consultation Session, any current surplus under a defined-benefit pension plan as a whole should be fully utilized before any additional contributions are permitted to fund the liability for surplus entitlements on partial wind-up resulting from the Monsanto decision.

As an example, a requirement of 6 million dollars but a surplus of only 5 million results in the ability to request 1 million in funding. If the surplus was 5 million but the requirement was only 4 million then there is no need or ability to request additional funds.

When no order has been issued, there must be written evidence from the Financial Services Commission of Ontario that the plan's situation is similar to that of the Monsanto case. When the surplus entitlements are paid out through benefit enhancements, a plan amendment is required.

Question 13 - Terms and conditions, and responsibility, regarding an individual pension plan funding deficit at termination

Can the plan text of a registered pension plan (e.g., an individual pension plan) for a connected person, provide for reduced annuities in the event of a funding deficiency at termination? Can we limit the employer's responsibility regarding a funding deficiency at termination?

Answer 13:

Go to the RPD Technical Manual, 5.1 147.4(1) – RPP Annuity Contract and the Newsletter no.16-3, Transfers from underfunded individual pension plans.

Question 16 - The Canada Revenue Agency's position on over-contributions

Further to Question 3 of the 2005 Consultation Session and its corresponding answer, we have been advised that the Canada Revenue Agency has rescinded Income Tax Rulings Directorate Document 9719235 and its position regarding the refund of employee over-contributions. As a result, it would appear that the answer to Question 3 is no longer accurate. Could you please provide an updated response to Question 3?

Answer 16:

Go to the RPD Technical Manual, 2.18 147.1(19) – Reasonable error and 8.4 8502(d) – Permissible Distributions.

Report a problem or mistake on this page
Please select all that apply:

Thank you for your help!

You will not receive a reply. For enquiries, contact us.

Date modified: