Newsletter no. 92-7, Pre-Reform Early Retirement Provisions and Post-Retirement Indexing

August 18, 1992

The Income Tax Regulations require that all pre-reform benefits provided under a defined benefit provision of a registered pension plan be acceptable to the Minister of National Revenue. This permits the Department to continue to apply a number of restrictions in Information Circular 72-13R8 that have not been included in the Regulations or that differ from the restrictions in the Regulations.

This is the third newsletter that explains how to apply the new pension legislation to benefits provided for pre-reform service under a defined benefit provision of a registered pension plan. It also explains which administrative rules outlined in the Circular continue to apply.

This newsletter refers to "pre-reform" and "post- reform" service and benefits. Pre-reform service means pre-1991 service for all plans except grandfathered plans.

A grandfathered plan is a plan which contains a defined benefit provision and which was registered on March 27, 1988 or for which an application for registration was made before March 28, 1988. Pre-reform service for grandfathered plans means all service prior to the earlier of January 1, 1992 and the effective date of the amendment made to the plan to comply with the requirements of the Income Tax Regulations. All service after those dates is post-reform service. Pre-reform benefits are benefits that accrue in respect of a period of pre-reform service. All other benefits are post-reform benefits.

This newsletter does not apply to benefits provided to connected persons as defined in subsection 8500(3) of the Regulations, or to partners and proprietors and their spouses unless specifically stated otherwise. The rules for these individuals are outlined in Pension Reform Update 91-1.

We wish to remind you that the Regulations cannot be applied to pre-reform benefits in pre-October 1968 and 1980 shareholder plans if doing so will increase the benefits or the costs under the plans.

Early retirement

Under paragraph 8503(3)(c) of the Income Tax Regulations, an unreduced benefit can be paid on the day on which the total of the member's age and the number of years of service equals 80 (75 for public safety occupations). Retirement benefits must be reduced by at least .25% for each month that the pension begins before an unreduced pension could be paid. The way that the reduction is calculated is known as "growing-in".

For example, a member who is age 49 and has 20 years of pensionable service decides to retire. The age and years of service add up to 69 years, which is 132 months short of the 80 requirement. However, the pension must be reduced by .25% for each month between actual retirement and the date when the member would have reached the 80 requirement if employment had continued. If the member had continued to work, it would have taken only 66 months, and not 132 months, for the age and service to equal 80 because for each month the member worked, the member's age would increase by one month and the member's service would increase by one month. The pension would therefore only have to be reduced by .25% x 66 months or 16.5%.

Grandfathered plans are not subject to the restrictions of paragraph 8503(3)(c) until 1992. If a plan does not provide for the appropriate reduction factor, it must be amended, but only for benefits accrued for years after 1991. Grandfathered plans which provide for a lesser reduction may continue to do so for pre-reform benefits, and plans with a greater reduction may be amended to use the .25% per month reduction for all years of service.

The provisions of paragraph 8503(3)(c), i.e., the .25% reduction and the growing-in, can be applied to all years of service in a grandfathered plan. However, if the plan keeps its present more generous early retirement provisions for pre-reform benefits, it cannot also apply the growing-in provisions to pre- reform benefits.

If paragraph 8503(3)(c) is applied to all years, the plan may provide a guarantee that in no event will the early retirement reduction for pre-reform benefits cause a benefit to become less than what the member was entitled to under the pre-reform provisions of the plan.

A grandfathered plan which has an early retirement reduction factor that is greater than the test in paragraph 21 of the Circular cannot be amended to the paragraph 21 test, since this would move the plan's provisions further away from the Regulations.

The above policy will apply to retirements that occur on or after January 1, 1992.

A new plan must comply with the conditions of paragraph 8503(3)(c) for all, including pre-reform, service.

Paragraph 10(a)(iii) of the Circular allows for a lower normal retirement age when retirement is being imposed on members because of automation or because of their failure to keep up with the advancements in technology. Effective January 1, 1992, such a provision is no longer acceptable in any pension plan. Also, there is no grandfathering of benefits for this purpose, that is, a member who retires after December 31, 1991 under the circumstances described in paragraph 10(a)(iii) may not be provided with unreduced pre-reform benefits. Enhanced early retirement benefits can now be provided only under an approved downsizing program as allowed under section 8505 of the Regulations. See Pension Reform Update 92-9.

Post-retirement indexing

According to paragraph 9(i) of the Circular, cost of living increases that occur before age 60 but after termination or retirement can be recognized if they are subject to the maximum in paragraph 9(g).

Paragraph 8504(1)(b) of the Regulations allows lifetime retirement benefits to be indexed from the year following the commencement of the benefits, with no age restriction.

Under all plans, indexing benefits in accordance with paragraph 8504(1)(b) will be allowed for all years of service, if the plan provides for it.

The above policy will apply to retirements that occur on or after January 1, 1992.