Variable benefits in Ontario and update on FSRA’s activities
Since January 1, 2020, defined contribution (“DC”) pension plan sponsors may offer variable benefits under the Pension Benefits Act of Ontario from their pension plan. The variable benefit rules allow members of a DC pension plan to receive retirement income directly from the plan upon retirement, if allowed by the pension plan, as opposed to being required to transfer the balance of their DC account to an authorized vehicle or use it to purchase an annuity.
This should be good news for plan sponsors who wish to offer an additional option at retirement. With the introduction of variable benefits in Ontario, they are now allowed in all provinces except New Brunswick and Newfoundland and Labrador. Plan sponsors are not required to offer variable benefits, but those who choose to do so will offer a more attractive plan by providing access to competitive investment management fees to their former employees during retirement, more developed investment options and better governance.
DC pension plans that will offer variable benefits are required to inform members upon retirement via their benefit statement that they have the option to establish a variable benefit account. If a member elects to do so:
- spousal consent, in the form of a written waiver, is required if a spouse is entitled to a joint and survivor pension
- the entire DC account is transferred to the variable benefit account, unless the plan permits only a portion of the DC account to be transferred
- upon application to the plan administrator, a transfer of up to 50% of the amount initially transferred to the variable benefit account upon establishment can be withdrawn or transferred to an unlocked registered retirement savings arrangement within 60 days of establishing the variable benefit account
The plan shall permit payments from the variable account at least once per calendar year and may permit more frequent payments.
Once the variable benefit account is established, the retired member will receive an initial statement and must notify the administrator in writing of frequency, method and amount of payment from the account. If the retired member does not provide instructions within 120 days of the initial statement, the administrator shall essentially pay the retired member an amount equal to the minimum requirement per calendar year.
Changes of preference with regards to frequency, method and amount of payment from the variable benefit account are permitted once per calendar year, or more than once in the same calendar year if permitted by the plan.
All payments from variable benefit accounts are subject to a minimum amount as set out in the Income Tax Act and are subject to a maximum amount as if the variable benefit account was a life income fund subject to Ontario law.
The administrator is required to provide annual statements to all members with a variable benefit account informing them of various elements, notably the balance and reconciliation of the variable benefit account and their right to inform the administrator of any desired changes with regards to frequency, method and amount of payment from the account.
Upon death of a member receiving variable benefits, the administrator is required to provide a statement within 30 days informing the spouse, beneficiary or personal representative, as the case may be, of his or her options with regards to the remaining benefits payable from the variable benefit account. A surviving spouse may, subject to certain conditions, have the right to elect to continue receiving variable benefits rather than to receive a lump sum benefit.
In accordance with the intention of the Financial Services Regulatory Authority of Ontario (“FSRA”) to promote good administration of pension plans and to protect and safeguard the pension benefits and rights of pension plan beneficiaries, FSRA has published a proposed approach to supervise and engage with single-employer defined benefit plans where there may be a concern with respect to the security of the promised pension benefits.
FSRA outlines the predictive and preventative tools and supervisory methods they will use to identify and supervise actively monitored plans. It also outlines FSRA’s engagement strategy and potential outcomes of the approach.
FSRA views this proposed approach as a prudent and a necessary step towards ensuring the long-term viability and sustainability of the Pension Benefits Guarantee Fund (PBGF) without imposing an undue burden on other continuing PBGF eligible plans.
FSRA is seeking feedback on the proposed approach. Comments/questions can be submitted on FSRA’s website by February 27, 2020.
In other news, Ontario pension plans with assets of less than $10 million at the end of a fiscal year are no longer required to submit audited financial statements (the previous threshold was $3 million). Although financial statements are still required, this should come as a relief for pension plan sponsors with asset values between $3 million and $10 million as there will be potential savings related to the unexecuted audit.
The Normandin Beaudry consultants will continue to monitor Ontario pension sector news and developments with FSRA’s activities and will keep you informed. Feel free to contact us if you have any questions.