Occupational pension schemesTypes
What are the main types of private pensions and retirement plans that are provided to a broad base of employees?
There are essentially three forms of employed-sponsored private pension plans in Canada:
Defined benefit pension plan (DBPP)
Benefits paid out on retirement are predetermined based on a formula typically using years of service and earnings. Employers manage the assets of a DBPP.
Defined contribution pension plan (DCPP)
Benefits paid out on retirement are not predetermined, but rather based on the assets within an individual’s account at the time of retirement. Employers contribute to the DCPP and employees choose the investment options in which to invest the contribution. Employees are often required, or entitled, to match their employer’s contributions to the DCPP. Ultimately, the benefit paid out upon retirement reflects the value of the investments in the DCPP as chosen by the employee.
In addition to DCPPs, which are regulated by minimum standards pension legislation, there are other types of tax-sheltered group retirement savings plans, such as registered retirement savings plans (RRSPs). These types of plans are regulated by the Income Tax Act, but are not subject to provincial minimum standards legislation.
Multi-employer pension plan (MEPP)
MEPPs are established by a group of two or more employers and are prevalent in construction and similar industries. MEPPs are governed by a board of trustees with board representation evenly split between employer and union-appointed representatives. Contribution amounts are established under the applicable collective agreements in unionised environments and, therefore, the benefit is not predefined or guaranteed and may be reduced.
A new category of employee-sponsored private pension is emerging in Canada. These plans take different forms but have some form of sharing of risk in common. These plans include:
Target benefit pension plan (TBPP)
Employer contributions are negotiated to a predetermined amount. The pension plan seeks to achieve returns necessary to meet a target benefit level established by a board of trustees. The advantage of a TBPP is the flexibility provided by not having guaranteed benefits. If investment returns fail to meet the target benefit, there are options available to address the shortfalls. Since TBPPs are an emerging pension option, regulations governing acceptable risk tolerances for investments and other important considerations are continuing to develop.
Jointly sponsored pension plan (JSPP)
Broader public sector employees in Canada (teachers, civil servants, municipal workers, healthcare professionals, police, firefighters, etc) typically participate in pension plans jointly sponsored by the employee and relevant public sector agency. These plans are subject to the same basic funding and management regulations as the private pension plans outlined above, except that they are exempt from solvency funding requirements, and benefits may be reduced on wind up if the plan is not fully funded.Restrictions
What restrictions or prohibitions limit an employer’s ability to exclude certain employees from participation in broad-based retirement plans?
As a general rule, employer-sponsored pension plans must be structured so as to permit participation for all employees who fall within the class of employees for whom the plan was established. Employees may be excluded from such plans on the basis of short-term, casual, or voluntary employment status, but part-time employees who meet the prescribed thresholds must be permitted to participate in the plan.
Can plans require employees to work for a specified period to participate in the plan or become vested in benefits they have accrued?
As a result of recent statutory amendments at both the provincial and federal levels, immediate vesting is the standard for private pension plans. Regardless of the shared contribution scheme, employees are immediately entitled to any amounts invested on their behalf.
Prior to these amendments, employees would be required to work for a finite period of time (normally two years) before being entitled to participate in the private pension plan. Plans can still establish waiting periods of up to 24 months before admitting employees.Overseas employees
What are the considerations regarding employees working permanently and temporarily overseas? Are they eligible to join or remain in a plan regulated in your jurisdiction?
Employees working outside Canada are generally entitled to remain in their Canadian plan for up to five years. This entitlement is governed by the Income Tax Act and specific advice should be sought from Canadian legal counsel.Funding
Do employer and employees share in the financing of the benefits and are the benefits funded in a trust or other secure vehicle?
The benefit financing model will always be unique to a specific pension plan. Plans are typically financed:
- by the employer only;
- by the employer, with required (matching) contributions from the employee; or
- by the employer, with optional (matching) contributions from the employee.
Regardless of the financing system employed for the specific pension plan, contributions are held in a formal trust or an insurance company. The monies invested and assets held by the pension fund are for the benefit of the plan members and are never treated as the property of the employer.
What rules apply to the level at which benefits are funded and what is the process for an employer to determine how much to fund a defined benefit pension plan annually?
While precise requirements vary slightly by jurisdiction, all pension plans are required to file regular actuarial reports to the appropriate regulator. Pension plans are required to be 100 per cent funded on both a solvency and going-concern basis. If a pension plan is found to be underfunded, it must comply with heightened reporting obligations and meet various targets in resolving the funding deficiency. While funding standards differ between jurisdictions, pension plans typically have between five and 10 years to resolve a solvency deficiency and 15 years to resolve a going-concern shortfall.
JSPPs and MEPPs are exempt from the solvency funding rules if they meet certain requirements.Level of benefits
What are customary levels of benefits provided to employees participating in private plans?
There is a high degree of variance in the level of benefits provided to employees participating in private pension plans.
From a best-practice perspective, employees typically aspire to obtain benefits that, when combined with CPP/OAS, provide 60-70 per cent income replacement over their retirement years. This figure is at least partially aspirational and should not be taken as a definitive statement of benefits actually received.Pension escalation
Are there statutory provisions for the increase of pensions in payment and the revaluation of deferred pensions?
This concept is typically referred to as ‘indexing’ in Canada. Indexing is applicable to the CPP, but there is no legislative requirement for private pension plans to provide indexing. The JSPPs in the broader public sector typically provide indexation, subject to the plan meeting funding objectives.Death benefits
What pre-retirement death benefits are customarily provided to employees’ beneficiaries and are there any mandatory rules with respect to death benefits?
There are pre-retirement benefits and rules in the applicable legislation for each province and federally.
In Ontario, for example, the Pension Benefits Act provides that where a plan member who is entitled, under the pension plan, to a deferred pension dies before the payment of the first instalment is due, or if a former member or retired member dies before the payment of the first instalment of his or her deferred pension is due, the member’s spouse on the date of the member’s death is entitled to:
- receive a lump-sum payment equal to the commuted value of the deferred pension;
- require the administrator to pay an amount equal to the commuted value of the deferred pension into a registered retirement savings arrangement; or
- receive an immediate or deferred pension, the commuted value of which is at least equal to the commuted value of the deferred pension.
A similar provision with respect to pre-retirement death benefits and their provision to the employees’ spouse or designated beneficiary exists in the Pension Benefits Standards Act, applicable to federally regulated private pensions and in all provincial statutes regulating private pensions.
For purposes of pension legislation across Canada, ‘spouse’ is defined to include common-law spouses and same-sex partners.Retirement
When can employees retire and receive their full plan benefits? How does early retirement affect benefit calculations?
The standard retirement age in Canada is 65. However, the age upon which entitlement to full benefits arises varies by private pension plan. Most jurisdictions in Canada require that a pension plan permit a participant to demand benefits at age 55, subject to an actuarial reduction.Early distribution and loans
Are plans permitted to allow distributions or loans of all or some of the plan benefits to members that are still employed?
No, this is not permitted in Canada.Change of employer or pension scheme
Is the sufficiency of retirement benefits affected greatly if employees change employer while they are accruing benefits?
Applicable legislation across Canada provides portability options in the event of employee movement. While it is technically possible for an employee to change employers without any loss of retirement benefits, the reality is that if an employee is a participant in a DBPP, he or she may experience significant obstacles to having his or her benefits transferred between employers.
The main obstacle is that the administrator of the receiving plan must consent to the transfer and such consent is rarely given in the context of private plans, unlike in the broader public sector where plan-to-plan transfers are common.
If members transfer their benefit from a plan, they will typically transfer the commuted value to an RRSP. Any such transfer must normally be done on a locked-in basis.
Another option that may be available is to apply the commuted value of the benefit to purchase an annuity.
In what circumstances may members transfer their benefits to another pension scheme?
Members may elect to transfer their benefits to another pension plan after their employment has been terminated. However, the transfer must be accepted by the receiving plan’s administrator. As per question 19, for individual transfers, other than in the broader public sector, it is much more common for the member to transfer the commuted value of his or her benefit to a locked-in RRSP.
A different set of rules applies to transfers on the sale of business. An employer considering a sale of business should consult Canadian legal counsel.Investment management
Who is responsible for the investment of plan funds and the sufficiency of investment returns?
The management of investment plan funds depends on the type of private pension plan.
In a DBPP, the employer administers the plan and makes the necessary investment decisions.
In a DCPP, typically, individual employees make elections as to how their specific benefits are invested. However, in a DCPP in which the employer has not provided for employee choice of investments, the employer invests the funds. These plans are in the minority in Canada.
In the cases of TBPPs and MEPPs, investment decisions are made by a board of trustees, typically with employer and employee representation.
Most provinces have adopted the investment rules in the federal Pension Benefits Standards Act, 1985. Every plan (other than DCPPs in some cases) must put in place a Statement of Investment Policies and Procedures (SIPP), which governs the investment of the plan’s assets.
In Ontario, starting in February 2016, the SIPP must be filed (there was no filing requirement between 2000 and 2016), and must include information as to whether the plan administrator has taken into consideration environmental, social and governance (ESG) factors in setting its investment policy.Reduction in force
Can plan benefits be enhanced for certain groups of employees in connection with a voluntary or involuntary reduction in workforce programme?
Benefits may be enhanced in specific circumstances, subject to regulatory approval. The most common example of such an enhancement is an early retirement window for eligible plan members meeting specified age and service criteria.Executive-only plans
Are non-broad-based (eg, executive-only) plans permitted and what types of benefits do they typically provide?
Yes. Canada does not prohibit discrimination in favour of highly compensated employees such as the non-discrimination rules in the US. For example, registered pension plans for executives are permitted as long as the class is carefully defined. In addition, as mentioned above, many employers sponsor plans (Supplemental Executive Retirement Plans or Retirement Compensation Arrangements), which provide benefits in excess of the Income Tax Act maximum. These plans are contractual in nature and are not regulated under minimum standards legislation, provided they are properly drafted. Employers can define their own vesting and other rules.
How do the legal requirements for non-broad-based plans differ from the requirements that apply to broad-based plans?
With reference to question 23, it is possible to establish a pension plan for specific classes of employees. If the plan is below the maximum tax-deductible limit provided in the Income Tax Act, it must comply with the same requirements as any registered pension plan. The class of employees must be a bona fide class and defined in such a manner that the eligible members are determinable on the basis of objective criteria. With reference to question 3 (taxation of pensions), executive pension plans such as SERPs and RCAs, which are limited to contributions and benefits beyond the maximum limits provided in the Income Tax Act, are not subject to the same benefit and funding regulations imposed on broad-based private pension plans (ie, DBPPs and DCPPs).Unionised employees
How do retirement benefits provided to employees in a trade union differ from those provided to non-unionised employees?
While the same types of pension plans may be established for both unionised and non-unionised workforces, MEPPs (question 8) are more prevalent in the union environment. The typical MEPP will require participating employers to contribute to the plan, expressed as dollars and cents per hour worked by a member. The benefit payable upon retirement is a target benefit, calculated on the basis of actuarial factors applied to the contributions made to the plan. MEPPs are governed by boards of trustees, typically with representation by employers and employees. In the broader public sector, the unionised employees participate in JSPPs (question 8).
How do the legal requirements for trade-union-sponsored arrangements differ from the requirements that apply to other broad-based arrangements?
These situations typically involve MEPPs and JSPPs, as referenced in questions 8 and 25. MEPPs and JSPPs have different funding and governance rules and obligations from typical broad-based pension arrangements. Where a MEPP is less than fully solvent, accrued benefits under the plan may be reduced. In the case of JSPPs, employers and employees share the funding risk, therefore, if a JSPP has an unfunded liability or solvency deficiency, contributions by employers and employees will be increased to fund the deficiencies.