Use the Lexology Navigator tool to compare the answers in this article with those from other jurisdictions.
Occupational pension schemes
Types of scheme What are the most common types of pension scheme provided by employers for their employees in your jurisdiction?
The two most common types of pension schemes provided by Canadian employers to employees are defined benefit registered pension plans and defined contribution registered pension plans.
Under a defined benefit registered pension plan, the employee is entitled to a certain benefit at retirement, as defined in the plan document, which is generally based on years of service and earnings. Common benefit formulas under a defined benefit plan include:
- final (or best) average earnings, under which the employee’s benefit is based on the employee’s earnings over the last (or highest paid) years of employment;
- career average earnings, under which the employee’s benefit is based on the employee’s earnings over the entire period of employment; and
- flat benefit, under which the benefit is equal to a fixed amount for each year of service.
Under a defined contribution registered pension plan, the member’s benefit is not defined in the plan document but is based on the contribution formula in the plan document. Under such a plan, the employee plan member’s benefit at retirement is equal to the employee’s contributions made to the plan and the employer’s contributions made on his or her behalf plus (or minus) investment earnings thereon. Employer and employee contributions to defined contribution plans are defined generally as a percentage of the employee’s earnings.
Defined contribution and defined benefit plans are required to be registered under the Income Tax Act and pension standards legislation.
As a result of maximum benefit limits under the Income Tax Act, employers may also provide high-income earners with a supplemental executive or supplemental employee retirement plan (SERP), in addition to a defined benefit or defined contribution registered pension plan. A SERP is often structured as a ‘top-up’ plan, such that the benefits that the employee earns under the SERP are equal to the difference between the benefits that the employee would have been entitled to under the registered pension plan but for the limits under the Income Tax Act and the benefits actually paid under the registered pension plan. Although there are some exceptions, a SERP is not generally required to be registered under pension standards legislation or the Income Tax Act.
In recent years, as a result of legislative changes in certain jurisdictions, some employers have begun to offer target benefit or shared risk plans to their employees. Such plans are similar to defined benefit registered pension plans, in that the plans include a defined formula pursuant to which benefits payable to members at retirement are calculated; however, they have certain differences, including that contributions are fixed and benefits may be reduced if the target benefit cannot be paid.
Statutory framework Is there a statutory framework governing the establishment and operation of occupational pension plans?
The federal government and each province, with the exception of Prince Edward Island, have enacted pension standards legislation pursuant to which minimum standards for the registration and administration of pension plans is defined. The Canadian territories have not enacted pension standards legislation but employees in the territories are subject to federal pension standards legislation. The federal government has also defined certain rules regarding the taxation of pension plan contributions and benefits, as set out under the Income Tax Act.
A defined contribution or defined benefit pension plan must be registered under both the Income Tax Act and the pension standards legislation in the jurisdiction in which the majority of plan members are employed. In other words, if an employer employs individuals in more than one province in Canada, the pension plan must be registered under the pension standards legislation in the province in which most plan members are employed.
Notwithstanding the jurisdiction of registration, if a plan has members employed in more than one jurisdiction, the plan sponsor and administrator must also comply with the pension standards legislation applicable to each member. For example, if the plan is registered in the province of Saskatchewan but has members employed in the province of Ontario, the Pension Benefits Act (Ontario) must be followed with respect to the Ontario members.
What are the general rules and requirements regarding the vesting of benefits?
The rules regarding the vesting of benefits under registered pension plans (defined contribution or defined benefit) are defined under pension standards legislation. Most jurisdictions provide for immediate vesting of employer and employee contributions under pension standards legislation.
An employer must consult the applicable pension standards legislation in the jurisdiction in which the plan member is employed in order to determine the applicable vesting rules.
What are the general rules and requirements regarding the funding of plan liabilities?
The rules regarding the funding of plan liabilities under registered pension plans (defined contribution or defined benefit) are defined under pension standards legislation. An employer must consult the applicable pension standards legislation in the jurisdiction in which the plan member is employed in order to determine the applicable funding rules.
The funding of a defined contribution registered pension plan is based solely on the contribution formula in the plan document. The employer’s obligation to fund a defined contribution registered pension plan is limited to that formula.
The funding requirements under a defined benefit registered pension plan are determined generally by reference to the amount determined by the plan actuary as necessary to fund the benefit defined under the plan. An actuarial valuation report of a defined benefit-registered pension plan must generally be undertaken at least once every three years; if the plan has a funding deficit, a valuation may be required more frequently.
There are generally two types of valuations that affect the funding of liabilities by an employer under a defined benefit registered pension plan:
- a going concern valuation, under which it is assumed that the plan will continue indefinitely; and
- a solvency valuation, under which it is assumed that the plan will wind up on the valuation date.
However, some jurisdictions (eg, Quebec) have recently moved away from requiring a solvency valuation or have introduced temporary solvency funding relief provisions in order to address the difficulties faced by many employers in funding defined benefit plans.
Depending on the funded status of the defined benefit plan, an employer may be required to make only current service payments, which are intended to fund the current service obligations under the plan, or current service and special payments, which are intended to fund any deficit under the plan. In the event of a defined benefit pension plan winding up with a funding deficit, the employer is liable for funding that deficit.
What are the tax consequences for employers and participants of occupational pension schemes?
Subject to certain limits under the Income Tax Act, employer contributions to a defined benefit or defined contribution registered pension plan are deductible. Similarly, subject to certain limits under the act, employee contributions to a defined benefit or defined contribution registered pension plan are deductible.
The benefits paid under a registered pension plan are included in the employee’s income on receipt.
Is there any requirement to hold plan assets in trust or similar vehicles?
The pension standards legislation and Income Tax Act define the manner in which the assets of a registered pension plan must be held and the entity that may hold such assets.
Most pension plans are held through an insurance contract with a company authorised to carry out a life insurance business in Canada or a trust in Canada governed by a written trust agreement pursuant to which the trustees are a trust company or individuals, at least three of whom must reside in Canada and one independent of the employer.
Are there any special fiduciary rules (including any prohibited transactions) in relation to the investment of pension plan assets?
The pension standards legislation defines the standard of care which plan administrators must meet in respect of the investment of plan assets. Although the standard varies between jurisdictions, it is generally high. For example, in Ontario the standard is that a person of ordinary prudence would exercise in dealing with the property of another person, whereas in Alberta the standard is that a reasonable and prudent person would adopt if investing the assets on behalf of a person to whom the investing person owed a fiduciary duty to make investments.
Under Canadian law, a plan administrator is also recognised at common law to be in a fiduciary relationship with plan members and other plan beneficiaries. As a fiduciary, the plan administrator has a number of duties, including to:
- act in utmost good faith;
- act in the best interests of the beneficiaries as a whole;
- not let personal or other interests conflict with the duty owed to beneficiaries;
- not profit from the fiduciary position; and
- hold an even hand between beneficiaries.
Specific rules with respect to the investment of plan assets are also set out in the pension standards legislation. Most provinces have adopted the investment rules set out under the regulations to the federal pension standards legislation. Among other restrictions, that legislation, subject to defined exceptions, restricts the investment of plan assets in related parties.
Is there any government oversight of plan administration and/or insurance coverage for plan benefits in the event of an employer’s insolvency?
Under pension standards legislation, the applicable regulator has the authority to appoint a replacement plan administrator on certain events, including in the event of the employer plan sponsor’s insolvency.
Under Ontario pension standards legislation, employers are required to contribute a defined amount to the Pension Benefits Guarantee Fund (PBGF). The PBGF provides protection, subject to certain maximums and exclusions, to Ontario members and beneficiaries of Ontario-registered pension plans in the event of the plan sponsor’s insolvency. No other jurisdiction in Canada has a similar fund.
Are employees’ pension rights protected in the event of a business transfer?
The treatment of employees’ pension rights on a business transfer depends on whether the transfer is a transfer of assets or shares.
On a sale or transfer of shares, the administration and sponsorship of a standalone registered pension plan (ie, a plan in which there is only one participating employer) is transferred to the purchaser. No regulatory approval is needed for such a transfer. However, if the plan is not a standalone registered pension plan (ie, it is a plan with more than one participating employer) and the other participating employers are not part of the transaction, then the transfer, from a pensions perspective, must be considered and dealt with along the same lines as a sale or transfer of assets.
In the event of a sale or transfer of assets, the purchaser has a number of options for addressing the assets of the pension plan and the pension plan itself, including:
- not establishing a new plan;
- if it has an existing plan, allowing transferred employees to participate in that plan on a future service basis;
- establishing a new plan in which transferred employees can participate on a future service basis without a corresponding transfer of assets and liabilities from the vendor's plan; and
- establishing a new plan in which transferred employees can participate with a corresponding transfer of assets and liabilities from the vendor's plan.
If an asset transfer is considered, particular attention must be paid to the applicable pension standards legislation. Many jurisdictions have specific and detailed rules on plan-to-plan asset transfers and require the prior approval of the pension regulator before assets can be transferred.
The pension standards legislation also provides certain protections to plan members upon the sale of a business, without a corresponding transfer of plan assets. For example, under Ontario pension standards legislation, if an employee who was a member of the seller’s pension plan becomes an employee of the purchaser and an employee of the purchaser’s pension plan, that employee is entitled to credit in the purchaser’s pension plan for the period of his or her membership in the seller’s pension plan for the purposes of determining eligibility for membership in, or entitlement to, benefits under the purchaser’s pension plan and is also entitled to credit in the seller’s pension plan for the period of employment with the purchaser for the purposes of determining entitlement to benefits under the seller’s plan.
Click here to view the full article.