New Ontario regulations could undermine employees’ retirement savings planning.
The Ontario government has released long-awaited regulations which establish procedures for withdrawing pension funds in times of financial hardship. The new regulations, which came into effect last month, make it easier for employees to gain access to locked-in pension funds.
The good news for plan sponsors from an administration standpoint is that the only funds from which the money can be withdrawn are life-income funds (LIFs), locked-in retirement accounts (LIRAs) and locked-in retirement income funds (LRIFs) held by approved financial institutions. This means that only financial institutions are required to process approved withdrawals.
The bad news is that this could be the “thin edge of the wedge.” Currently, in Ontario, terminating members get only one opportunity to transfer out of pension assets, when they retire or leave the company. Terminated members who left their money in the pension plan may think they got a bad deal and pressure the government to permit transfers to financial institutions at later dates (as in Quebec). Also, in the future, more people may elect to transfer their assets into a RIF, LIRA or LRIF so they have the option of making an application for withdrawal should financial hardship arise.
The owner of the locked-in funds will be able to apply to the Financial Services Commission to withdraw his funds if the owner or his spouse has received a written demand about:
•arrears in the payment of rent on the owner’s principal residence, and the owner could face eviction if the debt remains unpaid;
•a debt that is secured against the owner’s principal residence, and the owner could face eviction if the debt remains unpaid.
Or, the owner, his spouse or a dependant has:
•medical or dental expenses for treatment (and the expenses are not subject to reimbursement from any other source);
•expenses for renovations to the owner’s or dependant’s principal residence made necessary by illness or physical disability (as long as they are not subject to reimbursement from another source);
•the owner or his spouse needs money to pay the first and last months’ rent to obtain a principal residence for the owner; and
•the owner’s expected total income from all sources before taxes for the 12-month period after the date of signing the application is 66 2/3 per cent, or less, of the Year’s Maximum Pensionable Earnings for the year in which the application is signed ($25,067 in 2000).
The owner can apply once a year under each of the applicable categories. Consent can be given for the withdrawal of a lump sum or 12 monthly amounts.
The market value of all assets of the owner and his spouse will be considered when the application is assessed. However, the owner will not be required to liquidate assets such as his principal residence, furniture, vehicles, clothes, jewelry or certain business assets in order to qualify for a withdrawal.
It is intended that an income test will only apply if the basis for the application is the final category noted above.
While it makes sense that a person should not have to be destitute to access his own money, an asset-only test for all of the other prescribed grounds of hardship could bring unexpected results. For example, a person earning $200,000 a year could mortgage his home to the hilt, lose all his equity on the stock market, drive to the hearing in a BMW and withdraw enough money from his pension plan to finance the debt for the next 12 months.
While it remains to be seen how many people will apply to withdraw locked-in funds, and under what circumstances, it is not surprising that the pension industry is apprehensive about the long-term implications of this initiative.
The new rules do nothing to encourage Ontario residents to manage their money wisely or to educate them about the long-term advantages of a tax-assisted retirement savings program. These provisions could also undermine the retirement savings system in Ontario and elsewhere.
If employees can treat pension funds like a bank account, many employers may decide to substitute additional cash or a group RRSP for a registered pension plan — and ultimately the government and taxpayers will pay for this unfortunate experiment.
Sheryl Smolkin is a lawyer and has been director of Watson Wyatt Worldwide’s Canadian Research and Information Centre since it was established in 1987. She can be reached at (416) 943-6082.
The good news for plan sponsors from an administration standpoint is that the only funds from which the money can be withdrawn are life-income funds (LIFs), locked-in retirement accounts (LIRAs) and locked-in retirement income funds (LRIFs) held by approved financial institutions. This means that only financial institutions are required to process approved withdrawals.
The bad news is that this could be the “thin edge of the wedge.” Currently, in Ontario, terminating members get only one opportunity to transfer out of pension assets, when they retire or leave the company. Terminated members who left their money in the pension plan may think they got a bad deal and pressure the government to permit transfers to financial institutions at later dates (as in Quebec). Also, in the future, more people may elect to transfer their assets into a RIF, LIRA or LRIF so they have the option of making an application for withdrawal should financial hardship arise.
The owner of the locked-in funds will be able to apply to the Financial Services Commission to withdraw his funds if the owner or his spouse has received a written demand about:
•arrears in the payment of rent on the owner’s principal residence, and the owner could face eviction if the debt remains unpaid;
•a debt that is secured against the owner’s principal residence, and the owner could face eviction if the debt remains unpaid.
Or, the owner, his spouse or a dependant has:
•medical or dental expenses for treatment (and the expenses are not subject to reimbursement from any other source);
•expenses for renovations to the owner’s or dependant’s principal residence made necessary by illness or physical disability (as long as they are not subject to reimbursement from another source);
•the owner or his spouse needs money to pay the first and last months’ rent to obtain a principal residence for the owner; and
•the owner’s expected total income from all sources before taxes for the 12-month period after the date of signing the application is 66 2/3 per cent, or less, of the Year’s Maximum Pensionable Earnings for the year in which the application is signed ($25,067 in 2000).
The owner can apply once a year under each of the applicable categories. Consent can be given for the withdrawal of a lump sum or 12 monthly amounts.
The market value of all assets of the owner and his spouse will be considered when the application is assessed. However, the owner will not be required to liquidate assets such as his principal residence, furniture, vehicles, clothes, jewelry or certain business assets in order to qualify for a withdrawal.
It is intended that an income test will only apply if the basis for the application is the final category noted above.
While it makes sense that a person should not have to be destitute to access his own money, an asset-only test for all of the other prescribed grounds of hardship could bring unexpected results. For example, a person earning $200,000 a year could mortgage his home to the hilt, lose all his equity on the stock market, drive to the hearing in a BMW and withdraw enough money from his pension plan to finance the debt for the next 12 months.
While it remains to be seen how many people will apply to withdraw locked-in funds, and under what circumstances, it is not surprising that the pension industry is apprehensive about the long-term implications of this initiative.
The new rules do nothing to encourage Ontario residents to manage their money wisely or to educate them about the long-term advantages of a tax-assisted retirement savings program. These provisions could also undermine the retirement savings system in Ontario and elsewhere.
If employees can treat pension funds like a bank account, many employers may decide to substitute additional cash or a group RRSP for a registered pension plan — and ultimately the government and taxpayers will pay for this unfortunate experiment.
Sheryl Smolkin is a lawyer and has been director of Watson Wyatt Worldwide’s Canadian Research and Information Centre since it was established in 1987. She can be reached at (416) 943-6082.
