Ottawa's 2003 budget increases limits for tax-assisted retirement savings plans and proposes changes to the employment insurance rate-setting process.
For HR professionals, there are a number of implications arising from these proposals. From a pension perspective, HR managers will need to consider the impact on pension plan costs, supplemental plan funding or security arrangements, DC RPP payout options, employee communication and plan administration.
EI premium costs for 2004 will be reduced, and employers will need to consider how to handle the new compassionate family care provisions.
And some help may be on the way in managing the costs of employer-sponsored health-care plans.
Tax-assisted retirement savings limits
The budget increases annual contribution limits for defined contribution registered pension plans (DC RPPs), registered retirement savings plans (RRSPs) and deferred profit sharing plans (DPSPs).
There are also corresponding increases in the annual benefit limit for defined benefit (DB) RPPs from $1,722 per year of service to $1,833 for 2004 and $2,000 for 2005.
The budget proposals represent the first substantive increase to the DB plan limits since 1976. Arguably, the changes will make DB plans slightly more attractive for plan members since the changes provide an increase in benefits for past years of service while changes to DC plans will only apply to service after the changes take effect.
While the changes are good news for plan members they could represent new administration and contribution costs for plan sponsors, as well as new communication challenges. The specific impact of the change to these limits on an employer’s retirement plans will depend on each plan’s design, funded status and demographics.
DB pensions
Since increases in the DB limit will be retroactive, employees who are at the current limit will see an unexpected increase in benefits. Normally, such an increase was met with a reduction in RRSP contribution room via a past service pension adjustment (PSPA). However, the budget proposes to modify the PSPA rules to provide an exclusion for benefit increases arising directly as a result of increases to the DB limit. Employees getting an increase in benefits will not lose RRSP room.
It is also expected that the higher DB limit will only apply to employees who retire on or after budget day. If so, pensions payable to existing retirees whose pensions have been capped at the current DB limit could not be adjusted to take advantage of the higher limit.
Depending on how an employer’s DB plan document is worded, the increase in the DB limit may or may not apply automatically. Many plan documents refer to the current $1,722 limit “or such other amount as may be adopted” by the tax legislation. If left unchanged, such wording would automatically incorporate the higher DB limit. Depending on each plan’s circumstances, this could lead to higher contributions to cover increased benefits.
Supplemental plans
For plan sponsors that provide benefit coverage in excess of the DB limit through a supplemental plan, the higher limit will shift liabilities from the supplemental plan back to the registered plan since a greater portion of employee pensions will fall under the registered plan. In those cases employers may wish to review funding or security arrangements (if any) for the supplemental plan. If, for example, a sponsor was funding a supplemental plan to cover $5 million in liabilities, budget changes may drop the liabilities in the supplemental plan to $3 million. In some cases the changes may take the pressure off companies to provide supplemental plans.
DC RPPs
In situations where employers capped contributions to a DC arrangement at the tax sheltered limits, the proposals will increase the cost for sponsors since greater contributions will now be going into the registered DC vehicle.
Similarly, if the plan was being topped up, but through an unfunded account, the benefit increases will represent a new cash cost (as opposed to an accounting cost). However, if the top-up arrangement is funded, the cost increase for the registered plan will be offset by a cost reduction for the top-up plan.
For employers considering a conversion of a retirement plan from a DC to a DB design (an idea gaining attention as boomers look for more pension stability and security), the retroactive nature of the increase to the DB limits means there will be more room for creating or restoring benefits for past years of service.
Plan communication
The higher limits raise communication issues. Employers should consider how best to communicate the impact of the new limits to members. Payroll and pension administration systems will need to be updated to reflect the new limits.
DC RPP settlement options
Currently, at retirement, members of DC plans must transfer their savings into a life annuity or another tax-sheltered vehicle such as an RRSP or Registered Retirement Income Fund/Life Income Fund (RRIF/LIF).
Now, members will no longer be forced to create their own retirement accounts. They may have the option of leaving savings in the employer’s plan — with benefits paid out similar to a RRIF — to take advantage of the lower investment management fees typically charged on employer-sponsored pension plans.
The budget proposes to permit the transfer of funds back into a DC plan by former members who had previously transferred their DC accounts to a RRIF.
These measures will apply starting in 2004. They raise a number of plan administration concerns, such as:
•How this will be interpreted by the pension standards regulators? Will it be optional or mandatory for DC plans to offer RRIF-type payments to retiring members?
•Plan sponsors will need to consider administration implications of monitoring minimum and maximum withdrawal amounts.
•Employers should also consider the communication, education and governance implications of having retirees continue to participate in the DC plan.
Firefighters’ pensions
The budget proposes changes to help firefighters save for retirement at a faster rate than usual. In DB plans integrated with the Canada or Quebec Pension Plan (the typical arrangement for firefighters) the maximum accrual rate will increase to 2.33 per cent per year of service from the current two per cent. This was approved in principle by the House of Commons in 2002, and it will now be up to the firefighters to negotiate the extra benefits with the municipalities. It remains to be seen whether other public safety occupations (or, indeed, unions representing employees in physically demanding jobs) will lobby for similar treatment.
Employment Insurance
Employment Insurance (EI) premiums are currently 2.10 per cent for employees and 2.94 per cent for employers. The budget proposes to reduce the EI premium rate for 2004 to 1.98 per cent and 2.77 per cent of insurable earnings respectively. EI premiums have exceeded EI payments for several years resulting in a notional surplus. It’s expected the reduced rate will generate premium revenues equal to projected program costs for 2004.
The government will consult with stakeholders on a new permanent EI rate-setting regime to prevent future surpluses.
The budget also proposes an EI compassionate family care leave benefit, effective Jan. 4, 2004. This will provide benefits for a six-week period to care for a gravely ill or dying child, parent or spouse. The Canada Labour Code will be amended so that permanent employees working in federally regulated businesses can take the leave. This will likely place pressure on the provinces to follow suit.
For a complete look at all budget implications for HR, visit www.hrreporter.com select “search” and enter article #2360.
C. Ian Genno is a consulting actuary and principal in the Toronto office of Towers Perrin. He can be reached at (416) 960-2700. This article was prepared with the assistance of colleagues in the Toronto office.
For HR professionals, there are a number of implications arising from these proposals. From a pension perspective, HR managers will need to consider the impact on pension plan costs, supplemental plan funding or security arrangements, DC RPP payout options, employee communication and plan administration.
EI premium costs for 2004 will be reduced, and employers will need to consider how to handle the new compassionate family care provisions.
And some help may be on the way in managing the costs of employer-sponsored health-care plans.
Tax-assisted retirement savings limits
The budget increases annual contribution limits for defined contribution registered pension plans (DC RPPs), registered retirement savings plans (RRSPs) and deferred profit sharing plans (DPSPs).
There are also corresponding increases in the annual benefit limit for defined benefit (DB) RPPs from $1,722 per year of service to $1,833 for 2004 and $2,000 for 2005.
The budget proposals represent the first substantive increase to the DB plan limits since 1976. Arguably, the changes will make DB plans slightly more attractive for plan members since the changes provide an increase in benefits for past years of service while changes to DC plans will only apply to service after the changes take effect.
While the changes are good news for plan members they could represent new administration and contribution costs for plan sponsors, as well as new communication challenges. The specific impact of the change to these limits on an employer’s retirement plans will depend on each plan’s design, funded status and demographics.
DB pensions
Since increases in the DB limit will be retroactive, employees who are at the current limit will see an unexpected increase in benefits. Normally, such an increase was met with a reduction in RRSP contribution room via a past service pension adjustment (PSPA). However, the budget proposes to modify the PSPA rules to provide an exclusion for benefit increases arising directly as a result of increases to the DB limit. Employees getting an increase in benefits will not lose RRSP room.
It is also expected that the higher DB limit will only apply to employees who retire on or after budget day. If so, pensions payable to existing retirees whose pensions have been capped at the current DB limit could not be adjusted to take advantage of the higher limit.
Depending on how an employer’s DB plan document is worded, the increase in the DB limit may or may not apply automatically. Many plan documents refer to the current $1,722 limit “or such other amount as may be adopted” by the tax legislation. If left unchanged, such wording would automatically incorporate the higher DB limit. Depending on each plan’s circumstances, this could lead to higher contributions to cover increased benefits.
Supplemental plans
For plan sponsors that provide benefit coverage in excess of the DB limit through a supplemental plan, the higher limit will shift liabilities from the supplemental plan back to the registered plan since a greater portion of employee pensions will fall under the registered plan. In those cases employers may wish to review funding or security arrangements (if any) for the supplemental plan. If, for example, a sponsor was funding a supplemental plan to cover $5 million in liabilities, budget changes may drop the liabilities in the supplemental plan to $3 million. In some cases the changes may take the pressure off companies to provide supplemental plans.
DC RPPs
In situations where employers capped contributions to a DC arrangement at the tax sheltered limits, the proposals will increase the cost for sponsors since greater contributions will now be going into the registered DC vehicle.
Similarly, if the plan was being topped up, but through an unfunded account, the benefit increases will represent a new cash cost (as opposed to an accounting cost). However, if the top-up arrangement is funded, the cost increase for the registered plan will be offset by a cost reduction for the top-up plan.
For employers considering a conversion of a retirement plan from a DC to a DB design (an idea gaining attention as boomers look for more pension stability and security), the retroactive nature of the increase to the DB limits means there will be more room for creating or restoring benefits for past years of service.
Plan communication
The higher limits raise communication issues. Employers should consider how best to communicate the impact of the new limits to members. Payroll and pension administration systems will need to be updated to reflect the new limits.
DC RPP settlement options
Currently, at retirement, members of DC plans must transfer their savings into a life annuity or another tax-sheltered vehicle such as an RRSP or Registered Retirement Income Fund/Life Income Fund (RRIF/LIF).
Now, members will no longer be forced to create their own retirement accounts. They may have the option of leaving savings in the employer’s plan — with benefits paid out similar to a RRIF — to take advantage of the lower investment management fees typically charged on employer-sponsored pension plans.
The budget proposes to permit the transfer of funds back into a DC plan by former members who had previously transferred their DC accounts to a RRIF.
These measures will apply starting in 2004. They raise a number of plan administration concerns, such as:
•How this will be interpreted by the pension standards regulators? Will it be optional or mandatory for DC plans to offer RRIF-type payments to retiring members?
•Plan sponsors will need to consider administration implications of monitoring minimum and maximum withdrawal amounts.
•Employers should also consider the communication, education and governance implications of having retirees continue to participate in the DC plan.
Firefighters’ pensions
The budget proposes changes to help firefighters save for retirement at a faster rate than usual. In DB plans integrated with the Canada or Quebec Pension Plan (the typical arrangement for firefighters) the maximum accrual rate will increase to 2.33 per cent per year of service from the current two per cent. This was approved in principle by the House of Commons in 2002, and it will now be up to the firefighters to negotiate the extra benefits with the municipalities. It remains to be seen whether other public safety occupations (or, indeed, unions representing employees in physically demanding jobs) will lobby for similar treatment.
Employment Insurance
Employment Insurance (EI) premiums are currently 2.10 per cent for employees and 2.94 per cent for employers. The budget proposes to reduce the EI premium rate for 2004 to 1.98 per cent and 2.77 per cent of insurable earnings respectively. EI premiums have exceeded EI payments for several years resulting in a notional surplus. It’s expected the reduced rate will generate premium revenues equal to projected program costs for 2004.
The government will consult with stakeholders on a new permanent EI rate-setting regime to prevent future surpluses.
The budget also proposes an EI compassionate family care leave benefit, effective Jan. 4, 2004. This will provide benefits for a six-week period to care for a gravely ill or dying child, parent or spouse. The Canada Labour Code will be amended so that permanent employees working in federally regulated businesses can take the leave. This will likely place pressure on the provinces to follow suit.
For a complete look at all budget implications for HR, visit www.hrreporter.com select “search” and enter article #2360.
C. Ian Genno is a consulting actuary and principal in the Toronto office of Towers Perrin. He can be reached at (416) 960-2700. This article was prepared with the assistance of colleagues in the Toronto office.
