Proposed changes to tax regulations pursue greater flexibility in pension plan delivery

The federal Department of Finance is currently considering a series of additions and amendments to the Income Tax Act (ITA)

Regulations governing employer-sponsored registered pension plans. In keeping with recent federal and provincial legislative trends, many of the new rules, released in draft form earlier this year and likely to take effect in the next few months, aim to provide pension plan administrators with greater flexibility in designing how a plan’s members or their surviving spouses can receive their accrued pension benefits.

Other notable revisions would relax the restrictions on investments that can be made by multi-employer pension plans and change how granting credits for past service impacts RRSP contribution room.

The government has proposed adding several key new exceptions to the traditional requirement that pension plan payments be made to a member on an “equal periodic” basis. Right now, pension plans are restricted primarily to adjustments to accommodate cost-of-living increases. The new rules will make it easier for plan administrators to offer a range of adjustments to payments received by pensioners.

Among the proposed new exceptions to the “equal” rule, the government intends to recognize that some pension plans offer early retirement subsidies in the form of age-based “pop-up” adjustments. The new rule would allow a plan that imposes an initial early retirement reduction which exceeds the amount required by ITA Regulations to subsequently reduce or eliminate the excess portion at a specified future date. For example, if a plan pays a reduced pension starting at age 60 — despite the fact that tax law does not require a reduction at that age — it can later provide unreduced payments made after a specified age.

The exceptions also include allowing pension plans to incorporate payment increases that take effect when an offset that is in place for payments from a public disability benefits or private insurance plan is removed or reduced.

Adjustments to pension payments will be permitted when a pensioner makes a change to survivor benefits. The pension amount, for example, could be increased if a pensioner’s spouse dies and a joint and survivor option is cancelled, or decreased if a pensioner marries after the pension starts and opts to add or increase such survivor benefits.

Plans will be able to institute temporary reduced pensions whenever a plan member is continuing to receive remuneration (whether it is reduced or re-employment income) after pension payments have started. This proposed new tax rule aims specifically at resolving a conflict between the current ITA Regulations and Quebec’s Supplemental Pension Plans Act. Quebec legislation entitles plan members to a partial pension if they choose to continue to work at reduced pay after their plan’s normal retirement date. Members then receive their full pension, adjusted for payments already received, after they retire. This contravenes the current equal payment rule.

Incidentally, current ITA Regulations already accommodate Quebec’s phased-in retirement initiative. This initiative allows any plan member who is under an agreement with their employer to reduce their work hours, to request and receive an annual payment from their plan. This can start as many as 10 years prior to the plan’s normal retirement age. When the member retires, his pension amount is actuarially reduced to account for any payments already received.

The Canada Customs and Revenue Agency (CCRA) has ruled that such payments are “lump sum” partial commutations of accrued benefits and not pension payments. ITA Regulations have always permitted partial commutations in lieu of future entitlements and can accommodate the Quebec initiative without any further changes.

Also proposed are changes to the rules to allow a pension member to create or increase a bridge benefit by foregoing other benefits and the addition of a new spousal bridge benefit regulation.

The first change would increase the limit on a member’s monthly bridge to one-twelfth of 40 per cent of the applicable Year’s Maximum Pensionable Earnings (YMPE) plus subsequent cost-of-living increases.

This formula would accommodate Quebec’s 40 per cent YMPE limit on the “temporary pension” that a member may receive during a phased-in retirement and prior to age 65. It would also provide a benefit amount that is slightly higher than that which results when using the current Canada Pension Plan + Old Age Security test. (In 2000, for example, the new formula would result in a maximum bridge benefit of $1,253.33 per month.)

The other key change would allow plan members to create or increase a bridge by foregoing either or both of a lifetime pension amount or the attached survivor benefits. The current bridging rule requires a member to forego both. The change would mean, for example, that a member could opt to exchange only the survivor benefits (i.e.: a 10-year guarantee on his lifetime pension) for additional bridge benefits of the same value without reducing the amount of his lifetime pension. Or, the member could now forego lifetime pension amounts without affecting the survivor benefits.

A new bridge benefit regulation will permit surviving or former spouses to create “spousal bridge” benefits by giving up a portion of their survivor benefits. This would allow a pension plan, for example, to include provision for a surviving spouse to forgo all or a portion of their lifetime payments in exchange for bridge benefits up to age 65. The monthly limit on spousal bridge benefits will be the same as the limit that applies to a plan’s members.

The government is also proposing a change that aims to help plan members to better plan their Registered Retirement Savings Plan (RRSP) contributions in a given year.

When an employer amends a plan to provide all members with pension upgrades in respect of past service, the employer reports Past Service Pension Adjustments (PSPA) to Canada Customs and Revenue Agency without requiring certification from CCRA. Currently, a PSPA that is exempt from certification reduces an individual’s RRSP contribution room by the PSPA amount in the year the PSPA arises. As a result, an individual may have inadvertently over-contributed to their RRSP for the year, based on the expectation that the contribution will be deductible.

Under the proposed changes, exempt PSPAs that occur after the year 2000, would reduce an individual’s RRSP room in the year following the year of the past service event. As a result, individuals can plan their RRSP contributions for a year without worrying about immediate RRSP consequences should their employer improve their pension plan benefits.

No change is proposed for PSPAs that require CCRA certification. In that case, RRSP room is reduced when the certification is issued.

The government is proposing a new regulation that would allow multi-employer pension plans to hold a limited amount of shares and debt of companies connected to participating employers. The plan can invest in such a property only if:
•the plan has 15 or more non-related participating employers;
•the plan has no money purchase provisions;
•any participating employer in question (and related persons) does not employ more than 10 per cent of the active plan members; and
•the total cost of such properties cannot exceed 10 per cent of the cost amount of all the properties held by the plan.

This new rule would apply to property acquired after September 1999.

Recent federal and provincial changes to the laws governing privately sponsored pension plans have both relaxed some of the traditional rules and added greater flexibility in the provision of pension benefits. Although the federal Department of Finance will not mandate amendments to pension plans, most pension plan administrators will not be able to offer the new provisions without explicitly amending their plans.

It may be time for pension plan administrators to contact their pension benefit consultants to ensure that they can best take advantage of the new options.

Andrew Donelle is a pension consultant with Buck Consultants. He can be reached at (416) 865-0060 ext. 269 or adonelle@

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