Digest of Benefit Entitlement Principles Chapter 5 - Section 13

5.13.1.1 Pension plan legislation

Pension plans must be registered under provincial or federal pension legislation, as well as with the Canada Revenue Agency (CRA), for the purposes of the Income Tax Act. Any provisions in the pension plan must comply with not only any applicable pension legislation, but also with the conditions and limitations on pension benefits, imposed by CRA through the Income Tax Act. In general, the pension legislation sets the minimum provisions a plan must contain, and the Income Tax Act sets the maximum. During the entire time the pension fund is in operation, the authorities who administer this legislation control what may go into the plan, what may come out, how it may come out, and what happens while the moneys are in the plan.

Pension plans that cover all federal government employees, employees of the Canadian Armed Forces, the RCMP, and members of parliament, are established by separate federal legislation. The legislation setting up these pension plans is subject to the Income Tax Act and must meet all the income tax provisions. However, it is not subject to the federal or provincial pension legislation regarding provisions related to vesting and lock in.

All provinces, except Prince Edward Island, have pension legislation that sets out the provisions that must be contained in each province’s registered pension plan. The Pension Benefits Standards Act of the Government of Canada applies to the employees of any province who are under federal jurisdiction. This includes employees of Crown corporations, banks, railways, airlines, shipping companies, radio stations, communication companies, and employees of the Canadian territories. The applicable provincial legislation is determined by the location of the employee's work site. The provisions required by the federal or provincial legislation are the minimum that must be met; however, any plan can offer more generous terms within the limits set by CRA. In addition, plans for an employer whose operations span several provinces must meet the conditions set out in each of those provincial acts. An employer may achieve this by adopting the provisions of the most generous provincial legislation, or they may have separate sections in the plan containing the provisions for employees in each province. It is important that the particular provisions of the employer's pension plan are known, so that the true nature of the moneys, and the conditions under which they are being paid, can be determined.

In addition to defining the benefits that are payable on retirement, every pension plan must also define when pensions are payable, and the benefits and rights of the employees upon termination of their services. These rights may include having the locked-in pension credits transferred to a locked-in vehicle, having the right to a refund of their own contributions, a refund of their own and their employer's contributions, or a deferred annuity.

Some provincial legislation, as well as federal legislation, periodically undergo changes. Contributions made prior to the effective date of any changes in legislation may have one set of rules regarding when contributions are vested and locked in, and contributions made on or after the date of changes may have a different set of rules. The relevant dates and their provisions can be found in the pension plan itself.

5.13.1.2 Pension plan structure

Pension plans are as varied as the needs of the individuals they cover. However, generally, all pension plans share the same purpose and have some similar provisions regarding the payment of benefits. The similarities arise from the fact that the plans must meet the demands of diverse legislation; the Income Tax Act and the applicable federal or provincial pension legislation. However, retirement plans may exist which are not registered under the Income Tax Act. As no income tax deduction is possible for any contributions made to such a plan, these plans are not very common (Digest 5.13.10).

Pension plans may have various requirements for the employer and employees depending on the type of plan. A contributory plan requires employees to contribute, and the employer to pay the balance of the costs. In a non-contributory plan, the employer pays the full cost. If required, contributions made by the employee are collected by the employer, usually by way of a payroll deduction from the employee's gross pay, and placed in the pension fund. The employer's contributions go directly into the fund. The employer contributions do not form part of the employee's gross earnings, and are not included for the purposes of calculating income tax, EI premiums, and CPP contributions. While in the pension fund, both employer and employee contributions accumulate interest.

The purpose of a pension plan is to provide a pension benefit upon retirement. Retirement may be at an early retirement age or at normal retirement age; however it is important to note that receiving a pension from an employment does not necessarily mean that the individual is retiring from all employment (Digest 5.13.5.1). Contributing to a pension plan does not necessarily guarantee a pension, as not all employees remain employed by the same employer until retirement age. Some employees may work for an employer and contribute to the plan for a short time. The benefits, if any, that are payable to an employee who leaves employment prior to retirement age, depend on whether vesting and lock-in of the pension contributions have occurred.

Vesting is the employee's right to receive some sort of benefit under the pension plan (Digest 5.13.2). Normally, this vested benefit takes the form of either a return of the contributions made to the plan and the accumulated interest, or a deferred pension (an annuity). Whether contributions are vested under the terms of a pension plan depends on the length of employment with that employer. The type of benefit or the nature of the benefit that the employee receives, a refund of contributions or a deferred pension, depends on whether lock-in has occurred.

The locking in of contributions simply means that they can no longer be refunded in a lump sum, as a return of contributions. As such, the only benefit that can be paid by the pension fund, based on those contributions, is an immediate or deferred pension. Furthermore, that pension can only be paid upon reaching a specified retirement age. The locking in of contributions, like vesting, depends on the length of time employed, and is set out in the provisions of the plan. While vesting establishes the right to a benefit under the plan, locking in restricts access to that benefit until the specified retirement age is reached. Vesting usually occurs at the same time as lock-in, although it can occur earlier. The actual pension plan will describe at what point vesting and lock-in occur.

Return of contributions, whether the employer’s or employee’s, can only occur when these contributions are not locked in. In addition, to be refunded, the employee must have a vested right to these contributions. Under all pension plans, vesting occurs immediately for the employee's own contributions. This means, no matter how long the employee has been employed, as long as these contributions are not locked in, they can receive all of their own contributions and the accumulated interest, upon termination of employment. If these contributions are locked in, they cannot be refunded as they will be used to support the payment of a pension at retirement age. If the pension plan permits vesting to occur earlier than lock-in, the employee may be entitled to a lump-sum payment of the employer contributions and the accumulated interest, as well as to the return of their own contributions.

The provisions of a particular pension plan may allow vesting of the employer's portion of the pension contributions to be contingent on certain factors (conditional). This means that full benefits from both the employer’s and employee’s contributions are only paid if a certain option is chosen (the deferred pension). Contingent vesting therefore prevents the immediate payment of the employer contributions.

The term pension credits refers to contributions and the accumulated interest that are locked in and can no longer be refunded in cash, on termination of employment. Therefore, a benefit from these pension credits can only be paid as a pension. However, this does not mean that these pension credits have to remain with that employer's pension plan until the employee reaches retirement age. Pension plans allow for some degree of portability (transferability) of pension credits (Digest 5.13.2; Digest 5.13.7). The condition on the transfer of these credits is that they must move directly from one locked-in vehicle to another, and must remain locked in until retirement age is reached. As long as these conditions are met, a transfer may be made. Eligible locked-in vehicles can be another employer's pension plan (if the other plan so permits); a locked-in non-commutable RRSP, or its equivalent (provincial locked-in retirement account (LIRA) or Quebec’s compte de retraite immobilisé (CRI)); or an annuity purchase contract.

Upon reaching either normal retirement age or an early retirement age, as set out in the plan, employees may access their locked-in pension credits as a pension. Pension plans require that employees apply for their pension, as it is not paid automatically upon reaching retirement age. Employees can delay the start of their pensions to a time of their choosing, however, it cannot begin later than the maximum age allowed by legislation. This also applies to locked-in vehicles. Whether a pension is paid periodically as an annuity, or as a lump-sum pension payment, depends on the provisions of the pension plan (Digest 5.13.6).

5.13.1.3 Categories of pension plans

There are 6 types of pension plans that in turn, can be classified into 3 broad categories. These categories depend on whether the pension is defined on the basis of a set formula (that is, a defined benefit), a set level of contributions (that is, a defined contribution), or a combination of the 2 (that is, a hybrid or combination).

Defined Benefit Pension Plans specify the formula for calculating the pension that will be paid to the employee on retirement. Contribution rates are then established during the years employed to provide for a sum of money on retirement that will be able to support the payment of that pension. Any shortfalls, between what the accumulated contributions would support as a pension and the pension to which that employee is entitled, must be made up by the employer. There are 3 types of defined benefit pension plans:

• Final Earnings Pension Plan

  the pension is based on the member's length of service and average earnings for a stated period before retirement, for example: 2% multiplied by the number of years of service multiplied by an average of the member's earnings during the last or best five consecutive years of service.

• Career Average Earnings Pension Plan

  the pension is equal to a percentage of the aggregate earnings in the member's entire career. For example: 2% of the aggregate earnings during the employee's period of service

• Flat (or Uniform) Benefit Pension Plan

  the pension is based on a specified number of dollars for each year of service. For example: $40 per month for each year of service would yield a pension of $1200 per month for someone with 30 years of service

Defined Contribution Pension Plans specify the contribution rate. Whatever money is in the fund on retirement will be used to purchase an annuity. There are 2 types of defined contribution pension plans:

• Money Purchase (Defined Contribution) Pension Plan

  the contribution amount is specified, however the pension amount is not known until the employee retires. For example: 5% of the employee's salary per year from both the employer and the employee, reduced by the required contributions under CPP and QPP. The amount of pension that these contributions will be able to purchase as an annuity will not be known until the employee retires

• Profit Sharing Pension Plan

  the employer contributes an amount that varies each year with the profits earned.

  It is allocated to each member on a point system. Taxation authorities require that the employer make a minimum contribution, equal to at least 1% of remuneration of plan members in any year. The amount of pension that these contributions will provide will not be known until the employee retires

Hybrid or Combination Plans include characteristics of both defined benefit and defined contribution plans. In combination plans, the pension is the sum of 2 types of benefits; in hybrid plans, the pension is the greater of 2 types of benefits.

Actuary

An actuary is a business professional who computes insurance and pension rates and premiums on the basis of experience tables, by using probability, risk theory, and statistics (Black’s Law Dictionary).

Annuity

An annuity is a fixed sum payable to a person at specified intervals for a specific period of time or for life. Each payment represents a partial return of the capital invested and a return on the capital investment (commonly called interest).

Commuted value

To commute something in a financial sense is to convert it to cash. The commuted value of a pension represents the cash equivalent of what that pension would have been, if paid in a lump-sum payment. It is the value of the monthly pension payments to be made in the future, converted into a fixed or gross amount (a cash lump-sum settlement) (Digest 5.13.6.2).

Locked in

Locked in means that the contributions to the plan cannot be withdrawn by the employee, and the employee can only receive the benefit of those contributions in the form of a pension, at retirement. The employer and the employee portion of the pension fund contributions must stay in the fund, and cannot be refunded. Although they can’t be refunded, they may be transferred to another locked-in vehicle. Locked-in pension contributions may also be referred to as pension credits.

Through vesting, an employee establishes a right to receipt of the contributions. The lock-in provisions limit what the employee can do with the contributions to which they have a vested right; that is, they cannot receive them in cash until retirement age is reached. There are exceptions to the locking-in rule, and if the terms of the particular plan permit, the employee may receive a cash sum. These exceptions occur when the periodic pension amount that the employee is entitled to is below a set limit, when there is a shorter than normal life expectancy, when partial commutation is allowed by legislation, when Additional Voluntary Contributions are returned (Digest 5.13.9.1), or when provisions exist regarding Maximum Funding by Employee Contributions (Digest 5.13.8.1).

When identifying moneys paid out of a pension fund, any payout of pension moneys prior to lock-in is normally a return of contributions, whereas any payment after lock-in has occurred is generally a lump-sum pension benefit.

Locked-in, non-commutable RRSP

A locked-in, non-commutable RRSP, or its equivalent (LIRA, CRI), is a financial vehicle that can be likened to a portable pension plan. A non-commutable RRSP is one that can never be de-registered. The full value of the RRSP cannot be obtained in a lump sum, which is why it is said to be non-commutable. These types of RRSPs can only be used to purchase an annuity. An RRSP will be recognized as both locked-in and non-commutable when the RRSP agreement is accompanied by an additional guarantee: both the claimant and the financial institution guarantee that the funds in the RRSP will never be used for any purpose other than to purchase a monthly annuity at retirement age. Additional information regarding the consequences these RRSPs have on whether they are considered payable for the purposes of EI benefits, is available in section 5.13.7 of this chapter.

Such a locked-in, non-commutable RRSP is distinguishable from a personal, collapsible RRSP used as an individual investment tool. Personal RRSPs may or may not require the funds to be locked-in for a specific term, in order for the individual to gain a specific rate of return or growth for the investment. As the entire amount of personal RRSP funds belongs to the claimant, they may receive them at any time by collapsing the RRSP and converting it into cash, even if a penalty may be assessed by the financial institution for doing so before the end of the specified term.

Locked-in vehicle

A locked-in vehicle is a financial instrument designed so that moneys contained within it can only be used to pay a pension on retirement. The locked-in vehicles from which most provincial pension legislation allow the transfer of pension credits (locked-in contributions) are:

• another employer's Registered Pension Plan (RPP), if there is a provision for this transfer in the other employer's pension plan
• a prescribed RRSP that is both locked-in and non-commutable, or its equivalent, such as a LIRA, or CRI which have all the same provisions, and
• an annuity purchase contract

Portability

Portability means that the commuted value of a terminating employee's pension may be transferred to another locked-in vehicle. Most pension plans give a terminating employee the right to have the commuted value of the vested pension transferred to a locked-in vehicle.

Vesting

Vesting is the right of an employee to a benefit from the pension plan, on termination of employment. Vesting allows the employee to retain a pension (or the value thereof), even if the employee leaves the plan before a pension benefit is immediately payable. The length of time an employee must be employed before vesting is allowed is set out in the pension legislation and the pension plan. Normally, this vested benefit takes the form of either a return of contributions made to the plan and any accumulated interest, or a deferred pension. What the employee receives on termination of employment depends on whether the contributions are locked in. According to pension legislation, vesting normally occurs at the same time as lock-in, however, individual pension plans may provide vesting at an earlier date.

If the contributions have become locked in by the terms of the pension plan or pension legislation, the employer and employee contributions cannot be refunded. They must remain with the fund to support the payment of the deferred pension that the employee has a vested right to receive at retirement age. If the contributions have not become locked in, they are refunded to the employee on termination of employment.

The contributions that may be refundable to an employee on termination depends on whether they were made by the employer or the employee, and the provisions of the pension plan. Employees always have a right to a return of their own contributions, no matter how long they were employed with that particular employer. Therefore, vesting is always immediate for employee contributions. However, whether there is a right to the employer contributions on leaving employment depends on the terms of the pension plan and the employee's length of employment with that employer. If the pension plan allows vesting to occur prior to lock-in, and the employee was employed the required length of time, the employer contributions are refunded.

The provisions of a particular pension plan may allow conditional vesting of the employer's portion of the pension contributions. This means that full benefits from the contributions (that is, the receipt of both employer and employee contributions) occurs only if a certain option is chosen (usually the deferred pension). The plan will indicate whether vesting is conditional or not.

5.13.5.1 Retirement age

All pension plans set out a normal retirement age. This is the age at which an employee can retire with a full, unreduced pension. Normal retirement age can be anywhere from 60 to 65 years of age. However, some plans may provide a full, unreduced pension at a date earlier than normal retirement age. Normal retirement age simply governs the age at which the unreduced payment of pension benefits can start, under the provisions of the pension plan. Normal retirement age is not the same as a mandatory retirement age. An employer may establish a mandatory retirement age through personnel policies, whereby an employee is forced to resign when they reach that age.

In addition to setting out the normal retirement age, pension plans may allow the payment of pension benefits to be either deferred, or paid at an earlier age. If the option to defer the pension benefits is taken, they may be deferred up to age 71. Early retirement age, as set out in a pension plan, is the age at which a member may elect to retire and begin receiving pension payments, prior to reaching normal retirement age. This age may be within ten years of normal retirement age, and may involve the application of an actuarial pension reduction formula to compensate for the extra number of years the pension will be paid.

An employee must apply for their pension entitlement, whether it is upon reaching normal retirement or early retirement age. A pension is not automatically payable upon reaching a specified age, unless that age is beyond the maximum allowed under the pension plan. It involves a conscious choice by the employee, and the employee must meet eligibility criteria in terms of pension credits. If the pension plan allows an employee to defer the receipt of their pension to a future date, that pension is not considered payable until the employee applies and qualifies for it. Until this happens, that pension is not considered immediately due and therefore has no impact on EI benefits (Digest 5.6.1).

If the claimant is of retirement age and has an option to defer the collection of a pension, but elects to receive it, that pension is considered paid or payable. In addition, if a claimant has no choice under the plan and a pension is immediately due upon reaching a certain age, the pension is considered payable when the retirement age is reached. The determination that the pension is payable does not change if the claimant chooses to make alternate arrangements to dispose of these moneys. Any transfer of that periodic pension into a regular RRSP or a locked-in, non-commutable RRSP does not change the fact that the pension amount is payable, even if it is alleged that the money was never actually physically received (CUB 66832).

5.13.5.2 Pension bridging benefits

Pension bridging benefits allow an individual earlier access to moneys that normally are only payable at a future date. Bridging benefits, in the form of additional compensation, allow for an easier transition between an individual's present and future financial circumstances. The payment of bridging benefits ceases when the point of planned future compensation is reached.

Bridging benefits can be paid out of a pension fund or out of general company revenue. However, not all bridging benefits paid by an employer are considered pension bridging benefits. The fact that the pension bridging benefit is not paid out of the pension fund is not relevant in determining that it is in fact a pension bridging benefit, when the criteria for a pension bridging benefit has been met.

A pension bridging benefit is financial payment designed to allow an individual to move from one level of pension compensation to a future level of higher pension compensation with the addition of payments from the employer’s pension fund, Canada Pension Plan (CPP) or Quebec Pension Plan (QPP). It is structured so that the total moneys received each month, during the entire period, are constant. Pension bridging benefits are paid along with a pension to top-up that pension, or until the pension entitlement is reached. This top-up may be necessary as the pension that is payable may have been reduced or delayed due to forced early retirement. Pension bridging benefits may also act as an incentive to take early retirement.

A pension bridging benefit has the following characteristics:

• it bridges to future pension entitlement, such as a company pension, CPP/QPP and Old Age Security (OAS)
• the amount of the bridging benefit is based on a periodic payment
• the individual who is receiving it has reached retirement age (either early or normal)
• the amount that is being paid as the pension bridging benefit is approximately at the same level as the additional pension that is to be paid in the future

If the pension bridging benefits are to be paid out of general company revenues, 3 additional conditions must be met:

1. the bridging benefit payment period does not count towards years of service for the company pension that is to be paid
2. the employer’s bridging benefit program must be based on the worker meeting a set age, years of service and retirement date requirements, and
3. the bridging benefit payment must not reduce the individual’s entitlement to severance payments accumulated from that employment, according to the contract or collective agreement and/or provincial or federal labour standards

Periodic payments include situations in which employees have a choice of receiving the bridging benefits in a lump sum rather than in monthly instalments. If a lump-sum bridging benefit meets all the other conditions to be considered a pension bridging benefit, then the monthly amount upon which the lump-sum payment was based will be determined and allocated pursuant to EIR 36(14) over the period for which it is payable, in the same manner as monthly pension bridging benefits.

Because a pension bridging benefit arises out of employment, is paid at retirement age, and is usually calculated based on the employee’s age, years of service and retirement date, it resembles a retirement pension and is treated and allocated as such for EI benefit purposes.

Pension bridging benefits may be paid until pension entitlement is reached, or to supplement a pension or other retirement compensation, such as a pension payment from the employer’s Group RRSPs (Digest 5.13.3) and/or Deferred Profit Sharing Plans (DPSPs) (Digest 5.15.3).

It is not necessary that a bridging benefit be paid along with a pension to be considered a pension bridging benefit. It is sufficient that it allows the employee to make the transition to a future pension such as a company pension, CPP/QPP or OAS.

An example of a pension bridging benefit is the payment of an amount equal to future CPP/QPP and/or OAS entitlement. The pension bridging benefit may be paid alone, or in addition to the basic pension, or some other retirement income already payable to the employee. It is paid until the CPP/QPP pension and/or the OAS commence.

The fact that OAS is not pension earnings cannot change the nature of pension bridging benefits that are paid to compensate the employee at a level equivalent to their future OAS (EIR 35(1)). The employer or the pension fund has taken on the obligation of paying an equivalent amount until the actual OAS benefits start, and that equivalent amount becomes a retirement pension. This does not qualify these payments as OAS benefits. OAS does not meet the definition of a retirement pension arising out of employment as it is based solely on age and residence in Canada.

Pension bridging benefits cannot be considered a loan unless, under the terms of the pension bridging benefit plan, there is an obligation on the part of the pensioner, to repay the loan, and documentary evidence supporting that obligation exists (FCA A-1050-90; CUB 15686B).

A bridging benefit paid out of general company revenue, which does not meet the characteristics listed above, cannot be considered a pension bridging benefit and cannot be treated as a periodic pension. The allocation will depend on whether the claimant remains an employee while these payments are being made, or the employee has separated from that employment, and the payments are part of termination payments (EIR 36(5); EIR 36(9); Digest 5.7.2; Digest 5.12.7).

Pension bridging benefits are no longer considered earnings if the claimant meets the requalifier exemption for pension income (Digest 5.13.13). This is true whether the pension bridging benefits are paid out of the pension fund, or out of general company revenues. As well, when pension bridging benefits are no longer payable, and the claimant starts or continues to receive the company pension, any insurable hours earned while receiving pension bridging benefits, qualify as insurable hours towards meeting the requalifier exemption for the company pension.

5.13.5.3 Amount of periodic pension to be allocated

It is the gross amount of the periodic pension that must be allocated. This includes the basic pension amount as well as:

• any supplement to that pension, including any pension bridging benefits (Digest 5.13.5.2)
• any deductions made for the purpose of buying back previous service, or non-existent service, under the terms of the pension plan, or
• any other financial obligation of the claimant for which their pension is used to satisfy

The one exception to this occurs where the claimant's pension has been divided due to marital dissolution or due to spousal assignment of a CPP or QPP pension (Digest 5.13.12.1; Digest 5.13.12.2).

Periodic pensions are not always the same amount for the life of the employee. Periodic pension payments from a pension fund can increase. Increases may come about when the pension is indexed to the cost of living; when the pension annuity is reviewed periodically and ad hoc increases are given to compensate for the decreased buying power of the pension, or when the pension payment is a variable or escalating life annuity.

Periodic pension payments from a pension fund can also decrease. Decreases in periodic pensions may occur when:

• bridging benefits from a pension plan cease
• when CPP/QPP or OAS payments start where a pension plan is integrated with these benefits, whether through exercising an option or not
• when a pension is split due to marital dissolution, or
• CPP/QPP payments are assigned to a spouse

Whether the amount increases or decreases, the amount to be allocated is the amount of pension that is payable. When employment pensions decrease due to bridging benefits or integration with social security benefits, the amount to be allocated from the employment pension will also decrease. However, there may be a corresponding new allocation for the amount of the pension now being paid from another source (CPP or QPP). Should the pension bridging benefit be designed to bridge until OAS entitlement, there would be no corresponding increase in allocation, as OAS is not considered a pension for EI purposes (EIR 35(1)).

Periodic pensions resulting from employment are usually paid monthly, towards the end of the month. If the exact amount of the gross pension is not known, an estimate will be used until the exact figure is available.

In order to obtain the weekly amount for allocation, monthly periodic pensions are converted to a weekly amount by multiplying the monthly amount by twelve (12) to obtain the yearly figure, then dividing that figure by 52. If the start of the pension begins other than at the beginning of a week, the weekly amount will be pro-rated for the number of working days the pension was payable (that is, one-fifth for each working day).

Periodic pensions are allocated to the period for which they are paid or payable (EIR 36(14)). A periodic pension, like a lump-sum pension benefit, is allocated concurrently with any other earnings earned during that period (EIR 36(16)). In addition, periodic pension payments do not prevent an interruption of earnings (EIR 35(5)).

5.13.6 Lump-sum pension benefit

The goal of all pension plans is to pay a pension benefit at retirement (Digest 5.13.5.1). A pension benefit is an annual, monthly, or other periodic amount to which an employee is, or will be entitled, upon retirement. This periodic payment is commonly called an annuity. Although the goal of all pension plans is the same, the type of pension benefit payable under a pension plan depends on whether the plan is registered under the Income Tax Act (Digest 5.13.10).

What the pension legislation envisions, and what is reflected in the registered pension plans themselves, is that the pension benefit employees will receive will be in the form of an annuity. In addition, that annuity will be payable only on retirement. However, although the stated intention of pension plans is to pay pension benefits as an annuity, there are some restricted circumstances where the pension plan allows the transfer of accumulated pension credits (locked-in contributions) into a lump-sum payment. This is called a lump-sum pension benefit. Although it is normally paid on termination of employment due to retirement, it may be paid earlier under special unlocking provisions allowed under some pension plans, or as a return of additional voluntary contributions (AVCs) to the claimant (Digest 5.13.6.2; Digest 5.13.9.1). Lump-sum pension benefits are considered payable no matter how the claimant chooses to dispose of them (Digest 5.13.6.3). A lump-sum pension benefit is converted to an annuity, and then allocated starting with the week for which it became paid or payable (Digest 5.13.6.4).

5.13.7 Portability of locked-in pension credits

Due to the mobility that occurs within the labour force, an employee may not spend their entire career with just one employer. The employee is protected in that, if the employment was only for a short time and lock-in has not occurred, they can receive a return of all the contributions made to the pension plan. However, no refund can be made once pension contributions are locked into the pension fund under the terms of the plan.

Recognizing the need to be able to move locked-in pension contributions, pension legislation requires that pension plans under its jurisdiction, allow for the transfer of pension credits (locked-in pension contributions and the accumulated interest) when employment ends. This ability to transfer pension credits to another financial vehicle, where they will ultimately be used to pay a pension, is called portability. Non-registered pension plan contributions cannot be transferred in this manner as they are not considered to be locked-in pension credits under pension legislation (Digest 5.13.10).

The condition on the transfer of accumulated pension credits is that they must move directly from the pension fund into one of the locked-in vehicles approved by the pension legislation for this purpose. In addition, these moneys must remain locked in until retirement age is reached.

The acceptable locked-in vehicles are the following:

• another employer's pension plan, if the other plan permits this transfer of pension credits
• a locked-in, non-commutable RRSP; or some other similar vehicle, such as a provincial Locked-in Retirement Account (LIRA), or a Compte de Retraite Immobilisé (CRI) in the province of Quebec, which have all the same provisions as a locked-in, non-commutable RRSP (Digest 5.13.2), and
• an annuity purchase contract

Sometimes, due to the types of pension plans involved and the various benefits these plans provide, transfer of contributions from one plan to another is not possible. The plan, to which the pension credits are to be transferred, must permit this transfer.

If pension credits are transferred directly from one locked-in vehicle to another on termination of employment, it is considered that nothing was paid or payable to the claimant. Moreover, these pension credits can only be accessed at retirement age, according to the specified provisions of each locked-in vehicle. Therefore it is only at that time that any legal entitlement to an immediate payment exists. Claimants who arrange for the transfer of their pension credits in this manner will not have any earnings allocated from these vehicles until they are paid out under the terms of the locked-in vehicle.

At age 71, any moneys in a locked-in RRSP must be used to purchase an annuity. Once the pension becomes payable, it is allocated against EI benefits.

5.13.8 Return of contributions on termination of employment

Although it is the intention of all plans to pay a pension benefit upon retirement from employment, sometimes the employment ends before an employee reaches retirement age. If the employee has worked a sufficient period of time, according to the terms of the pension plan, the contributions made while employed are non-refundable (that is, they are locked-in). These contributions and the accumulated interest (pension credits), can only be used to support a deferred pension, or they can be transferred to another locked-in vehicle (Digest 5.13.7). Contributions and the accumulated interest that are not locked in, and to which the employee has a vested right under the terms of the plan, will be paid to the employee on termination of employment (Digest 5.13.2).

When reference is made to contributions in this section, whether they are employee or employer generated, they include the interest that has accumulated on them. Should the claimant be entitled to additional interest on any contributions because the employer has delayed in refunding those contributions to the claimant, that interest amount would not be included in any allocation (Digest 5.3.1.6).

Pensions can be funded through contributions made by both the employer and the employee, or the employer alone. How this return of contributions will be treated for benefit purposes depends on who made them; the employee, or the employer.

5.13.9 Additional contributions to a pension fund

Pension plans can be contributory or non-contributory. Whether a plan is contributory depends on whether the employee is required to make contributions. In a non-contributory plan, the employer contributes the entire cost of the pension benefit. The employee in these plans is not required to contribute anything. A contributory plan, on the other hand, is a plan where the employees are required to contribute towards their pensions, and the employer pays the balance of the costs.

All pension plans set out what is required in contributions, whether by their members and the employer, or the employer alone. Some pension plans allow their employees to increase their pension amounts on retirement by making additional pension contributions on a voluntary basis, buying back past service where no contributions had been made, or purchasing additional years of service, whether or not those years have been worked.

When these pension benefits, funded through additional contributions to the pension fund, are paid out, either through receipt of an annuity or in a lump sum, they are handled differently depending on whether they were additional voluntary contributions (AVCs) or additional required contributions (ARCs) to the pension fund.

5.13.10 Non-registered pension plans

A retirement compensation package may comprise different pension plan components; a pension plan registered under the Income Tax Act, as well as a non-registered pension plan.

The Income Tax Act sets out the maximum pension benefit that a pension plan may provide, to remain registered for the purposes of receiving income tax deductions for pension contributions. If an employer makes a commitment to pay pension benefits in excess of this maximum, the excess benefits cannot be included in the registered pension plan. If these excess benefits were to remain in the pension plan, the entire pension plan would no longer meet the criteria for registration under the Income Tax Act. In order to avoid this, the employer may create a non-registered pension plan just to pay these excess benefits. These benefits are then paid out of general company revenues and not out of the registered pension fund.

The key to handling any payments made under a non-registered pension plan is to determine the true nature of the payment. These payments are then treated in the same manner as any similar payment out of a registered pension plan.

Generally, payments from a non-registered pension plan are either a lump-sum pension benefit, a periodic pension, or a return of contributions. The nature of these payments depends on whether or not an individual is eligible for retirement. The applicable early and normal retirement ages are set out in the provisions of the non-registered pension plan. These ages are generally the same as those in the registered pension plan, as they are designed to supplement the registered pension amounts.

When an individual reaches retirement age, either early or normal, the employee's pension is calculated using all components, based on the formula developed by the company for this purpose. Any pension payable from the registered pension plan is supplemented by either an additional periodic pension, or a lump-sum pension benefit paid out of the non-registered pension plan. However, the non-registered pension may be paid separately. Regardless of the fact that this pension is paid by the company, and is not paid out of a registered pension plan, these moneys still meet the definition of a retirement pension arising out of employment (EIR 35(1)). The allocation will be the same as for any pension; that is, periodic pensions are allocated to the period for which the pension is paid or payable and lump-sum pension benefits are converted to an annuity and allocated from the week paid or payable (Digest 5.13.5.3; Digest 5.13.6.4). Should the employee defer the receipt of the registered portion, the non-registered portion, or both portions, allocation only occurs when the pension becomes payable (Digest 5.13.4).

If an individual leaves employment prior to retirement age, the plan may allow the employee to leave all pension entitlement in the pension plans (both registered and non-registered) until retirement age is reached. This is treated in the same way as any deferred pension entitlement. The allocation does not start until the employee elects to receive their pension as it is only then that the pensions are considered payable (Digest 5.13.4).

On termination of employment prior to retirement age, a claimant may receive the commuted value of their non-registered pension entitlement. These moneys are earnings and are allocated in the same manner as any other payment made by reason of a lay-off or separation, and the same way as a return of employer contributions (Digest 5.13.8.2). The manner in which the claimant disposes of these moneys does not alter this allocation. As these moneys are accessible to the claimant on termination, they cannot avoid allocation by transferring them to a locked-in vehicle.

5.13.11 Pension fund surplus and contributions in excess of CRA limitations

In addition to the various payments that may arise from a pension fund, an employee may also receive a payment that is attributed to either a surplus in the pension fund itself, or contributions which are in excess of those allowed by CRA. The implication of these payments on EI benefits depends on how the pension fund reassigns these moneys. Due to the pension legislation provisions, distribution of money from a pension fund is restricted to certain types of moneys that can only be paid under limited circumstances. It is the true nature of what is being paid that determines how these payments are treated.

5.13.12 Division of pension assets

Pensions and pension credits have been considered a marital asset in court cases dealing with marital dissolution. As such, the ownership of the pension may be divided between the spouses, like any other form of marital asset or property.

Like property, the right to a pension can be legally transferred from one person to another. Once the rights to a pension have been legally transferred or disposed of, the pension is no longer owned entirely by the individual who first had the right to it. Since the ownership of that pension is no longer only the claimant's, the total amount can no longer be considered their pension benefits. However, it must be a legal transfer of ownership or rights, not simply a direction by the owner that part of the moneys due them be paid to another party (Digest 5.13.12.1).

This division of pension assets can occur when a couple separates or divorces. However, it can also occur under the Canada or Quebec Pension Plans while a couple is still married (Digest 5.13.12.2). The general principle used in dealing with these types of cases is the following:

Once the rights to the asset (that is, the claimant's pension credits, or the pension itself) have been legally and formally assigned or transferred to the spouse, the assigned or transferred portion is no longer the claimant’s pension income. The test used to determine this is not to whom the pension payments are distributed or paid, but rather who is entitled to the moneys, or who has a vested right to them.

5.13.12.1 Pension split due to marital dissolution

In deciding on cases of marital dissolution, the courts have normally split the entitlement to the pension or the pension credits, based on co-habitation during the period the contributions were made. This may not necessarily be one-half of the claimant's pension. For the purposes of determining whether this split will have an effect on the pension earnings of the claimant, the claimant must be transferring the right to the pension, or the ownership of the pension, and not simply arranging to use the pension to satisfy a financial obligation connected with the marital dissolution. If the rights to a portion of the pension have been legally transferred to the spouse, under the terms of a separation or divorce, then that portion is no longer pension income of the claimant. The amount transferred will not constitute earnings of the spouse who receives that portion of their former spouse's pension. This is because these moneys do not arise out of the receiving spouse’s pension contributions during their employment.

Whether part of the pension paid or payable to a claimant is no longer their property, and whether it has become the property of their spouse, will depend on the documentation presented. This documentation should be in the form of a separation agreement, order or decree, or a divorce decree (nisi or absolute), that clearly states that the pension rights have been divided between the 2 spouses. The documentation must contain a specific reference to the division of the pension rights and not be merely an order to pay alimony or child support. An order to pay alimony or child support is a financial obligation of a claimant, which they may use their pension to satisfy. Satisfying financial obligations does not alter the fact that this money remains paid or payable, and belongs to the claimant (Digest 5.6.1).

If the pension has been divided by a separation or divorce decree or agreement, then it does not matter if one payment for the full amount is issued directly to the claimant. The portion belonging to the spouse will not be earnings of the claimant, as the claimant is considered to be legally acting as a trustee only, for the spouse's portion, even if they initially receive both portions. The claimant would be legally bound to forward the spouse's portion to the former spouse. On the other hand, the fact that a pension plan administrator makes separate payments is not sufficient to prove that the pension rights have been divided, and that the amount of earnings determination should be reduced. An arrangement to have more than one payment issued may be made simply to facilitate the claimant's discharge of legal obligations to pay alimony or child support.

5.13.12.2 Spousal assignment of a CPP or QPP pension

A provision within the Canada and Quebec Pension Plans allows for a portion of the CPP or QPP pension that is credited to an individual, to be assigned to the pensioner's spouse. Spouses in a continuing marriage and partners in a common-law relationship may apply to receive an equal share of the retirement pension earned by both parties during their life together. On application, the spouse is normally entitled to the pension owed based on 50% of the pension credits accrued by the pensioner, during the years of co-habitation. Both spouses must be at least 60 years of age and have applied for pensions to which they were entitled under the plan.

Only one spouse has to apply for this assignment. The Minister, upon request, automatically grants the assignment; however, the assignment may be appealed if it was made without the consent of the pensioner. This assignment will only be revoked by CPP under 4 specific circumstances:

1. the death of the spouse or pensioner
2. the separation of the couple
3. their divorce, or
4. the non-contributing spouse starts contributing to the fund

As well, the couple, on their own, can request that their assignment of pension be terminated at any time.

If the pensioner provides written proof that such an assignment has been made, the portion of the pension that has been assigned to the spouse will not be considered income of the pensioner. In cases of these pension assignments, the portion of the pension that has been assigned is no longer legally payable to the spouse who has lost that portion of their pension entitlement. Should this spouse be on claim, it cannot be considered as earnings since this spouse is no longer legally entitled to receive the assigned portion of the pension. In addition, the assigned portion will not be considered as income of the spouse who receives it, as this pension does not arise from that person's employment, nor their own pension contributions.

If the spousal assignment is subsequently revoked, the question of the allocation of pension earnings will need to be reviewed.