CONSULTATION PAPER. Bill 30 Pension Benefits Act. December 3, 2010

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1 CONSULTATION PAPER Bill 30 Pension Benefits Act rd December 3, 2010

2 I. Introduction On December 1, 2010, the government of Prince Edward Island introduced Bill 30 Pension Benefits Act for first reading. The Bill is modeled on existing Nova Scotia legislation and is intended to harmonize with pension legislation of other Canadian jurisdictions. The legislation can be viewed at: The purpose of this consultation paper is to solicit comments on the legislation. In order to enable us to complete consultations prior to the Spring 2011 session of the legislature, we would st like to receive your comments by January 31, Further consultations on Regulations may be held when the legislation is introduced to the legislature for second reading. -2-

3 II. Submissions The Department of Justice and Public Safety invites comments on Bill 30 Pension Benefits Act. Interested parties are asked to provide their submissions in writing st to the Department by January 31, Submissions should be forwarded to: Bill 30 Pension Benefits Act Consultations Consumer, Corporate and Insurance Services Division Department of Justice and Public Safety P.O. Box 2000 Charlottetown, PE C1A 7N8 Telephone: (902) Fax: (902)

4 III. Discussion Discussion on all aspects of the legislation will be received. Nevertheless, this paper invites stakeholders to focus their discussion on the following specific issues: Vesting If you are a member of a pension plan, and you terminate your employment, you have several options. If you have less than two years of membership in the plan when you terminate, and your plan does not provide for vesting earlier than two years of membership, you are said to be "not vested." You will get a refund of your own contributions to the plan, plus interest. You can take this refund as cash (with tax withheld), or have it transferred to your personal Registered Retirement Savings Plan (RRSP), or to the pension plan of your new employer (tax sheltered). If you have equal to or more than two years of membership in the plan when you terminate (or if your plan provides for vesting earlier than two years), you are said to be "vested." If you are vested, you are entitled to a deferred pension. A deferred pension means that you can leave your accrued pension in the pension plan until you retire. When you retire, you get pension payments from the plan. Question: Should the legislation maintain the proposed two year vesting threshold? Locking-In Locking-in is a requirement of the legislation. Locking-in ensures that funds contributed to pension plans are saved to give you a retirement income, even if your membership in the pension plan ends. Locked-in pension funds cannot be used as collateral for loans, nor can they be seized by creditors. General Rule Under the legislation, your pension benefits must be locked-in after two years of membership in the plan. Your pension plan may lock in your benefits even earlier. Generally, locking-in coincides with vesting, which is your right to receive the benefit you have earned in the pension plan. If you are vested immediately in your pension plan, then your benefit may be locked-in immediately too. Pension funds that are locked-in under the proposed Act may be transferred to certain investments or classes of investments to be held in a locked-in account set up for you by a financial institution. A list of investments or classes of investments that may be held in a locked-in account will be later prescribed in Regulations of the proposed Act. Applicable restrictions on the use of the funds in the pension plan continue to apply upon transfer out of a pension plan. If your pension benefit has been divided between you and your former spouse or common-law partner, locking-in still applies. -4-

5 Exceptions The proposed Act provides for limited exceptions to locking-in: one for unlocking pension benefits that represent only a small amount, and one for unlocking benefits due to a shortened life expectancy. Small Amount and Shortened Life Expectancy Funds in a Pension Plan Small amount - Small amounts of pension benefits do not have to be locked-in. Your plan administrator will determine if your benefit can be unlocked because it is a small amount. The proposed Act permits unlocking if your benefit meets certain criteria For example: If you terminate employment in 2010, your benefit can be unlocked if it has a value less than $4,720, or if it will provide you with a pension of less than $1,888 per year starting at age 65. Shortened life expectancy - Your pension plan may also unlock benefits if your life expectancy is considerably shortened, but it is not required to do so. Funds Transferred to Locked-In Accounts Small amount It is anticipated that Regulations to the legislation will provide that a person age 65 or older may unlock locked-in pension benefits if the sum of his or her entitlements in every locked-in account is less than 40 per cent of the year's maximum pensionable earnings under the Canada Pension Plan. In 2010, amounts under $18,888 could be unlocked. If you were to qualify under this anticipated provision, you would be entitled to transfer the money to an RRSP or receive it as a cash lump sum. Any lump sums withdrawn would be fully taxable in the year in which they are withdrawn. To make a transfer or receive a lump sum under this provision, you would have to complete and file a prescribed form with each relevant financial institution. Shortened Life Expectancy - It is also anticipated that Regulations to the legislation would provide for the withdrawal of a lump sum of locked-in pension benefits due to shortened life expectancy. To unlock your entitlement under this provision, a physician would have to certify that, due to a mental or physical disability, your life expectancy is likely to be shortened considerably. To unlock funds under these circumstances, you have to complete and file a prescribed form with each relevant financial institution. Financial Hardship The Nova Scotia Pension Benefits Act, upon which this legislation is modeled, also provides for an application to withdraw some of your locked-in pension funds due to financial hardship. Ontario and Alberta also provide for a similar exception. -5-

6 Under the Nova Scotia legislation, an applicant may qualify under this exception if that person has medical expenses that are not reimbursed from any other source, is facing foreclosure on his or her mortgage, or if that applicant s income is below 40% of the year s maximum pensionable earnings under the Canada Pension Plan. Significant additional resources may be required to include and administer a financial hardship exception as part a Prince Edward Island Act. As a result, adding this exception may also require the imposition of higher registration fees. Other Exceptions Neither Bill 30 nor the Nova Scotia legislation currently provides exceptions to the lockingin requirements for persons who have permanently left Canada. Finally, neither Bill 30 nor the Nova Scotia legislation gives the Superintendent of Pensions any special powers to override the legislation. Question: Should the legislation include any other exceptions than the proposed two exceptions for a small amount and for shortened life expectancy? Application and Registration Pension plans are subject to provincial and federal pension standards legislation. Provincial legislation applies to members of pension plans who report to work within that province. Federal pension standards legislation applies to members of pension plans who work in federally regulated industries (e.g. banks, interprovincial communications, and interprovincial transportation). All pension plans are subject to the Income Tax Act. Employees of the provincial government, teachers, and federal public sector employees are covered by separate acts relevant to their pension plans. Employers must register their pension plan in the province in which the majority of the plan members report to work. For example, a large company in Prince Edward Island might have a pension plan with members employed in New Brunswick. If the majority of the members are employed in Prince Edward Island, then the plan is registered here. Prince Edward Island must ensure that the plan applies Prince Edward Island law to Prince Edward Island members, and New Brunswick law to New Brunswick members. Employers who maintain pension plans will require a reasonable transition period in order to make any necessary amendments to their plans to comply with the minimum standards under the proposed Act. Accordingly, an employer who continues to maintain a pension plan for its Prince Edward Island employees after the Act comes into force, and who is required under the Act to register that plan, will have a three year transition period to do so. Question: Should the proposed transition period be three years? -6-