The federal government’s proposals around advanced life deferred annuities and variable payment life annuities represent significant enhancements in decumulation options for Canadian capital accumulation plan members, according to a letter from the Pension Investment Association of Canada.
In the association’s feedback to the government, it encouraged the facilitation of the broadest potential access for Canadian savers in drafting the changes to the Income Tax Act, which were introduced in the 2019 federal budget.
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“We believe that this means a regime whereby [registered retirement savings plans] and [retirement income fund] savings will have efficient access, and whereby a variety of financial service providers can offer VPLA structures,” noted the letter. “PIAC’s view is that large [defined contribution] plan sponsors will have the scale to integrate VPLA structures into their registered plan offerings if they so choose, but that smaller employers will likely look to direct their members to third-party providers of such products.”
Under the current budget language, the only alternative to in-plan variable payment life annuities available to smaller employers is through a pooled registered pension plan, said the PIAC, noting this could create a significant barrier to accessibility since Canada hasn’t yet seen meaningful traction in the PRPP market.
It also said the introduction of the variable payment life annuities could open up an opportunity for the federal government to revisit the PRPP framework to encourage broader adoption. “Once the tax changes are in place, we note that the federal government can continue to play a leadership role in this area by encouraging provincial policy-makers to advance any required legislative changes to facilitate the introduction of VPLA structures in a provincial pension context.”
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In the letter, the PIAC noted it’s also supportive of proposed changes to pension legislation, including the government re-introducing changes that would provide a full discharge of pension liabilities on the purchase of annuities by federally regulated plans.
As the government considers the details of the changes, the PIAC suggested it looks at the approach taken by the Ontario government, which mandated the retention of entitlement to surplus by annuitized members in the event of a windup post-annuitization.
However, the letter noted the association is disappointed there was no follow through in the budget to review defined benefit funding rules for federally regulated employers and, in particular, to permit solvency reserve accounts, which were mentioned in the government’s discussion paper on retirement security.
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“In our Jan. 11, 2019 letter to you, PIAC has advocated in favour of [solvency reserve accounts] for many years as a means to overcome the inherent procyclicality of pension funding requirements and to mitigate the asymmetries regarding the potential for trapped surplus in plans,” stated the letter. “We see no policy downside in terms of benefit security from appropriately structured [solvency reserve accounts] and encourage the federal government to follow the lead of British Columbia, Alberta and Quebec in terms of making these an eligible funding mechanism for federal plans.”
The letter also referred to the recent recommendations from the Canadian Association of Pension Supervisory Authorities on DB plan funding, which endorsed the use of solvency reserve accounts. “We reiterate that now is the right time to implement the [solvency reserve accounts] change as federal plans are generally well-funded and the change could bring additional funding into federally regulated plans ahead of the next turn in the pension funding cycle.”
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