Amendments to the Pension Benefits Standards Act take effect on July 1, including an update to the 10 per cent rule for investments and regulations around spousal consent for pension portability.
From July 1, the 10 per cent rule for investments will be based on the market value of a federally regulated pension plan’s assets rather than book value. That is, plans can invest a maximum of 10 per cent of their assets in a single entity. Before July 1, that 10 per cent was calculated based on the investment’s purchase price, says Tom Mudrinic, principal and consulting actuary at Xerox HR Services.
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Under the amended regulations, the 10 per cent will be calculated according to market value, or how much the asset can be sold for. So, Mudrinic notes, future appreciation counts towards the 10 per cent cap. If a pension fund invests eight per cent of its assets in one company, for example, and it appreciates to make up 11 per cent of its assets, the fund couldn’t buy any more stock in that company.
The one exception to the 10 per cent rule is when assets are invested in a recognized index, says Mudrinic.
For employers and pension fund managers, this change adds another compliance element to their responsibilities, he adds. Fund managers must keep track of what is invested where. And, if the 10 per cent limit is reached – which he notes is not common – “they don’t have to do anything but they can’t add to it anymore.”
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Another amendment coming into effect on July 1 is that spousal consent is now required to exercise pension portability options. So, if a plan member takes an early retirement, their spouse would have to consent before they can transfer the value of the pension into a locked-in registered retirement savings plan, for example.
“The spousal consent will apply where the money is transferred to a ‘retirement savings plan,’ so it would not apply to [an] annuity purchase or the transfer to another pension plan,” says Mudrinic.
“The consent form asks the spouse to acknowledge that transferring the pension value out will mean that there is risk of poor investment performance and that a life annuity may not purchased in future years with those funds. In summary, a warning to the spouse’s that her survivor pension may be reduced in the future.”