Defined contribution pension plans in Ontario can now offer variable benefits to their plan members.
The provincial government passed a series of regulations under the Pension Benefits Act to allow the accounts, bringing it in line with every other jurisdiction in Canada except for New Brunswick and Newfoundland and Labrador.
“The important thing is that now this fills in the last and biggest piece in Canada where variable benefits accounts are now available [almost] everywhere,” says Andrew Zur, a principal on Morneau Shepell Ltd.’s governance, legal and compliance consulting team. “It’s going to be a much more attractive feature to pension plans with members in multiple jurisdictions because most of Canada is now covered.”
For plan sponsors that choose to offer variable benefits, there are many upsides, he says. These include retaining more assets in the plan, providing lower investment management fees to members throughout their retirement, increasing negotiating power with financial institutions and raising the attractiveness of the plan to members.
However, before employers can offer variable benefits, plan administrators will have to make the option available. Zaheed Jiwani, principal at Eckler Ltd., believes employers will be interested in the option because the thinking around supporting members through retirement is shifting.
“With various provincial governments bringing up variable benefits and that option to plan sponsors, I think it’s gaining a lot more momentum,” he says. “We do see this as a positive for plan sponsors and members because more and more of the larger plan sponsor community was thinking about offering something in decumulation.”
While some plan sponsors may be wary of increasing the length of their fiduciary responsibility to plan members, governmental support and mechanisms for supporting members through retirement have increased, he adds.
“Now that the governments are supporting this, almost encouraging this, and giving us a lot more direction, you’re feeling that, not only has plan sponsor interest shifted but also the responsibility might be shifting as well. Previously, we were only worried about members while they were in our plan up until they retired and then we didn’t really feel we had an obligation; now there may be this extension of fiduciary responsibility.”
If plan sponsors move to allow variable benefit accounts, plan members can move the entirety of their DC plan savings to the account, or they can choose to allocate some savings to the account while moving the remainder to an annuity or another option.
Within 60 days of establishing the variable benefits account, plan members can elect to transfer 50 per cent of the amount they started with into an unlocked registered retirement savings account, though they would need to apply to the plan administrator to do so. Zur says he was pleased to see that feature included in Ontario’s final regulations and expects it to be an important selling point.
“Retired members enjoy flexibility even if they don’t intend to use it. And someone who opens a . . . variable benefits account will now have the option to transfer to their personal RRSP in which there are no minimum or maximum withdrawal rules.”
Plan members can also choose the frequency of payments they receive, if their plan sponsor allows more than one payment per year. If members don’t make an initial choice, the plan sponsor pays the minimum amount according to the federal Income Tax Act rules that govern life income fund payments.
They can also transfer funds into their variable benefits account from their LIFs, locked-in retirement accounts and locked-in retirement income funds, which will be beneficial for both plan members and plan sponsors, says Jiwani. Plan members can put their entire retirement balance in one place and enjoy reduced investment fees on funds that were previously outside of the plan.
“From a plan sponsor perspective, not only are they getting the benefit of existing accumulation assets that have now flipped over to the retirement side in the variable benefits account, but they’re getting the benefit of outside assets coming in to help build up more of that economy of scale.”
Plan sponsors that elect to make variable benefits accounts available to their members must provide information about the accounts in retirees’ retirement option statement. They must also provide annual statements to members who choose the option, which include the amount and nature of fees and expenses charged to the account.