Ontario permits variable benefits in DC pension plans
Following the publication of Regulations 368/19 and 369/19 under the Ontario Pension Benefits Act (PBA), Ontario’s rules permitting defined contribution (DC) pension plans to offer variable benefits to their former members came into force on January 1, 2020. The variable benefit rules permit former members to receive a retirement income directly from a DC pension plan, rather than transferring a member’s pension benefit to a prescribed savings arrangement or using it to fund the purchase of an annuity.
The province of Ontario first published a description of the variable benefits regulation on March 20, 2018 and a draft regulation on April 11, 2019 (as described in the April 2018 and May 2019 News & Views, respectively).
Rules for administering variable benefit accounts
DC pension plans offering variable benefits are required to give prescribed information about variable benefits as part of the former member’s retirement option statement. The statement must include a statement that the retired member will have the option of transferring up to 50% of the amount transferred to the variable benefit account at the time it was established to an unlocked registered retirement savings arrangement within 60 days of establishing the variable benefit account.
A DC plan may permit the transfer of only a portion of a former member’s DC account to a variable account, in which case a former member may elect to transfer part of the account to a variable benefit account. Otherwise, the entire amount credited to the former member will be transferred to the former member’s variable benefit account.
A spouse’s consent is required to establish a variable benefit account, unless the spouse is living separate and apart from the former member.
After the establishment of a variable benefit account, the retired member will receive a statement requiring the retired member to elect the amount to be paid during the calendar year, the method of payment and the frequency of payments, if the plan permits more than one payment per year. If the retired member does not make an initial election, the minimum amount will be paid. The retired member may be restricted to changing the election only once annually, but a pension plan may also permit a retired member to make more than one change annually.
The amount paid from a variable benefit account in a given year must be at least equal to the annual minimum amount set under the Income Tax Act, while the maximum amount that can be paid out in a calendar year mirrors the limits applicable to life income funds in Ontario.
For retired members with variable benefit accounts, the administrator must provide annual statements, including the amount and nature of the fees and expenses charged to the variable benefit account, if any.
A retired member’s spouse who is not living separate and apart is entitled to the variable benefit account upon the retired member’s death, unless the spouse waives the right to the death benefit. A spouse who was designated a specified beneficiary by the member has the right to continue to receive an income from the pension plan. A retired member and a specified beneficiary also have the right to designate a beneficiary who is not a spouse.
Upon the death of a retired member who was receiving variable benefits, a surviving spouse whom the member had designated as a specified beneficiary may elect to continue receiving variable benefits rather than a lump sum benefit.
The introduction of variable benefit accounts allows DC pension plans to offer Ontario members the option of receiving variable benefits in retirement directly from the pension plan. By providing this option, a DC pension plan can make the pension plan more attractive to members, offer lower investment management fees throughout retirement, and retain assets in the pension plan, potentially providing greater negotiating power with service providers. Pension plans are not required to offer variable benefit accounts to their members.
With the introduction of variable benefit accounts in Ontario, such accounts are now permitted everywhere in Canada except in New Brunswick and Newfoundland and Labrador.