Quebec’s annuity purchasing policy
In July 2019, Retraite Québec added a new web page summarizing the Annuity Purchasing Policy. Establishing such a policy allows plan administrators to discharge their obligation to pay pension benefits by purchasing annuities from an insurer. Retraite Québec’s web page addresses various aspects of this process, as summarized below.
Introducing an annuity purchasing policy
When an annuity purchasing policy is adopted, it does not have to be submitted to Retraite Québec. However, the plan text must be amended to indicate that the plan administrator is authorized to settle or discharge the benefits in accordance with the annuity purchasing policy. The plan text should also outline the preconditions that will permit the plan administrator to purchase annuities to settle the rights of members and beneficiaries, as well as the rules which may apply.
If there is no annuity purchasing policy, one may still purchase annuities from an insurer. However, it would not be considered a discharge of their rights and the members concerned would remain members of the plan. If an annuity purchasing policy were subsequently adopted, it would be possible, through subrogation, to proceed with a discharge.
The payment of benefits under an annuity purchasing policy applies to pension plans registered in Quebec, except for the following types of plans:
- Target-benefit pension plans
- Member-funded pension plans (MFPP)
- University and municipal sector pension plans
Only pensions already in payment and pensions for which an application for payment has been filed may be discharged under an annuity purchasing policy.
Annuity purchasing process and annuity characteristics
There are two categories of annuity purchases: purchases without modifications and purchases with modifications.
Annuity purchase without modifications
The purchase of annuities without modifications means that the annuity paid by an insurance company must have the same characteristics as the pension payable under the plan. The annuity amount, joint and survivor conditions, and guaranteed period must all remain the same.
The plan administrator does not have to obtain plan member’s consent to purchase an annuity without modifications. However, the members and beneficiaries concerned must be notified and informed of the amount and characteristics of the purchased annuity, the name and contact information of the insurance company, as well as the rules regarding the termination of a plan that has an asset surplus or a deficit arising from employer insolvency.
Annuity purchase with modifications
The purchase of an annuity with modifications applies when the pension characteristics are not available on the market. In such circumstances, an annuity with similar characteristics may be purchased from an insurer only if the replacement annuity’s value is equal to the value of the pension payable from the plan, on a solvency basis, as of the date of the agreement with the insurance company.
To purchase an annuity with modifications, the prior consent of the members and beneficiaries concerned must be obtained in writing within 30 days. Only annuities for which written consent has been received may be purchased. However, the plan administrator is under no obligation to proceed if, for example, the number of consents received are insufficient to obtain a reasonable price. Once the purchase has been made, members and beneficiaries must be notified in the same manner as for a purchase of the pension without modifications.
Since the establishment and updating of an annuity purchasing policy is considered a plan administrative expenses, such fees are assumed by the pension fund, unless the plan text states otherwise.
Content of the annuity purchasing policy
The Regulations under the Supplemental Pension Plans Act identify the main subjects that must be addressed in an annuity purchasing policy. Some of these subjects are addressed in more detail on Retraite Québec’s website:
- Elements that trigger the purchase of annuities
- Conditions for paying a portion of the member’s benefits
- Criteria for selecting annuities to guarantee
- Process and criteria for selecting the insurance company
Funding criteria and special monitoring
For the annuity purchase to constitute a discharge under the annuity purchasing policy, a special annuity purchasing payment may be required in order to maintain the plan’s degree of solvency or restore it to 100%. If such a payment is required, the employer must consent in writing.
If the annuity purchasing policy so provides, the special payment may be subject to special monitoring so that the employer may recover it in the event of an appropriation of surplus assets.
If there have been discharges of benefits under the annuity purchasing policy during the year, the following subjects must be on the agenda of the annual meeting:
- Number of annuity purchase transactions and premium required by the insurance company for each transaction
- Selection criteria for the annuities and the insurance company
- Plan solvency ratio before and after each annuity purchase and the amount of any special annuity purchasing payments
- The main changes made to the annuity purchasing policy since the last annual meeting
Plan termination and employer withdrawal
Although a person whose pension was purchased in accordance with the annuity purchasing policy is, as of the date of such purchase, no longer a member or beneficiary of the plan, that person retains his or her status as a plan member or beneficiary for three years. If the plan is terminated during that period and has surplus assets, that person will be considered a member or beneficiary with respect to allocation of the surplus. On the other hand, if the plan terminates in a deficit position due to the insolvency of the plan sponsor, the guaranteed annuity will also be reduced, in the same manner as that of the other members and beneficiaries.
Retraite Québec provides additional information on its website to facilitate the implementation of annuity purchasing policies by sponsors who wish to mitigate their risks. However, sponsors in the municipal and university sectors will be disappointed to learn that the rules governing such purchases still do not apply to their plans. Furthermore, the information provided does not address the challenges faced by plans with members in several jurisdictions.