Important Regulatory Updates Impacting Defined Benefit Pensions in 2020

1. Changes To Commuted Value Calculation Coming in December

NEW UPDATE: It has been confirmed that these revisions to The Canadian Institute of Actuaries (CIA) Standards For Pension Plan Commuted Values will go into effect December 1st 2020.

On that date, the calculation used by administrators will change. The formula will include non-Federal bonds which include provincial and corporate bonds. This will likely result in lower commuted value amounts on or after December 1st 2020, therefore reducing the possibility of receiving a cash surplus. Furthermore, this makes it more difficult for insurance companies to match copycat annuities.

There are two key changes, both affect those with defined benefit pension plans.

  1. a) A change in the interest rate assumption
  2. b) A change in the pension commencement age assumption used to calculate your commuted value.

Both of these changes could have a significant effect on the commuted value paid to you when you retire, especially if you have an early retirement provisions.

The rules that we’re living with right now, prior to the December changes, are good. So if you are able to retire, we advise that you do so before November. If you are retiring in the Fall, talk with us. There are ways to minimize your tax.

We specialize in helping individuals prepare for retirement and can help you minimize your tax.

If you’re planning to retire prior to December 2020, call us at 1-888-554-6661.

Read more about the changes here.

2. Solvency Of Pension Plans Impacted

The Financial Services Regulatory Authority of Ontario (FSRA) came out with guidance on May 22, 2020, which refers to the solvency of pension plans. What it says is that the solvency of pension plans have been undermined and are ‘under water’ far more than expected. This is due to the stock market taking a dive, so pension plans that invested in stocks (approx. 40% of pension plans are in stocks), as well as the bond rate falling off a cliff. This impacts pensions because pensions rely on long-term interest rates and interest rates dropped.

Read more about this news here.

3. The Canada Revenue Agency Announced Pension Relief Measures

In early May 2020, the Canada Revenue Agency announced pension relief measures and guidance amidst the COVID-19 pandemic for plan sponsors and administrators.

These included:

a) A change to the 1% minimum contribution rule, where the Minister of National Revenue agreed to waive the 1% rule for the remainder of 2020, meaning it will be permissible to amend a pension plan to allow your employer to decide not to contribute at least 1% of the total pensionable earnings.

b) A period of reduced services, allowing employers to report the eligible period of reduced pay by way of a pension adjustment (PA) rather than a past-service pension adjustment (PSPA).

Learn more about these measures here.

4. Transfers Out Of Federally Regulated Pension Plans Affected

The Office Of Super Ontario Financial Institutions (OSFI) announced early on during the coronavirus pandemic that they froze transfers out of Federally Regulated Pension Plans.

May 7th they softened their position and are now allowing transfers out, subject to “Solvency Ratio”. So if your pension is 100% funded, you get 100% of it transferred. 90% funded, only 90% transferred, etc.

Ontario has not yet followed suit with the rest of Canada and have not yet changed the regulations to adopted the transfer freeze. It is unclear if or when they will.

So if you are in Ontario, right now you CAN transfer commuted value, so as financial advisors, we recommend that you take your commuted value as soon as possible.

Unsure how your pension will be impacted by these changes? The Pension Solutions Canada team is here to help! We specialize in helping individuals prepare for retirement. Call us at 1-888-554-6661.

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