Registered Plans Directorate technical manual

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• 10 8503(3) – Conditions Applicable to Benefits
• 10.1 8503(3)(a) – Eligible Service
• 10.1.1 8503(3)(a)(i) & (ii) – Participating Employer & Predecessor Employer
• 10.1.2 8503(3)(a)(iii) – Periods of Temporary Absence
• 10.1.3 8503(3)(a)(iv) – Disability
• 10.1.4 8503(3)(a)(v) & (vi) – Prior Service
• 10.1.5 8503(3)(a)(vii) – Acceptable to the Minister
• 10.2 8503(3)(b) – Benefit Accruals After Pension Commencement
• 10.3 8503(3)(c) – Early Retirement
• 10.4 8503(3)(d) Increased Benefits for Disabled Member
• 10.5 8503(3)(e) – Pre-1991 Benefits
• 10.6 8503(3)(f) – Determination of Retirement Benefits
• 10.7 8503(3)(g) – Benefit Accrual Rate
• 10.8 8503(3)(h) – Increase in Accrued Benefits
• 10.9 8503(3)(i) – Increase in Accrued Benefits – Part-Time Member
• 10.10 8503(3)(j) – Offset Benefits
• 10.11 8503(3)(k) – Bridging Benefits – Cross-plan Restriction
• 10.12 8503(3)(l) – Division of Benefits on Breakdown of the Marriage or Common-Law Partnership

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10 8503(3) – Conditions Applicable to Benefits

10.1 8503(3)(a) – Eligible Service

The preamble of this paragraph has been amended for greater certainty to exclude any periods of service that are after the end of the calendar year in which the member reaches 71 years of age.[Footnote 1]

If a plan simply says that credited service is service with the employer or an affiliate, we cannot be sure that this complies with the requirements of paragraph 8503(3)(a) of the Regulations. The plan will have to specify that it is service in Canada or we will have to assume that there may be foreign service. If foreign service is being recognized, the plan terms should also specify that the service is acceptable to the Minister. This applies only to plans submitted for registration after October 29, 1993.

SMEPs:

There are exceptions for SMEPS:

• One case is where "hour banks" are maintained for purposes of crediting service in a year where a member worked fewer hours than the regular work year. This may occur during an "eligible period of temporary absence" or simply a period of unemployment. Hours from the "bank" are used in respect of a past year or in the future. The debited hours must be qualifying periods under 8507(3)(a) or periods of disability.
• A second case is where members continue to pay union dues and accrue pensionable service after severance of employment. They do not contribute to the plan during such periods. The cost of the benefits is absorbed by the plan.

We will not impose a limit on the length of time which may be credited as long as:

• PAs were calculated for all contributions to the plan
• The plan meets the additional prescribed conditions in paragraph 8510(7)(a) of the Regulations

Plan Text:

Often the nature of an industry will drive the way in which full-time service is accrued under the terms of a pension plan. For example, if an industry sector, such as a trade, has a four days workweek, this could be considered a full-time accrual of pensionable service. Conversely, if an industry sector has a five days work week, and an individual works four days a week, eighty percent of a full year would be accrued over a calendar year.

Where pensionable service is based on hours worked with an employer, and a set number of hours are used to determine whether a year of pensionable service has been accrued, this full-time number of hours must be reasonable given the circumstances. We would not accept 1 day a week or 1 day a month as being a full-time accrual of pensionable service. The plan provisions should not permit the accrual of more than year of service in a calendar year.

Cross References:

Benefit Entitlement – 8302(1)

Benefit Accrual for Year – 8302(2)

Early Retirement – 8503(3)(c)

Lifetime Retirement Benefits – 8504(1)

Newsletter No. 93-3, Service in Canada

10.1.1 8503(3)(a)(i) & (ii) – Participating Employer & Predecessor Employer

Members may only accrue service with a participating employer, the exceptions being service with a predecessor employer and certain service with a former employer. Service with employers associated with the participating employer is not acceptable unless it clearly meets the predecessor employer and former employer service requirements.

When an employer terminates an employee's employment, there may be employment legislation in place requiring that the employee be given advance notice of the termination ("notice period"). The notice period is considered eligible service. Moreover, if, in lieu of advance notice of termination, the employee receives "termination pay" that is equal to the wages that the employee would have received during the notice period, the foregone notice period can similarly be considered eligible service. The plan text does not need to specifically include such a period as eligible service, but it could specifically disqualify the notice period as eligible.

10.1.2 8503(3)(a)(iii) – Periods of Temporary Absence

The term "continuous service", for example, is often used for vesting purposes, while some other term, such as "credited service" or "pensionable service" may be used for service during which benefits actually accrue. As the Agency is not usually concerned about vesting schedules, we should not request amendments to definitions of service that affect vesting only.

The restrictions on the duration of periods of leave are contained in the prescribed compensation rules in section 8507 of the Regulations. They allow compensation to be prescribed for PA limit purposes up to the 5 + 3 year limit.

Connected Persons:

Connected persons may not accrue pensionable service during an unpaid leave of absence. If connected persons are participating in the plan and the plan permits benefit accruals during leaves of absence, it must be clear from the plan terms that the pension benefits do not accrue to connected persons for an unpaid leave of absence. Connected persons may, however, accrue benefits during a paid leave of absence under 8503(3)(a)(i).

This restriction does not apply to a pre-reform leave of absence.

MEPs:

The restrictions on connected persons do not apply if the plan is a MEP, including SMEPs.

Cross Reference:

Prescribed Compensation – 8507

Information Circular 98-2, Prescribed Compensation for Registered Pension Plans

10.1.3 8503(3)(a)(iv) – Disability

Ensure that where a plan permits accruals during periods of disability, that the disability is defined in accordance with the definition of "disabled" in subsection 8500(1) of the Regulations. We accept references to coverage under long-term disability plans for this purpose.

It is acceptable for plans to provide that members who have terminated employment with the employer continue to accrue pensionable service as long as they are disabled. It is also permissible for a recuperating member who returns after a period of disability to work part-time to accrue benefits on the same basis that applied while the member was away on disability, provided the member is impaired from performing the duties of employment in which the member was engaged before the commencement of the impairment, or can only perform such duties to a lesser degree, and provided the administrator has obtained medical certification to this effect.

Cross Reference:

Undue Deferral of Payment – 8503(4)(f)

10.1.4 8503(3)(a)(v) & (vi) – Prior Service

Plans will often provide that the funds associated with benefits accrued with a former employer will be transferred into the plan in order to provide the benefits. This is not, however, a requirement for post-reform service. The PSPA system will regulate the repurchase of post-1989 past service benefits under the new plan. Where the period includes an "eligibility period", a period during which the member was waiting to qualify for plan membership, there would be no funds associated with that period. A transfer of funds is, however, still required for a portability arrangement relating to pre-reform service.

Reciprocal agreements involve the movement of employees between two employers. In order to use a reciprocal agreement to recognize pre-reform service of a prior employer under a current employer’s plan, the member must go directly from the employ of the prior employer to the current employer.

10.1.5 8503(3)(a)(vii) – Acceptable to the Minister

The periods acceptable to the Minister are outlined in Newsletter No. 93-2, Foreign Service Newsletter and Newsletter No. 00-1, Foreign Service Newsletter Update. Generally, the following periods of service outside Canada will be acceptable in a plan submitted for registration after the date of the Newsletter, October 29, 1993:

• Employment with a resident participating employer
• We will accept unlimited periods of foreign service with a resident participating employer. The following conditions apply:
  • The employee is or has been a resident of Canada
  • The benefits can be provided on a current or past service basis
• Employment with:
  • Non-resident participating employer
  • Non-participating employer
• We will accept a maximum 5-year period of foreign service with:
  • A non-resident participating employer,
  • A non-participating employer that is connected with a participating employer
  • A non-participating employer who has entered into an arrangement with a participating employer, i.e. an agreement with a subsidiary that an employee will go work there, not an agreement under section 8308 of the Regulations

The following conditions apply:

• Member is or has been resident in Canada
• Member has previously rendered service in Canada to the resident participating employer, that is the employee has to have worked in Canada before the foreign service
• Cannot include service prior to coming to Canada (eg. teachers)
• Service does not have to be pensionable service
• Must be current service
• Limited to five cumulative years with an employer
• Each 5-year period can be with more than one employer
• Employee has to return to Canada for at least 12 months before another 5 year period can start

For existing DB provisions

We will accept unlimited periods of foreign service under an existing DB provision. The following conditions apply:

• The benefits are being provided on a current service basis only;
• The terms were submitted to us on or before October 29, 1993;
• We accepted the terms either by registering the plan with the terms in it, or accepting an amendment with the terms in it; and
• The terms of the plan cannot require that before the service is credited, the period has to be accepted by us, or accepted under any administrative positions we have taken.

Administrative positions would be positions that have been formally and widely circulated, by the way of Information Circulars, Newsletters, 1980 shareholder plan rules, etc. If they do not meet the last condition, but meet the others, we will consider their request to include the service on a case-by-case basis. They don't have to come in to us if the service meets any of the other criteria set out in the Newsletters.

This means that if the plan terms that we previously accepted were vague, for example, "we will include any foreign service that is acceptable to the Minister", then they will have to come into us for acceptance if the service isn't covered in the Newsletters.

This policy applies to all new and grandfathered plans that were submitted for registration before October 29, 1993. It also applies to "spin off" plans, submitted before October 29, 1993, if the service provisions of the spin off plan are the same as the original plan. If there has been some change in the spin off plan and that change could have been made in the original plan without affecting its status under Section 3 of Part III of Newsletter No. 93-2, then we should consider the spin off as an existing DB provision.

If an existing DB provision subsequently amends its service provisions, it will still maintain its status under Section 3 if the scope of the terms relating to foreign service is not being broadened.

Reciprocal agreements

We will accept unlimited periods of foreign service under a reciprocal agreement between a registered pension plan and an unregistered plan. The following conditions apply:

• The agreement has specifically been approved by us before the date of the Newsletter; or
• The agreement was established on or before October 29, 1993 in accordance with the terms of the plan.

Therefore, any agreements entered into before October 29, 1993 will continue to be accepted. For any new agreements, the service must meet the requirements as though no agreement exists.

Grandfathered Plans:

We will not revoke a plan that provided for benefits based on service before 1992, which would not qualify as eligible under these rules. In general, we will continue to administer the requirements of Information Circular 72-13R8, Employees’ Pension Plans for eligible service before 1992.

Regardless of when the benefits in respect of pre-1992 service become available, they do not necessarily have to comply with the eligible service rules in 8503(3)(a).

We will continue to apply the more restrictive provisions of the Circular in respect of eligible pre-reform service in both new and grandfathered plans since there is no control mechanism (i.e. PA/PSPA) in the Act to ensure that the eligibility of pre-reform service is not abused. Reciprocal agreements will continue to be required for pre-reform service. They must be current, ongoing agreements for the crediting of pre-reform service and not merely agreements that existed at the time the service took place. The agreements must be submitted to the Agency. They must be:

• Current, ongoing agreements for the crediting of pre-reform service and not merely agreements that existed at the time the service took place,
• Applicable to all members or for a whole class of members,
• Bilateral, i.e. the movement of individuals in both directions, and
• Must be in writing and submitted to the Agency.

Note:

A reciprocal agreement is utilised for the transfer of pensionable service credits between plans. The reciprocal agreement cannot provide for unacceptable benefits to be moved between plans. Reciprocal agreements are not acceptable for pre-1968 plans, 1980 shareholder plans or individual pension plans.

The transfer of funds will continue to be required under portability arrangements for pre-reform benefits.

Plan texts should specify what pre-reform service they provide. Pre-reform service credited after 1991 under a grandfathered plan must be in accordance with the Circular, or if more restrictive, the terms of the plan. Pre-reform service under a new plan must comply with the Circular.

Any period of leave without pay that has a specified time limit is not cumulative. A member can have more than one such period in their career, but each period cannot exceed the length of time specified in the Circular.

As a general rule, we will require that an individual return to work for 12 months before being eligible for another period of absence. However, we will consider shorter periods on a case-by-case basis.

Different types of periods of leave can be taken consecutively within their respective limits.

If any part-time service is to be credited for pre-1992 service after 1991, the service must be actualized and the earnings must be annualized. A member cannot credit the time worked as a period of leave of absence.

Here are examples of scenarios for purchasing pre-reform service credited after 1991:

Example 1

A member terminates his employment with Company A to work for Company B. He transfers his entitlement through a portability arrangement from the Company A pension plan directly to Company B to purchase pre-reform service under the Company B plan. This pre-reform service may be recognized under Company B’s plan since the funds associated with that service are transferred to the current plan under a portability arrangement.

A portability arrangement exists when the funds associated with the accrued entitlement under the prior plan (Company A) are transferred directly to the current plan (Company B) and such periods of eligible service under the prior plan are also pensionable service under the current plan.

Example 2

If the same member as in example 1 transferred his benefit entitlement to an RRSP on termination from Company A before becoming employed with Company B, he would be unable to purchase pre-reform service. This service would not fall under a portability arrangement as the funds associated with the service did not transfer directly from the prior plan to the current plan.

In order to recognize this pre-reform service under the Company B plan, he would have to become re-employed with Company A , transfer the funds from the RRSP to the Company A plan and buy back his pre-reform service under that plan. At that point he could transfer the funds associated with that service directly to the Company B plan under a portability arrangement.

Example 3

A member terminates employment with Company B and receives a return of employee and employer contributions plus related interest and transfers his entitlement to an RRSP. He subsequently becomes re-employed with Company B and would like to re-purchase his pre-reform service. He may do so if the funds associated with that service are transferred from a registered vehicle (registered pension plan, deferred profit sharing plan, RRSP) to the Company B plan to buy back the pre-reform service. This is considered eligible service with an employer who participated in the plan under paragraph 8(e)(i) of Information Circular 72-13R8.

Example 4

A member terminates employment with Company B and receives a refund of employee and employer contributions and related interest and transfers his entitlement to an RRSP. He subsequently becomes re-employed with Company B and would like to re-purchase his pre-reform service; however, he has cashed out all of his RRSPs and does not have any funds in any other registered vehicle to transfer to the Company B plan to fund the pre-reform service. This pre-reform service is considered service with an employer who participates in the plan; however, he cannot presently buy back the service as he does not have the money in any other registered vehicle to transfer to the Company B plan to fund the service. He could contribute to his RRSP on a current service basis and transfer his money to the Company B plan once there is adequate money to fund the pre-reform service.

Example 5

A member terminates employment with Company B and receives a return of employee contributions and related earnings. He has the choice of transferring the money to an RRSP or receiving a lump sum. Upon becoming re-employed with Company B, he may buy back the pre-reform service. The amount necessary to fund the pre-reform benefit does not have to be transferred from another registered vehicle to fund the pre-reform service. This is because the original contribution made to the plan by the member for the prior years would have decreased the amount that would have been contributed to an RRSP in each of these years. Therefore, the re-purchase of this past service with new money would not be considered double-dipping.

Note:

Appendix A distinguishes between vested and non-vested members to determine whether the funds must be transferred from a registered vehicle when a reemployed member is purchasing past service; however, this requirement depends on the termination benefit the member received as described above in examples 3, 4 and 5 rather his vested or non-vested status. For purposes of the Appendix, we will consider an individual to be “vested” if his benefits on termination included any employer money.

Cross References:

Appendix A – Eligible Service

Information Circular, 98-2, Prescribed Compensation for Registered Pension Plans

Information Circular 72-13R8, Employees’ Pension Plans

Newsletter No. 93-2, Foreign Service Newsletter

Newsletter No. 00-1, Foreign Service Newsletter Update

10.2 8503(3)(b) – Benefit Accruals After Pension Commencement

Plan terms may not provide that accruals will continue while a member is in receipt of pension benefits. Where plans provide that a member may continue in employment after pension benefits commence, they must stipulate either that:

• No further benefits may accrue to a member who is in receipt of a pension; or
• Payments of the pension benefits will be suspended until accruals cease.

MEPs:

Where the plan is a MEP (including SMEPs), it is not necessary to take into consideration benefits payable under other plans. This means that an employee could continue to accrue benefits under a MEP even if in receipt of a pension from another plan of a participating employer or non-arm's length employer.

Grandfathered Plans:

We will not revoke a grandfathered plan for the sole reason that it allowed members to accrue benefits while receiving a pension before 1992. After 1991, however, any members who are in that situation must either cease accruing benefits or cease receiving the pension.

Cross Reference:

Statutory Plans – Special Rules – 8503(13)

10.3 8503(3)(c) – Early Retirement

Early retirement eligibility service

Early retirement eligibility service includes pensionable service, but it can also include periods of employment with the employer or predecessor employer that is not pensionable service.

Generally, periods of lay-off are not considered periods of employment and therefore would not be included in the determination of early retirement eligibility. However, if the plan includes periods of lay-off in pensionable service and the reduction factors are determined using pensionable service, they can be included in early retirement eligibility. If periods of lay-off are included in pensionable service but the plan reduction factors are determined using continuous service, the periods of lay-off may only qualify as early retirement eligibility subject to the cumulative limits of section 8507 of the Regulations not being exceeded. In other words, only periods of lay-off that qualify as pensionable service under the terms of the plan, subject to the limits of section 8507, may be included in the determination of early retirement eligibility. Also, a year of part-time employment counts as a full year.

Growing-in rule

Using combined years of age and service to determine the date where LRBs do not have to be reduced (75 in a public safety occupation, and 80 otherwise), each month between the day payment of LRBs start and the day an unreduced pension could have been paid if the member continued in employment counts as two (2) months. The effect, referred to as the "growing-in rule", is that component Y of the reduction formula is reduced by half when compared to a determination based only on age or service.

Example 1

Member starts to receive LRBs at age 56, having been employed by the employer for 21 years. Combined age and service equals 77, i.e. 3 years or 36 months short of entitlement to an unreduced pension.

As each month between the date payment of LRBs starts and the date an unreduced pension could have been paid counts as two months, component Y equals 18 months (36¸ 2). In other words, if the member had continued in employment for 18 months, he would be age 57½ and would have been employed 22½ years, for a combined total of 80.

The growing in period applies to the period between a member's date of retirement or termination of employment and the members pension commencement date. In other words the Y factor continues to accrue during the deferral period "as if the member continued in employment with an employer who participates in the plan."

Example 2

Member retires or terminates employment at age 46 with 12 years of service. He elects to defer receipt of pension until age 57. Combined age and Y factor equals 80 (57+12+11). There is no reduction required.

Ensure that no provision of the plan contravenes the requirements of paragraph 8503(3)(c) of the Regulations. As a general rule, the early retirement reduction formula applies to the lesser of:

• The member's unreduced LRBs based on the plan benefit formula; and
• The maximum LRBs permitted under section 8504 of the Regulations.

However, the way the early retirement formula and the maximum LRBs limit are applied depend entirely upon the terms of the plan. It is possible to structure the limits in ways other than described above and still comply with the requirements of the legislation.

Example 3

The plan provides benefits based on the formula 1.5% x final average earnings (FAE) x years of service, reduced by 6% per annum for each year that retirement occurs prior to age 62. In the same or a separate section, the terms state that in no event will LRBs payable exceed the maximum permitted under section 8504 of the Regulations, and in cases of early retirement, reduced according to paragraph 8503(3)(c). In this case, the amount of LRBs that may be paid from the plan is the lesser of:

• LRBs based on the 1.5% FAE formula, reduced by 6% per annum; and
• Maximum LRBs permitted by section 8504, reduced by paragraph 8503(3)(c).

A plan does not have to state a normal retirement age, but it does have to state the earliest date at which an unreduced pension is payable. The plan may specify the reduction formula, in which case it cannot be less than that required by paragraph 8503(3)(c). Or, the plan may specify the minimum reduction that applies by referring to the specific Regulations. It could also provide for early retirement benefits that are "actuarially equivalent" to benefits paid on normal retirement, provided that it also states that the reduction will be no less than that required by paragraph 8503(3)(c).

It is acceptable for a plan to be more restrictive. For example, a plan may apply an annual 3% reduction for members who start to receive LRBs between the ages of 58 and 62 and a 1.5% reduction for members who start to receive LRBs between the ages of 62 and 65. In this case the legislative requirement of a 0.25% reduction for each month between the date LRBs start to be paid and the member attains age 60 is satisfied.

A reduction factor lower than 0.25% per month is not acceptable when a plan permits payment of LRBs to start prior to the earliest day required by paragraph 8503(3)(c). However, a lower factor (or no factor at all) is acceptable when a plan permits payment of LRBs to start on or later than the earliest day required by paragraph 8503(3)(c). For example, the plan may provide an unreduced pension when retirement occurs at age 65, and a reduced pension benefit if a member retires between the ages of 60 and 65. In this case the reduction factor can be lower than .25%.

If unreduced LRBs are provided on retirement due to total and permanent disability, ensure the plan's description of totally and permanently disabled satisfies the definition in subsection 8500(1). Reference to a member qualifying for CPP or QPP disability benefits satisfies the definition.

Example 4

A connected member retires on December 31, 2001 at age 55 with "X" years of post-reform service and because of the member's high earnings, before applying indexed compensation limit, as per paragraph 8504(1)(a), the plan LRB formula results in a benefit that would exceed $1,722.22 per each year of service. We assume that the early retirement reduction provision in the plan mirrors paragraph 8503(3)(c).

We will look at only one year's worth of service. It's assumed that before limiting the benefit to $1,722.22, the member's pension formula provides a "potential" benefit of $2,300 for the 2001 year of service. An actuary has taken the $2,300 amount and has applied the applicable 15% early retirement reduction (i.e. 5 years x 0.25% per month), before comparing the amount to the DB limit. Thus, after the reduction, the actuary compares $1,955 to $1,722.22 and concluded that the limits of the Regulations apply and the member's pension is limited to $1,722.22 for this year of service.

When the benefit calculation is done in this way, the effect of the early retirement reduction is canceled because this particular member would end up receiving the same pension as another plan member who is not subject to the minimum reduction factors of paragraph 8503(3)(c).

Because of the wording of 8503(3)(c), the pension calculation must be limited to the limits of section 8504 before calculating the applicable early retirement reduction. The reduction must be applied to the benefit that the member would otherwise have been entitled to. Which is $1722.22 for the 2001 credited year of service, not $2,300. Consequently, the member's reduced pension should end up being $1,463.89 instead of the full $1722.22 (i.e. $1,722.22 x (1 - 0.15).

Connected Persons:

LRBs for a connected person have to be reduced when retirement occurs due to total and permanent disability, unless the plan is a multi-employer plan or a specified multi-employer plan.

Grandfathered Plans:

If a grandfathered plan provided more generous early retirement benefits than permitted by paragraph 8503(3)(c) of the Regulations, the plan has to comply with the legislation, but only for benefits for post-1991 service. For retirements occurring on or after January 1, 1992, early retirement benefits for pre-1992 service can continue to be provided on the more generous basis, but the plan cannot then also apply the growing-in rule. As a means of ensuring entitlement to the more generous pre-1992 benefits, the plan can have paragraph 8503(3)(c) apply for all years of service, but also have a notwithstanding clause guaranteeing that the early retirement reduction will not result in benefits for pre-1992 service being less than what the member was entitled to under the previous plan provisions.

If a grandfathered plan provided less generous early retirement benefits than permitted by paragraph 8503(3)(c), for retirements occurring on or after January 1, 1992, the plan can provide benefits based on paragraph 8503(3)(c) for pre-1992 and/or post-1991 service. Generally, if the plan continues to apply the more restrictive benefits, it can apply the growing-in rule even where benefits for pre-1992 service are provided on the basis of an actuarial equivalent value of an unreduced pension. This is because usually such reduced benefits are as restrictive as the legislative requirements. However, the growing rule cannot be applied when the plan also continues to apply the test in paragraph 21 of Information Circular 72-13R8 to the benefits for pre-1992 service. This is because the test can result in a benefit higher than a member would receive if it didn't apply.

Cross References:

Appendix A – Eligible Service

Additional Conditions – 8503(4)(e)

Statutory Plans– Special Rules – 8503(13)

Excluded Benefits – 8504(10)

Excluded Benefits – Total and Permanent Disability – 8504(11)

Conditions Applicable After 1991 to Benefits Under Grandfathered Plans – 8509(2)(b)

Benefits Under Plan Other Than Grandfathered Plan – 8509(9)

10.4 8503(3)(d) Increased Benefits for Disabled Member

Plans may provide reduced pensions to members who are impaired but not totally and permanently disabled. The reductions must be in accordance with the formula in paragraph 8503(3)(c) of the Regulations.

Unreduced pensions may be paid to members of any age who are totally and permanently disabled as long as they are not a connected person.

Paragraph 8503(3)(d) also permits a total and permanent disability pension to be calculated by deeming years of service to age 65, but based on the member's actual rate of remuneration at the time the disability pension commenced. The deeming of the additional years may not result in a disability pension that is greater than the YMPE (minus benefits under other provisions/RPPs) at the time the disability pension commences (except that it may be indexed after commencement for CPI).

Plan Text:

If the plan provides for a disability pension, it must be clear from its terms that, for a member who becomes totally and permanently disabled after 1991, the disability pension will not exceed the above limit. Otherwise, the plan has to be amended. It must also be clear from the plan terms that the member qualifies to receive the disability pension by meeting the definition of “totally and permanently disabled” in subsection 8500(1) or by being eligible for disability benefits under the CPP or QPP.

Connected Persons:

Connected persons are not entitled to the deeming of years of service under paragraph 8503(3)(d), nor are they entitled to an unreduced pension for total and permanent disability. They are entitled only to a pension which is reduced in accordance with paragraph 8503(3)(c) as though they were not disabled.

MEPs:

The restrictions on connected persons do not apply to MEPs, including SMEPs.

Grandfathered Plans:

For members who become physically or mentally impaired after 1991, the requirements of paragraphs 8503(3)(d) and 8503(3)(b) of the Regulations, have to apply. However, for members who became physically or mentally impaired before 1992, paragraph 8503(3)(d) has no application where the plan provides offside disability benefits or fails to meet a condition affecting disability benefits.

Example

Paragraph 8503(3)(d) does not apply to:

• A disability pension that is based on deemed years of service up to normal retirement age where the normal retirement age is later than 65;
• A disability pension that is not capped by YMPE; or
• A pre-retirement disability pension that is paid up to normal retirement age and then replaced with a recalculated pension for life that is provided based on service up to normal retirement age.

If an amendment is received improving an offside disability pension or introducing an offside disability pension, even if it only applies to members who became impaired before 1992, additional conditions or limits may have to be imposed before we would approve the amendment. In no event would the amendment be acceptable for members who became physically or mentally impaired after 1991.

Cross References:

Definition of Totally and Permanently Disabled – 8500(1)

Early Retirement – 8503(3)(c)

Undue Deferral of Payment – 8503(4)(e)

Limits Dependent on CPI – 8503(12)

Excluded Benefits – 8504(10)

Excluded Benefits – 8504(11)

Benefits Under Grandfathered Plan – Pre-1992 Disability – 8509(4.1)

Condition Not Applicable to Grandfathered Plans – 8509(5)(a)

Special Rules – MEP – 8510(5)

10.5 8503(3)(e) – Pre-1991 Benefits

Any exceptions from the pre-1991 policy set out in Information Circular 72-13R8 will be announced to the Industry in a Newsletter. These are the Newsletters that have been published:

• Newsletter No. 91-1, Transitional Registration Rules for Pension Plans
• Newsletter No. 92-5, Pre-Reform Death Benefits
• Newsletter No. 92-6, Pre-Reform Disability and Bridging Benefits
• Newsletter No. 92-7, Pre-Reform Early Retirement Provisions and Post-Retirement Indexing
• Newsletter No. 92-8R, Eligible Service
• Newsletter No. 99-1, Proportionality Condition for Pre-1990 Pension Benefits

In addition, it must be noted that the grandfathering rules contained in section 8509 will allow benefits in respect of certain periods to be paid if they were permitted under the terms of an existing plan.

The Directorate is to be notified when benefits in respect of periods before 1991 become provided to members who are now or have been connected with a participating employer. When such notifications are received, ensure that:

• The 50/50 cost rule continues to apply to all new accruals of defined benefits, and upgrades to previously accrued benefits, relating to pre-reform service, but "connected person" replaces "significant shareholder". (1980 and pre-1968 shareholder plans are exempt from this rule as long as benefits are not increased, employers are not added, and additional connected persons do not join);
• Based on the description of pre-reform and post-reform service above, note, for example, that even though a grandfathered plan for a connected person fails to meet the 50/50 rule after 1990, it may include 1991 as eligible service if the plan was amended to comply with the Regulations with effect from Jan 1/91.
• The restrictions in paragraph 8(e)(vii) of Information Circular 72-13R8 apply to connected persons for the pre-reform years.
• Since the proportionality condition restricts the amount of pre-1990 service that can be recognized at a given time, a 50/50 demonstration is required each time additional pre-1990 service is acquired by a connected person who is subject to the proportionality condition.

One of the exceptions, in the Newsletter No. 99-1, Proportionality Condition for Pre-1990 Pension Benefits, states that the ability to acquire the past service benefits must be available to the “general membership” of the plan. For purposes of the condition, our interpretation of this condition “ general membership” includes all members of the plan, up to 90% is acceptable. This includes all active members as well as those who are entitled to a deferred pension. This is in line with the definition of “member” in subsection 147.1(1) of the Act, which includes anyone who has a right to receive benefits under the plan. However if the benefits are not available to all members we will question why not.

It should be noted that according to paragraph 19(b) of Information Circular 72-13R8, the nominality condition does not include AVCs.

A plan, which provides benefits solely to an individual who has terminated, can be registered if the following tests are met:

• 8502(a) – Primary purpose
• 8502(b)(iii) – Permissible contributions
• 8503(3)(a)(i) – Eligible service
• 147.1(1) – Definitions of "member" and "participating employer"
• 147.2(2) – References to former employees

However, pre-91 benefits have to be acceptable to the Minister.

MEPs:

The connected persons restrictions do not apply where the plan is a MEP (including SMEPs).

Grandfathered Plans:

Grandfathered plans are not subject to this restriction until 1992.

10.6 8503(3)(f) – Determination of Retirement Benefits

We should be on the lookout for plan provisions which leave the accrual of a pension benefit in the year open to some discretionary factor, for example, whether or not the employee was in "good standing". On the other hand, factors such as a specific number of hours worked by employees before they would qualify for a year of service would be acceptable.

A plan that promises benefits based on the greater of a DB and a MP provision is not acceptable. This is because “the greater of” benefits will only be known when they become payable. Pension credits, determined annually, are therefore indeterminable. An exception to this rule applies to benefits payable under Section 78 of the Supplemental Pension Plans Act of Quebec.

A benefit formula that is upgraded within the maximum pension limits can be capped at a specified value as long as PA/PSPA is determinable. This is common when plans are amended to provide an early retirement program, whether or not it is a program needing approval as a downsizing under section 8505 of the Regulations. Those who elect to retire within a specified time period under the program are offered increased benefits. The regular benefit formula under the plan is generally increased for those electing to retire, say from 1.5% to 2%, but with a condition that the increase will not exceed a specified value, such as the equivalent of a year's salary or the increase that would have been provided by an additional 5 years of service under the regular formula. To minimize PSPA, these upgrades are usually worded so that the upgrade applies first to pre-90 years and then to post-89 years as needed to reach the value cap.

SMEPs:

This condition does not apply to SMEPs.

Grandfathered Plans:

Grandfathered plans are not subject to this restriction until 1992.

Where we have registered a pension plan after March 27, 1988 that provides benefits that do not comply with this condition, any retirement benefits which have commenced to be paid before 1992 are not affected. However, the benefits must be acceptable to the Minister.

10.7 8503(3)(g) – Benefit Accrual Rate

In no event will we accept a benefit accrual rate, payable under the normal form, greater than 2% per year. Some plans may be grandfathered until the end of 1994. Effective after 2002, the benefit accrual rate for firefighters under a defined benefit plan that is integrated with CCP or QPP cannot exceed 2.33% of the member’s remuneration.

The rule is applicable to each benefit accrual rate within a DB provision and not only to the average or net result of the rates.

This means that we will not accept, for example, a formula of 1% up to YMPE and 2.2% above YMPE. The fact that a plan is limited by the maximum pension clause will not make a benefit accrual rate in excess of 2% acceptable. Where a plan formula is a percentage of contributions, officers should verify that the equivalent benefit accrual rate is not greater than 2%.

We will also not accept amendments to plans that provide for a flat percentage increase to the benefit accrual rate, unless the submitter can clearly demonstrate that the accrual rate is not in excess of 2%. For example, an amendment that provides for a 10% increase in all accrued benefits in a 1.5% CAE plan would be unacceptable as a form of pre-retirement indexing. Amendments that provide for the accrual rate to increase from 1.5% CAE to 1.65% of CAE would be acceptable, as it is clear that the accrual rate is less than 2%. However, if a 1.5% plan had repeatedly provided for a 10% ad hoc increase in the accrual rate, the benefit accrual rate would eventually exceed 2%.

Most plans allow members to receive their benefits in a form that is different from the normal form. The present value of benefits payable under an optional form must be equal to or less than the present value of benefits payable under the normal form. Theoretically, a member who elects the payment of his or her benefits under an optional form could receive benefits equivalent to a yearly accrual rate in excess of 2%. However, the payment of benefits under optional forms which could result in a yearly benefit accrual rate in excess of 2% are not offensive.

Where a plan allows a member to receive his or her benefits under an optional form, ensure that the lifetime retirement benefits payable under the DB provision, regardless of the form, are subject to the maximum imposed under section 8504 of the Regulations.

Grandfathered Plans:

For plans which were already registered on July 31, 1991, or which had been submitted for registration by August 1, 1991, the 2% benefit accrual cap applies only to the portion of a member's benefits that relate to service after 1994. Such plans must be amended to provide for this by January 1, 1995.

Benefits under subsection 8509(9) paid before 1992 under plans that were registered after March 27, 1988 but before July 31, 1991, are grandfathered. As such benefits must be acceptable to the Minister, it is unlikely that any plans will be affected by the grandfathering provision.

10.8 8503(3)(h) – Increase in Accrued Benefits

Final and best average earnings plans are restricted by this clause by virtue of the words "the member's remuneration in subsequent years". Basically, the percentage increase of LRBs must not exceed the percentage increase of remuneration. This should also be read in conjunction with paragraph 8502(l), inappropriate PA. For example, it prevents plans from providing integrated formulas where the integration is not based on YMPE. A plan could not provide 1% up to $50,000 and 2% above $50,000, without contravening this paragraph.

SMEPs:

This condition does not apply to SMEPs.

Grandfathered Plans:

Few grandfathered plans will contravene paragraph 8503(3)(h), as it exists primarily as a PA anti-avoidance rule. Those that contravenes must be amended as of January 1, 1992, but the amendment is not required to be retroactive.

Where:

• A grandfathered plan has a formula and one of the rates is above 2.0%; and
• The plan is amended to update the earnings base.

Where we have registered a pension plan after March 27, 1988 that provides benefits that do not comply with this condition, any benefits which commenced to be paid before 1992 are not affected. However, the benefits must be acceptable to the Minister.

Cross References:

Appropriate Pension Adjustments – 8502(l)

Increase in Accrued Benefits – Part-Timers – 8503(3)(i)

Artificially Reduced Pension Adjustment – 8503(14)

Conditions Applicable to Amendments – 8511(1)(a)

10.9 8503(3)(i) – Increase in Accrued Benefits – Part-Time Member

Forms T510, Application to Register a Pension Plan and T244, Registered Pension Plan Annual Information Return, should tell you whether part-time employees participate in the plan. If they do, it must be clear in the plan terms that their earnings will be annualized and their service actualized for pension calculation purposes, unless it is a true career average plan.

Paragraph 8503(3)(i) of the Regulations requires that the increase of LRBs to a part-time worker be attributable to the increase in the rate of remuneration. Not due to an increase in remuneration because of an increase in the number of hours worked.

SMEPs:

This rule does not apply to SMEPs.

Grandfathered Plans:

This rule applies only to benefits accrued after 1991 if the plan is a grandfathered plan.

Where we have registered a pension plan after March 27, 1988 that provides benefits that do not comply with the conditions, any retirement benefits which have commenced to be paid before 1992 are not affected by this rule. However, the benefits must be acceptable to the Minister.

Cross References:

Increase in Accrued Benefits – 8503(3)(h)

Artificially Reduced Pension Adjustment – 8503(14)

Part-Time Employees – 8504(4)

Conditions Applicable to Amendments – 8511(1)(a)

10.10 8503(3)(j) – Offset Benefits

Benefit formulas that provide for an offset are relatively rare. Any plan that has this type of formula will be required to stipulate the requirements of paragraph 8503(3)(j) of the Regulations, or at least refer to them in the plan terms.

SMEPs:

SMEPs are not subject to this requirement.

Grandfathered Plans

Members who receive their pensions before 1992 from a grandfathered plan which provides for offset benefits are not necessarily restricted by the rule that a reasonable estimate must be made of the offsetting benefits if they are commuted. 

10.11 8503(3)(k) – Bridging Benefits – Cross-plan Restriction

The general rule is that members may not accrue bridging benefits under two DB provisions at the same time, with two exceptions. The first exception to the general rule is that the Minister may waive its application. Waivers will be given on a case-by-case basis, and normally only where the total bridging benefit payable to the member under the combined provisions won't exceed what could have been payable as one bridging benefit under one provision. This would occur, for example, where one bridging benefit is offset by the other, or where half of a bridging benefit is payable under each provision.

The second exception is where all three of conditions of subparagraph 8503(3)(k)(i), (ii) and (iii) are met.

Plan Text:

Where a plan contains more than one DB provision that provide bridging benefits, it must be clear in the plan text that each member is entitled to a bridge benefit under only one provision unless a Ministerial waiver has been granted.

Where forms T510 or T244 indicate that members accrue benefits under another RPP of the employer or a non-arm's length employer, check any DB plans listed to see if they also provide for bridging benefits. If they do, it must be clear in all of the relevant plan texts that each member is entitled to a bridge benefit under only one plan.

MEPs:

Where the plan is a MEP, including SMEPs, bridging benefits payable under other plans may be disregarded for purposes of this rule. The only part of the rule which applies to MEPs is the general rule that bridging benefits should be payable under only one provision of the particular rule. This would be subject to a Ministerial waiver as described above.

Grandfathered Plans:

If a member is in receipt of more than one bridging benefit in respect of a participating employer or a non-arm's length employer before 1992, they may continue to receive them. After 1991, plans may not provide for this unless exempted.

10.12 8503(3)(l) – Division of Benefits on Breakdown of the Marriage or Common-Law Partnership

If the plan is silent, we will not require any stipulations. We will ensure that any wording regarding marriage breakdown conforms with paragraph 8503(3)(l) and subsection 8501(5).

Under paragraph 8501(5)(c), the member's pension is paid to the spouse or common-law partner or former spouse or common-law partner rather than to the member. In this case, the member's and spouse or common-law partner's pensions are treated as one pension for purposes of the Regulations and paragraph 8503(3)(l) has no application. Paragraph 8503(3)(l) applies where the situation is as outlined in paragraph 8501(5)(d) of the Regulations. In that situation, a provision of the law of Canada or a province requires that a spouse or common-law partner be entitled to certain benefits, and that those benefits either (A) become payable to the spouse or common-law partner at the time other than when the member receives the pension or (B) gives the spouse or common-law partner additional rights with respect to the benefits.

Grandfathered Plans:

Grandfathered plans that allowed the member’s benefits to increase to compensate for benefits assigned to a spouse on marriage breakdown may no longer do so after 1991. Such benefits which were already in pay before 1992 may continue to be paid.

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Footnote

[Footnote 1]
Addition made on June 20, 2008.