Regulations change to allow members to manage and withdraw funds after retirement
Many pension professionals and plan sponsors believe that accrued pension funds should be used to pay a pension for the member’s lifetime, and not be treated as savings plans where funds can be withdrawn at any time after retirement. Plan members on the other hand, want the flexibility to access and manage funds as needed after retirement. Saskatchewan is the first province to come down on the side of flexibility.
The province is enabling portability for the full commuted value of an accrued pension. As of April 1, 2002, the Saskatchewan Pension Benefits Regulations, 1993 will allow funds in existing life income funds (LIFs) and locked-in retirement income funds (LRIFs) to be transferred into a retirement income fund (RRIF). In addition, the amendments permit former members to transfer funds from locked-in retirement accounts (LIRA) into RRIFs at the earlier age of 55 or the early retirement age established by the pension plan from which the funds originated.
This represents a distinct shift in thinking in pension management. Saskatchewan’s amendments transfer significant risk to members, who will now be fully responsible for investing and preserving their pension funds.
The changes could also have serious ramifications for spouses who consent to RRIF transfers without fully understanding the implications of their actions. They may be surprised to discover, on the death of the member, that the assets in the RRIF have been depleted, and no joint and survivor pension is payable from the spouse’s former employer.
Previously, on termination of employment, pension funds could only be transferred to a LIRA. Also under the previous regulations, where a pension plan allowed a transfer of the commuted value upon retirement, funds could be transferred to, and subsequently paid out from, an annuity, LIF or LRIF. However, LIFs and LRIFs had withdrawal limits, which were viewed as inflexible, particularly in a period of low investment returns. The Income Tax Act (ITA) only requires minimum — but not maximum — withdrawals from RRIFs. Therefore, these amendments effectively remove the withdrawal limits formerly imposed on LIFs and LRIFs.
Pension plans can also allow retiring employees to transfer accrued pension funds into RRIFs. However, plan sponsors can require members to receive a pension if they terminate on or after early retirement age. Sponsors are not obligated to offer portability options, including a transfer of funds to a RRIF, in these circumstances.
In addition to including the RRIF as a portability option, Saskatchewan’s Form 1, Spouse’s Waiver Under a Locked-in Retirement Account, and Form 2, Spouse’s Waiver Under a Pension Plan, have been repealed and replaced by three new forms. Each form is accompanied by a page of comments and instructions which strongly urges the spouse to seek independent advice from a lawyer and a financial advisor before completing the forms.
Form 1 is a new consent form, entitled Spouse’s Consent to Transfer to a Registered Retirement Income Fund Contract. To be valid, it must be signed by the spouse in the presence of a witness and outside the presence of the contract owner before assets may be transferred into a RRIF. Informed completion of this form is important because a RRIF contract has no limit on the amount of annual income that may be withdrawn. The owner could withdraw the entire balance in the contract, leaving the spouse with no survivor benefit payable on the death of the owner.
Form 2, the Spouse’s Waiver of Designated Beneficiary Status, will permit a spouse to waive entitlement as the designated beneficiary of a RRIF if the form is signed in the presence of a witness and outside the presence of the contract owner. If the form is not completed and filed with the issuer of the RRIF, on the death of the owner the balance of the money will be paid to the owner’s spouse who survives the owner for 30 days. Where there is no surviving spouse, where the spouse does not survive the owner for 30 days or more, or where the surviving spouse has signed Form 2 and the waiver has been filed with the issuer of the contract, the balance of the money goes to the beneficiary or to the personal representative of the owner’s estate, if there is no designated beneficiary.
Form 3, the Spouse’s Waiver of 60% Post-Retirement Survivor Benefit, has also been added. To be valid, it must be signed by the spouse in the presence of a witness and outside the immediate presence of the retiree not earlier than 90 days prior to the date that the pension payments are to commence. The waiver may be revoked at any time prior to the commencement of the pension payments by providing notice in writing to the plan administrator or the contract issuer.
Actions for plan sponsors with Saskatchewan members
In response to these regulatory changes, plan sponsors with Saskatchewan members may wish to:
•review plan provisions for portability options on or after the member’s early retirement date; and
•decide whether offering portability options at retirement which are permitted but not mandatory are in line with their overall pension philosophy.
Where transfers of commuted value at retirement are currently not available, and the plan sponsor decides to permit portability options including RRIFs, the plan sponsor should:
•initiate an enhanced employee communications program, including a financial education component on the role of RRIFs to provide income and preserve assets throughout a retiree’s lifetime, and
•review the statement of investment policies and procedures to ensure investment strategies are in line with increased cash flow needs.
Explanatory material and a series of questions and answers regarding the new rules can be found at http://www.saskjustice.gov.sk.ca/Pensions/Publications/toc.shtml.
Sheryl Smolkin is director of the Canadian Research and Information Centre, Watson Wyatt Worldwide. She can be reached at (416) 943-6082 or [email protected].
The province is enabling portability for the full commuted value of an accrued pension. As of April 1, 2002, the Saskatchewan Pension Benefits Regulations, 1993 will allow funds in existing life income funds (LIFs) and locked-in retirement income funds (LRIFs) to be transferred into a retirement income fund (RRIF). In addition, the amendments permit former members to transfer funds from locked-in retirement accounts (LIRA) into RRIFs at the earlier age of 55 or the early retirement age established by the pension plan from which the funds originated.
This represents a distinct shift in thinking in pension management. Saskatchewan’s amendments transfer significant risk to members, who will now be fully responsible for investing and preserving their pension funds.
The changes could also have serious ramifications for spouses who consent to RRIF transfers without fully understanding the implications of their actions. They may be surprised to discover, on the death of the member, that the assets in the RRIF have been depleted, and no joint and survivor pension is payable from the spouse’s former employer.
Previously, on termination of employment, pension funds could only be transferred to a LIRA. Also under the previous regulations, where a pension plan allowed a transfer of the commuted value upon retirement, funds could be transferred to, and subsequently paid out from, an annuity, LIF or LRIF. However, LIFs and LRIFs had withdrawal limits, which were viewed as inflexible, particularly in a period of low investment returns. The Income Tax Act (ITA) only requires minimum — but not maximum — withdrawals from RRIFs. Therefore, these amendments effectively remove the withdrawal limits formerly imposed on LIFs and LRIFs.
Pension plans can also allow retiring employees to transfer accrued pension funds into RRIFs. However, plan sponsors can require members to receive a pension if they terminate on or after early retirement age. Sponsors are not obligated to offer portability options, including a transfer of funds to a RRIF, in these circumstances.
In addition to including the RRIF as a portability option, Saskatchewan’s Form 1, Spouse’s Waiver Under a Locked-in Retirement Account, and Form 2, Spouse’s Waiver Under a Pension Plan, have been repealed and replaced by three new forms. Each form is accompanied by a page of comments and instructions which strongly urges the spouse to seek independent advice from a lawyer and a financial advisor before completing the forms.
Form 1 is a new consent form, entitled Spouse’s Consent to Transfer to a Registered Retirement Income Fund Contract. To be valid, it must be signed by the spouse in the presence of a witness and outside the presence of the contract owner before assets may be transferred into a RRIF. Informed completion of this form is important because a RRIF contract has no limit on the amount of annual income that may be withdrawn. The owner could withdraw the entire balance in the contract, leaving the spouse with no survivor benefit payable on the death of the owner.
Form 2, the Spouse’s Waiver of Designated Beneficiary Status, will permit a spouse to waive entitlement as the designated beneficiary of a RRIF if the form is signed in the presence of a witness and outside the presence of the contract owner. If the form is not completed and filed with the issuer of the RRIF, on the death of the owner the balance of the money will be paid to the owner’s spouse who survives the owner for 30 days. Where there is no surviving spouse, where the spouse does not survive the owner for 30 days or more, or where the surviving spouse has signed Form 2 and the waiver has been filed with the issuer of the contract, the balance of the money goes to the beneficiary or to the personal representative of the owner’s estate, if there is no designated beneficiary.
Form 3, the Spouse’s Waiver of 60% Post-Retirement Survivor Benefit, has also been added. To be valid, it must be signed by the spouse in the presence of a witness and outside the immediate presence of the retiree not earlier than 90 days prior to the date that the pension payments are to commence. The waiver may be revoked at any time prior to the commencement of the pension payments by providing notice in writing to the plan administrator or the contract issuer.
Actions for plan sponsors with Saskatchewan members
In response to these regulatory changes, plan sponsors with Saskatchewan members may wish to:
•review plan provisions for portability options on or after the member’s early retirement date; and
•decide whether offering portability options at retirement which are permitted but not mandatory are in line with their overall pension philosophy.
Where transfers of commuted value at retirement are currently not available, and the plan sponsor decides to permit portability options including RRIFs, the plan sponsor should:
•initiate an enhanced employee communications program, including a financial education component on the role of RRIFs to provide income and preserve assets throughout a retiree’s lifetime, and
•review the statement of investment policies and procedures to ensure investment strategies are in line with increased cash flow needs.
Explanatory material and a series of questions and answers regarding the new rules can be found at http://www.saskjustice.gov.sk.ca/Pensions/Publications/toc.shtml.
Sheryl Smolkin is director of the Canadian Research and Information Centre, Watson Wyatt Worldwide. She can be reached at (416) 943-6082 or [email protected].
