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Phased retirement is not a new phenomenon in Quebec. The province was the first jurisdiction in Canada to allow phased retirement back in 1997. However, the province has tabled legislation to amend the phased retirement provisions of its Supplemental Pension Plans Act (SPPA) to reflect recent changes to the federal Income Tax Act (ITA). Introduced on April 2, 2008, An Act to amend the Supplemental Pension Plans Act, the Act respecting the Québec Pension Plan and other legislative provisions (Bill 68) also breaks new ground by including measures allowing hybrid and defined contribution (DC) pension plans to offer phased retirement. It also makes other important changes to the SPPA’s provisions.
Changes to Phased Retirement Rules - DB Plans
Federal Bill C-28 the Budget and Economic Statement Implementation Act, 2007, came into effect in December 14, 2007. It amended the ITA and Regulations to let qualifying members of defined benefit (DB) pension plans receive up to 60% of their accrued pension while continuing to accrue additional benefits. Previously, the ITA had stipulated that an employee could not collect and accrue a pension at the same time, a requirement that limited the ability of employers to offer effective phased retirement programs.
As the changes implemented by Bill C-28 relative to phased retirement only affected the ITA and the Pension Benefits Standards Act, 1985, amendments to provincial pension standards legislation are required in order for plan sponsors to take advantage of this new flexibility. This is the primary purpose of Bill 68. It repeals the current phased retirement provisions of the SPPA and replaces them with the new provisions that reflect the new reality.
Bill 68 proposes to allow DB plans to provide a phased retirement pension to eligible members who have entered into a phased retirement agreement with their employer. In order to be eligible, the member must be either at least 60 years of age or at least 55 years of age and entitled to an unreduced early retirement pension; in either case, the member must be under 65 years of age.
The amount of this pension cannot exceed 60% of the pension the member is currently entitled to or in receipt of, or has suspended the payment of, depending on whether the member is currently an active member, a retiree or a retiree who has suspended payment of their pension. This excludes any additional or purchased pension benefits or those that result from plan options.
A pension plan cannot provide more generous phased retirement benefits than those set out above. In addition, a member cannot replace a phased retirement pension by an optional form of payment.
Bill 68 provides that a member receiving a phased retirement pension cannot receive any other benefits under the plan, with the exception of additional pension benefits, purchased pension benefits, or phased retirement benefits from a hybrid plan or DC plan (discussed below). The payment of any other benefit is suspended during the phased retirement period. In addition, a plan may provide for the suspension of additional, purchased and/or DC or hybrid phased retirement pension benefits at a member’s request. Finally, the remuneration received by a member during the phased retirement period is not taken into consideration when calculating benefits relating to prior credited service, unless it is to the member’s advantage.
The member’s pension is recalculated at the end of their phased retirement period. For a member whose retirement pension was reduced because pension payments began before the member’s normal retirement age, the reduction must be recalculated at the end of the suspension period. In addition, the member’s pension must be increased to account for the pension contributions paid during the phased retirement period pursuant to the SPPA. These adjustments also apply to the calculation of the value of any additional pension and/or purchased pension that were suspended during the phased retirement period.
Bill 68 also amends the Fifty Percent Rule, which requires that employer contributions pay for at least 50% of the member’s vested pension, in light of the new phased retirement provisions. Following the amendment, the SPPA will ensure that this rule applies in respect of the total pension accrued before and after the phased retirement.
Changes to Phased Retirement Rules – Hybrid and DC Plans
The release of legislation changing the SPPA’s phased retirement rules was first mentioned in the 2008-2009 Quebec Budget, along with the fact that the legislation would contain “similar provisions” for DC plans. Bill 68 includes provisions allowing DC plans and hybrid plans to offer phased retirement benefits.
Under the proposed new section 67.5 of the SPPA, phased retirement is available, upon concluding an agreement with their employer, to members of hybrid or DC plans who are between the ages of 60 and 65. Such employees will receive a benefit, other than a pension, that is calculated and paid as prescribed by the plan. The benefit cannot exceed 60% of the ceiling on the life income that the member could receive under a replacement pension purchased at the end of the fiscal year of the plan immediately preceding the commencement of the phased retirement period. The pension to which the member is ultimately entitled is reduced by the amount of the phased retirement benefit paid.
Other Changes
In addition to the phased retirement provisions, Bill 68 contains a number of other important changes, including:
Spousal Status Provisions: Bill 68 proposes to amend the spousal status provisions of the SPPA. The amendments provide that spousal status is established on either the day a member begins receiving payment of a retirement or disability pension or a pension that replaces it, or the day preceding the death of the member, whichever date is adopted by the pension plan. If the plan is silent, the spousal determination will be made on whichever of the two events occurs first. The Bill also clarifies the provision regarding children born before a marriage, common-law relationship or civil union.
Corrections to Bill 30: Bill 68 also proposes changes that are directly related to Bill 30, An Act to amend the Supplemental Pension Plans Act, particularly with respect to the funding and administration of pension plans. One change allows for the introduction of upcoming regulations regarding the provision for adverse deviation (PfAD) that was implemented by Bill 30 and will come into effect in 2010. The legislation also proposes a number of changes to the rules governing letters of credit (LOCs). Notably, the current LOC limit of 15% of the plan’s liabilities is repealed. Instead, the sum of all LOCs will be taken into consideration for purposes of the solvency valuation, up to a maximum of 15% of the liabilities. As a result, while plans can theoretically obtain LOCs in any amount (for example, to fund special amortization payments as well as solvency contributions), only a portion of their value will be considered plan assets if their total exceeds the 15% limit. Bill 68 also eliminates the restriction of the use of LOCs by multi-employer pension plans.
Please contact Karen DeBortoli, Roxanne Poulin or your Watson Wyatt consultant for additional information.
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