Your Pension Rights - Ontario

In addition to the basic benefit (that is, the amount determined by the formula),DB plans may provide additional benefits such as disability benefits, bridgingbenefits, indexation and plant closure benefits.Defined contribution (DC) pension plans (also known as moneypurchase plans)In a DC pension plan, it is the contribution rather than the benefit that is“defined”. The employer regularly contributes a specified amount of money(usually a fixed percentage of your earnings) to an individual plan accountthat is set up in your name. Employee contributions (if required), any additionalvoluntary contributions (if allowed) and any interest or other investmentearnings are also credited to this account.If you are a member of a DC plan, you will not know the value of your pensionuntil you retire because it will depend on a number of factors, including theamount of contributions made by your employer and by you, the investmentearnings on those contributions and, if you purchase a life annuity with themoney in your DC account, the annuity rates in effect when you retire. Theannuity rates that are applied to purchase life annuities (or life pensions) arebased on long-term interest rates.Some DC plans allow members to make investment choices for their individualDC accounts, although the plan usually provides a limited number of optionsfrom which these choices can be made. In other DC plans, the plan administratoris responsible for the investment decisions. In all cases, the investmentsmust comply with the rules set out in pension legislation and the federalIncome Tax Act.If your plan allows you to make investment choices, it is important that youmake informed decisions, since these will affect the ultimate amount of yourpension. The law does not set out the type of information and investmentoptions you should receive, but at minimum your plan administrator shouldprovide you with: sufficient information to make informed investment decisions; investment options that allow diversification; and regular statements that show how investments are performing.DC plans are also called money purchase plans because the money in theaccount is usually used to purchase a life annuity at retirement. To obtain alife annuity, the money in your DC account is paid to an insurance companythat guarantees the payment of a pension (usually in fixed monthly amounts)for your lifetime. Under Ontario’s pension legislation, two special kinds oflocked-in Registered Retirement Income Funds (RRIFs) are alternatives tothe life annuity: Life Income Funds (LIFs) and Locked-in Retirement IncomeFunds (LRIFs).5

Multi-Employer Pension PlansMulti-employer pension plans (MEPPs) are a distinct type of registeredpension plan that may be established by agreement (usually a collectiveagreement), statute or municipal bylaw. MEPPs allow two or more unrelatedemployers to contribute to a single pension plan fund and recognize a member’sservice with all of the participating employers when determining that member’spension benefits. MEPPs can be DB or DC or hybrid pension plans.MEPPs are most often established in unionized industries, where individualstend to move frequently among employers or are employed by a successionof small- to medium-sized businesses, for example, in the construction trades.In many cases, MEPPs are sponsored or administered by a trade union.Typically, a collective agreement requires each participating employer tocontribute a fixed amount to the pension fund based on the hours workedby each employee. Although a collective agreement can also establish thebenefit level for members, it is usually the board of trustees administeringthe MEPP that determines the benefit level of the plan.Most of the provisions outlined in this brochure apply to MEPPs. However,these plans differ in some significant ways from single-employer pensionplans, and are subject to some special rules, including: A MEPP must usually be administered by a board of trustees and atleast half of the trustees must be representatives of the plan members.In contrast, a single-employer pension plan is usually administeredby the employer. Because employer contributions to a MEPP are usually set at a fixedamount, it is possible that the amount contributed by the employerswill not be enough to provide the intended benefits. If this happens,the benefits may be reduced. In other words, if you are a member of aMEPP, your plan may be changed to reduce the pension benefits youhave already earned or “accrued”, or to reduce the amount of pensionyou are being paid. These types of changes, which apply to benefitsalready earned, are generally not permitted in single-employer pensionplans. (In both MEPPs and single-employer pension plans, plans canbe changed to reduce the pension benefits you will earn in future. See“Registration of Pension Plan Amendments”.) The Pension Benefits Guarantee Fund (PBGF), which guarantees certaindefined benefits in situations involving insolvency or bankruptcy, doesnot apply to MEPPs, so the benefits provided by a MEPP are notguaranteed by the PBGF.6

Pension Plan MembershipAn employer may establish a pension plan for all of its employees or justfor certain groups or classes of employees. A class of employees is normallydefined by the nature and terms of employment. For example, any of thefollowing groups could make up a class of employees: salaried or hourlyemployees, unionized or non-unionized employees, supervisors, managers,executives, corporate officers or employees who work at a specific locationor division. Once a pension plan is established for a group of employees,every employee in that class is eligible to join that plan.A class cannot be made up of a specific or named individual. If an employerwants to provide pension benefits to a particular person, it can establish aseparate single-member plan (often called an Individual Pension Plan, or IPP).However, a class can consist of only a few individuals if they make up areadily identifiable group, for example, vice-presidents of a corporation.Employers can also establish separate pension plans for full-time and part-timeemployees. However, a plan established for part-time employees must providebenefits that are reasonably equivalent to those provided for full-time employeesin the same class.Employees must be provided with information that describes the pension plan,including their rights and obligations regarding the plan, within 60 days priorto their eligibility for membership in the plan or within 60 days of their hiringif plan membership begins immediately.Mandatory vs. voluntary membershipMembership in a pension plan can be either mandatory or voluntary. If theplan is mandatory, you must join the plan – you cannot choose whether ornot you want to be a plan member. If the plan is voluntary, you choosewhether or not to join the plan. If you are eligible to join but decide not to,you still have the right to join at a later date if you decide to do so.7

Eligibility conditions for plan membershipYour eligibility to join a pension plan is based on years of service (employment).Your age or gender cannot be a condition of eligibility.If you are a full-time employee, you are entitled to join a pension plan aftercompleting two years of continuous service.If you are a part-time employee, you are entitled to join the plan once you: work 700 hours; or earn at least 35% of the Year’s Maximum Pensionable Earnings(or YMPE, a term used in the CPP);whichever is less, in each of the two consecutive calendar years beforejoining the plan.However, your plan may allow you to join earlier. For example, a plan couldallow full-time employees to become members immediately or after onlyone year of employment, or allow part-time employees to join after workingonly 500 hours in each of two prior consecutive years.It should be noted, too, that once you meet the eligibility conditions and jointhe plan, you do not stop being a member of the plan just because your hoursor earnings are reduced.Eligibility for MEPP membershipThe eligibility rules for MEPPs are somewhat different because the employeestend to move back and forth among the employers who participate in these plans.Employees are entitled to join a MEPP once they: work a total of 700 hours for one or more of the participatingemployers; or earn a total of at least 35% of the YMPE with one or more of theparticipating employers;whichever is less, in each of two consecutive calendar years before joiningthe plan.Similar to single-employer plans, your MEPP may allow you to join earlier.8

Pension Plan ContributionsPension plans are either contributory or non-contributory.In a contributory plan, both you and your employer must make contributionsto the plan. Your member contributions are usually a percentage of your earnings,as described in the plan terms, and are normally made by payroll deduction.In a non-contributory plan, only the employer is required to make contributions.In some pension plans, you can also make additional voluntary contributions,which allow you to purchase additional pension benefits.Contributions held in trustThe employer and member contributions to a registered pension plan, and theinvestment earnings on those contributions, must be held separate and apartfrom the assets of the employer. This is in order to protect the assets of thepension fund in the event the employer becomes insolvent or goes bankrupt.The pension fund is usually held by a trust company or insurance company.Member contributions and interest earnedThe law requires employers to deposit all member contributions, includingmoney withheld by payroll deduction, into the pension fund within 30 daysfollowing the month the contributions were received or deducted.In a DC plan, the interest earned on all member contributions (includingadditional voluntary contributions) must be at least the rate of return earnedby the pension fund.In a DB plan, the interest earned on required member contributions must beat least the average rate of five-year personal fixed-term chartered bank depositrates; however, the plan can require that the rate of return earned by thepension fund be used instead. Any additional voluntary contributions madeby members must earn the rate of return earned by the pension fund.9

Employer contributionsIn a DC plan, the amount that your employer must contribute is set out in thepension plan text, and is usually equal to a set percentage of your earnings.Your employer must pay these amounts into the pension fund each month.In a DB plan, other than a MEPP established under a collective agreement ortrust agreement, or a plan in which an employer’s obligation to makecontributions is limited to a fixed amount set out in a collective agreement,the amount that your employer contributes is not set out in the pension planterms. Instead, the employer’s contributions to the pension fund are based onpredictions of what the accrued benefits will cost. An actuary estimates thecost by using actuarial assumptions about future salary levels, investmentreturns, when members will retire, mortality rates, etc. The actuary thenprepares a funding valuation report that contains this information. This typeof report must be filed with FSCO at least once every three years. If the actuarydetermines that there is not enough money in the pension fund to pay forthe estimated cost of the accrued benefits, the law requires that the employermake up the difference with additional special payments until there is enoughmoney in the fund.Fifty per cent employer cost rule (“50% rule”)This rule applies to members of contributory DB pension plans who havevested pension benefits when they terminate employment, retire or die beforeretirement, or when their plan is wound up. Under this rule, the value of thecontributions made by a member after December 31, 1986, plus interest, mustnot be greater than 50% of the commuted value of the pension or deferredpension accrued by that member after that date.This does not mean that your employer must contribute the same amount asyou into the pension fund, or that you are entitled to pension benefits thatare worth twice as much as what you contributed. What the 50% rule doesmean is that you are entitled to a refund, which is taxable, of any contributionsyou have made, plus interest, that exceed half of the commuted value of thepension benefits you accrued after December 31, 1986.For example:You were a member of a contributory pension plan from 2000 to 2004. When you leftyour job after four years of membership, the commuted value of your DB pensionbenefit was calculated to be 5,000. According to the 50% rule, the total of yourmember contributions, plus interest, should not be more than half of this amount –that is, 2,500. As it turned out, your contributions, plus interest, totalled 3,000,which was 500 more than 50% of the commuted value. Therefore, you were entitledto receive a refund of 500 in cash, which is taxable.10

Vesting and Locking in of Pension BenefitsVesting of pension benefitsWhen your pension benefits are vested, this means that you are unconditionallyentitled to receive the pension benefits you have accrued under your plan asa result of satisfying age or service requirements.In the case of a DC plan, being vested means you are entitled to receive apension benefit equal to the value of the contributions your employer madeon your behalf and your own contributions, if any, plus investment earnings.In the case of a DB plan, being vested means you are entitled to receive thepension benefits accrued according to the benefit formula.Being vested does not mean you are entitled to the employer’s contributions;it means you are entitled to the promised pension benefit (that is, the benefityou have accrued), consistent with the type of plan you have.Although pension plans may have shorter vesting periods, Ontario’s pensionlegislation sets out the maximum period of time that it can take for a memberto become vested: For any benefits earned after 1986, you are vested once you completetwo years of continuous membership in a plan (which includes anyperiod of your membership before 1987). For any benefits accrued before 1987, you are vested if you are at least45 years old and have worked or been part of the plan for 10 continuousyears (which includes any period of your service or membership bothbefore and after January 1, 1987).If you leave a pension plan before your benefits are vested, you lose your rightto any pension benefits under the plan. However, you are entitled to a refund,which is taxable, of any contributions you made, plus interest (but not to anycontributions your employer made on your behalf).11

Locking in of pension benefitsOnce your pension benefits are vested, they are usually “locked in”. Thismeans that the pension money payable to you is to be used only for thepurpose of providing you with a lifetime retirement income. In other words,once your pension benefits are locked in, you normally cannot take the moneyout of the pension plan as a lump sum cash payment. If you leave the planbefore you retire, you may be able to transfer the money from your plan –for example, to a LIRA or another pension plan – but the money remainslocked in in order to provide you with a retirement income. These transfer(or portability) options are described below.There are two significant advantages to having your benefits locked in. First,you will have a regular income at retirement. Second, creditors may not seizelocked-in pension benefits.There are some limited exceptions to the locking-in rule: for example, if youhave a medical condition that is expected to shorten considerably your lifeexpectancy. If the terms of your plan allow, you may also be able to unlockyour pension money when you terminate employment if the commutedvalue of your benefit is small (2% or less of the YMPE in the year youremployment ends).If you have transferred your pension monies to a LIRA, LIF or LRIF, thereare also limited circumstances in which you might gain special access toyour locked-in money (see “Locked-in Retirement Savings Arrangements”).In addition, the locking-in rule does not normally apply to any additionalvoluntary contributions you may have made.Leaving a Job and Transfer RightsWhen you terminate employment or membership in the pension plan, yourplan administrator must provide you with a written statement within 30 daysof the date of termination. This statement must include details about thebenefits payable to you from the plan, the options you have and the deadlinesfor choosing an option. If you leave a pension plan before your benefits arevested, the statement must also set out any information related to the refundof any contributions you made, plus interest.12

Transfer rights for vested membersIf you are a vested member when your employment terminates, but you arenot yet eligible for early retirement, you are entitled to leave your accruedpension benefits in the pension plan to provide for a deferred pension that ispayable at retirement. You also have the option of transferring the commutedvalue of your pension benefits out of the plan.If you are a vested member when your employment terminates, and you areeligible for early retirement under your plan (usually age 55), you cannottransfer the commuted value out of the plan unless your plan allows this orthe plan is being wound up.If you choose to transfer the commuted value out of the pension plan, it isimportant to note that the money transferred is still locked in and is to be usedto provide retirement income. You will also have no further entitlement topension benefits under the pension plan: for example, ad hoc benefit increases.The commuted value of your deferred pension may be transferred to: another pension plan that agrees to accept the money; a LIRA, LIF or LRIF (see “Locked-in Retirement Savings Arrangements”);or an insurance company to purchase a life annuity that becomes payableat the time you would have been entitled to receive pension paymentsfrom your plan.For some DB plans, there may not currently be enough money in the pensionfund to pay the entire commuted value of your pension at the time youterminate employment. If that is the case, the transfer may be done in twosteps. First, you would receive a portion of the commuted value that is basedon the funded level of the pension plan. The balance owing to you, plusinterest, would have to be transferred out of the plan’s pension fund withinfive years of the initial partial transfer.It should be noted, too, that federal tax law limits the amount of money thatcan be transferred on a tax-sheltered basis to a LIRA, LIF or LRIF. Moneyexceeding this limit must be paid to you in a non-locked-in form, such ascash, which is taxable.13

Retirement Age (or Date)Normal retirement ageIn a pension plan, the normal retirement age or date is the time at which youbecome eligible to receive an unreduced pension. This age or date must beset out in your pension plan and can be no later than one year after you turn65. This does not necessarily mean that you must retire at that time. The ageat which you retire will depend on the terms of your employment and anyapplicable legislation.Early retirementIf you are within 10 years of the normal retirement age and are entitled to adeferred pension, you have the right to retire and begin receiving a pensionat any time within that 10-year period.For example:If the normal retirement age in your plan is age

of employment and total years of service. For example: 1.5% of average earnings over the last 5 years of employment x total years of service. Career average earnings formula - the benefit is normally based on the member's earnings over the entire period of plan membership. For example: 1.5% of your total earnings.