Payment of defined benefits
Benefits are paid after a settlement of rights under a pension plan, most often via a
transfer out of the plan or a
cash payment (refund). As a result, the person no longer has any ties with the pension plan.
The initial payment of defined benefits payable to members or beneficiaries other than in the form of regular installments must take into account the plan's degree of solvency. The degree of solvency is established based on the information in the most recent document sent to Retraite Québec, that is, based either on the plan's actuarial valuation report or on the notice presenting the plan's financial situation. This rule does not apply to
The applicable degree of solvency is the most recent degree determined prior to the date of the valuation of the benefits for the purposes of payment. For example, for a request to transfer benefits within 90 days following receipt of the statement of cessation of membership, the applicable degree of solvency will be the most recent degree determined prior to the date on which active membership ended. In the case of a death benefit, it will be the most recent degree determined prior to the date on which the death occured.
The administrator may decide to add to the amount that cannot be paid under the above-mentioned rule an amount of up to 5% of the maximum pensionable earnings (MPE), without exceeding 5% of the assets of the plan determined on a solvency basis.
Despite the above, the value of the benefits paid initially cannot be less than the total amount of contributions paid by the member plus the amounts credited to his or her account following a transfer, plus interest.
For a pension plan with surplus assets whose degree of solvency is 115%, members are usually paid 100% of their benefits. However, a plan may stipulate that this limit does not apply, that is, that members' benefits will be paid at 115% or that the applicable degree is set at a level above 100%, for example 110%, which allows members to receive a portion of the surplus assets.
It is no longer necessary to capitalize and pay the balance of the value of the benefits that could not be paid at the time of the initial payment (residual benefits) because of the plan's insolvency, except in the following cases:
- When the plan provides for the payment of the value of members' and beneficiaries' benefits in a proportion that is greater than the degree of solvency
- When members and beneficiaries do not have the option of maintaining their benefits in the pension plan, for example, if the administrator requires that the value of the benefits be refunded when that
value is less than 20% of the
In these exceptional cases, an amount must first be paid into the pension fund in order to ensure full payment of the benefits of members who received an initial payment. This amount corresponds to the balance owed. It must be paid into the fund over and above the current service contributions for the fiscal year within five years after the date of the initial payment or no later than the date on which the member reaches the normal age of retirement if that age is reached before the expiry of the five-year period. The administrator will complete the payment
after this amount has been paid into the fund.
Note that any change in the plan's solvency
will not affect the amounts payable to the pension fund for the partial or total payment of residual benefits.
Terms of payment in the case of the partition of benefits between former spouses
The administrator should not take the plan's degree of solvency into account when paying the former spouse the amount owing following the breakdown of the union. The total amount, plus interest, must be paid within the time frame specified in the
Regulation respecting supplemental pension plans. If the plan is insolvent, no additional amounts will be paid into the pension fund with respect to the settlement.
Annual statement and statement of cessation of membership
The annual statement for members who are still eligible to transfer their benefits must indicate, at least once every three years, the value of the benefits at the end of the fiscal year and the value that can be transferred out of the plan at that date, given the plan's degree of solvency. Other information, namely transfer deadlines and the rules concerning payment, must also be included.
The statement of cessation of membership must indicate the plan's most recent degree of solvency and explain the rules concerning payment.
What you need to know
No annual statement is sent to members and beneficiaries whose benefits were paid following the purchase of an annuity under the annuity purchasing policy, even if they retain their status as a member or beneficiary under the plan for a period of three years in the case of plan termination.
Negotiated contribution pension plans and member-funded pension plans
Special rules apply to negotiated contribution multi-employer plans and member-funded pension plans.
Treatment of residual benefits in the Annual Information Return
Statement of changes in the plan's net assets
Residual benefits must be taken into account in the statement of changes in the plan's net assets (lines 301 to 333).
The amounts paid or to be paid into the pension fund to cover residual benefits are a source of increase in the plan's assets, regardless of their due date. They must be entered on line 309.1 of the return, "Amounts required to pay the residual benefits." Interest on these amounts for the fiscal year covered by the return must be indicated on lines 311 to 313, "Other sources of increase." In this case the following wording must be used: "Interest on the amounts required to pay the residual benefits."
When the administrator pays a portion of members' benefits, the plan's net assets must be reduced by the total amount of the value of those benefits, that is, the benefits paid and the residual benefits to be paid. The total amount must be distributed between lines 322, "Transfers to a supplemental pension plan," and 323.1, "Other transfers or refunds (locked-in or not locked-in)."
Lastly, the annual interest on residual benefits must be entered on lines 326 to 328, "Other sources of decrease." In this case, the following wording must be used: "Interest on the residual benefits."
Residual benefits must be taken into account in the net assets (lines 336 to 378).
The amounts payable to the pension fund that are required to pay the residual benefits are considered accounts receivable, regardless of their due date. They must be entered, along with the interest payable, on line 362.2, "Amount receivable, including interest, required to pay the residual benefits." They must be entered on this line until they are paid into the pension fund, and interest must be added each fiscal year.
The amounts payable to members as residual benefits are considered liabilities, regardless of their due date. They must be entered on line 372.1, "Residual benefits to be paid, including interest," along with the interest accrued at the close of the fiscal year. They must be entered on this line until they are fully paid, and interest must be added each fiscal year.
Example 1 : The value of the benefits is transferred in proportion to the degree of solvency, and there are no residual benefits.
George ceases active membership in the plan on 31 January. He applies for a transfer of the value of his benefits to his new employer's supplemental pension plan within 90 days following receipt of his statement of cessation of membership.
The plan does not provide for payment of the value of benefits in a proportion that is greater than the plan's degree of solvency. As at 31 January, the plan's degree of solvency is 75%, and George's benefits are valued at $100 000. An amount of $75 000 (75% x $100 000) can be transferred to his new plan. The transaction is finalized at the end of the fiscal year.
In the Annual Information Return as at 31 December, George's information must be indicated as follows:
|322||Transfers to a supplemental pension plan||$75 000|
Example 2 : The total value of the benefits can be transferred.
Lucy ceases active membership in the plan on 31 March. She applies for a transfer of the value of her benefits to a locked-in retirement account (LIRA) within 90 days following receipt of her statement of cessation of membership.
The plan stipulates that members have the right to transfer the total value of their benefits when they cease active membership. As at 31 March, the applicable degree of solvency is 80%, and the total value of Lucy's benefits is $200 000. She is therefore entitled to an initial payment of $160 000 (80% x $200 000) and to residual benefits of $40 000.
For the residual benefits to which she is entitled to be transferred to her
LIRA, $40 000 must be paid into the pension fund.
In the Annual Information Return as at 31 December, Lucy's information must be indicated as follows:
|309.1||Amount required to pay the residual benefits ||$40 000|
|311 to 313||Interest on the amount required to pay the residual benefits ||$200|
|323.1||Other transfers or refunds (locked-in or not locked-in)||$200 000|
|326 to 328||Interest on the residual benefits||$200|
|362.2||Amounts receivable, including interest, to pay for the residual benefits||$40 200|
|372.1||Residual rights payable, including interest||$40 200|