Annuity purchasing policy
Development of the annuity purchasing policy
The person or body empowered to amend a plan can adopt an annuity purchasing policy that allows the plan administrator to begin paying benefits through the purchase of annuities from an insurance company. In order for the policy to maintain its relevance, it must be sent to the plan administrator and be reviewed on a regular basis. The policy does not have to be sent to Retraite Québec, unless the agency considers it necessary.
If such a policy is adopted, the plan text must be amended to indicate that the plan administrator is authorized to pay benefits to members and beneficiaries in accordance with the plan's annuity purchasing policy. The plan text should in general terms provide the circumstances within which the plan administrator, according to the conditions, must or can purchase annuities. The purpose is not to integrate the provisions of the annuity purchasing policy into the plan text. However, the principal conditions of the policy that authorize the administrator to pay the benefits of members and beneficiaries through the purchase of annuities, as well as the rules applicable to such a payment, including those applicable to subrogation, should be included.
If there is no annuity purchasing policy, it is still possible to have benefits guaranteed. However, in that case, it is not considered a payment and the member in question remains a member of the plan.
Plans concerned
The payment of benefits under an annuity purchasing policy applies to pension plans whose funding rules are not subject to an exemption regulation made under the second paragraph of section 2 of the Supplemental Pension Plans Act.
Payment of the members' and beneficiaries' benefits allowed under an annuity purchasing policy does not apply to, in particular the following types of plans:
Pensions concerned
Pensions that can be paid under an annuity purchasing policy are:
- pensions already being paid
- pensions for which an application for payment has been filed.
Therefore, it is not possible to pay the benefits of a member who is entitled to a deferred pension if that person has not already applied for a retirement pension.
In addition, pensions that have been guaranteed by an insurance company, but not in accordance with an annuity purchasing policy, are not considered to have been paid under that policy. They can, however, be subject to subrogation. This means that the pensioner is substituted for the pension fund as holder of the annuity contract.
Thus, when annuities have been guaranteed other than under the annuity purchase policy, the pension fund is the holder of the annuity contract. In order for benefits to be paid, there must be an agreement between the insurance company and the pension fund so that the pensioner becomes the holder of the same contract in place of the pension fund. The parties must agree on the form this agreement may take.
Annuity purchasing process and the characteristics of guaranteed annuities
Annuity purchasing without modifications
Annuities that are guaranteed by an insurance company must have the same characteristics as the pension payable under the plan. The amount of the annuity that is purchased must, among other things, provide the plan member or beneficiary with a pension that is the same amount as the pension payable under the plan (unless it is a partial purchase) and offer the same period of guarantee.
Consent is not required from the plan member or beneficiary to carry out the purchase of an annuity. However, once the purchase has been made in accordance with the annuity purchasing policy, the members and beneficiaries concerned must be notified. The plan administrator must inform the member or beneficiary of the amount and characteristics of the purchased annuity, the name and contact information of the insurance company, as well as the applicable rules concerning termination of a plan that has a surplus or deficit of assets by reason of the insolvency of the employer.
The same rules apply to payments through subrogation.
Annuity purchasing with modifications
Despite the above, when no annuity is available on the market because of the nature of the pension to which the member or beneficiary is entitled, the characteristics of the pension that make it unavailable on the annuity market can be replaced with others having similar characteristics. The replacement annuity must have the same value on a solvency basis as the plan member's or beneficiary's pension in payment as of the date the agreement came into force with the insurance company.
It should be noted that the characteristics of a pension cannot be replaced by equivalent characteristics due to the cost of the pension to which the member or beneficiary is entitled being too high. Only the characteristics of a pension which is not available on the market because of its nature can be replaced with another having similar characteristics. This is the case, for example, where the formula for indexation of the pension depends on pension fund return.
A notice with an enclosed consent form must be sent to all members and beneficiaries concerned in order to communicate:
- the amount of the proposed annuity purchase
- the characteristics of the proposed annuity purchase
- the effect of replacing the characteristics of a pension by similar characteristics
- a mention that the purchasing of annuities is conditional upon the premium that would be required by an insurance company.
The members and beneficiaries concerned have 30 days to provide their written consent for the purchase of their pensions. After the 30-day limit, despite the consents that the plan administrator receives, he or she can decide not to proceed with the proposed purchase, for example, if the administrator is of the opinion that there are not enough consents in order to obtain a fair price. In that situation, the members and beneficiaries who consented to the purchase must be informed of the administrator's decision.
If the plan administrator decides to purchase annuities, he or she can only do so for those who have given their consent. Once the purchase has been made, the administrator must send the same information as a purchase of the pension without modified characteristics.
Fees
Since the fees related to establishing and updating an annuity purchasing policy are part of the administrative expenses of the plan, such fees are assumed by the pension fund, unless the provisions of the plan text specify otherwise.
Content of the annuity purchasing policy
The annuity purchasing policy establishes the rules that must be respected in order for a purchase of annuities to constitute an acquittal of the benefits of the members and beneficiaries concerned.
The annuity purchasing policy must, among other things, address the following subjects:
The circumstances in which the purchase of annuities can occur
The policy must outline the elements that trigger the purchase of annuities, for example:
- favorable economic conditions
- the plan's financial situation
- the plan's maturity
- the offer of an advantageous premium from the insurance company
- the frequency of purchases, either regular or one-off.
The conditions for paying a portion of members' benefits
The policy must indicate if it is permitted to purchase a portion of the pension of each of the plan's members and beneficiaries and specify the special conditions that apply. For example, the policy can provide that if a portion of a pension is not indexed, only that portion can be used for the purchase of an annuity.
Criteria for selecting annuities to guarantee
The policy must indicate which annuities will be purchased, so that the administrator can verify that the purchase of annuities is part of the overall risk management strategy. For example, the selection criteria may relate to:
- age
- province of employment
- employer
- the characteristics of the pension.
The criteria make it possible to avoid certain situations where participants would benefit on an individual basis.
The process and the criteria for selecting the insurance company
The policy must provide certain criteria for selecting the insurance company, such as:
- the insurance companies' reputation
- the size of the insurance company
- the quality of the administrative services offered by the insurance company with regard to management of the annuities of retirees or beneficiaries
- the experience the insurance company has in the field of group annuities or defined benefit pension plans
- the premium offered by the insurance company.
In order to conduct a call for tenders, the chosen criteria may restrict the potential number of insurers who meet the intended objectives. Subsequently, a formal evaluation, based on the chosen criteria could be used to select the insurance company that will be chosen at the end of the tendering process.
Funding criteria and special monitoring
For the purchase of annuities to constitute a payment in accordance with the annuity purchasing policy, a special annuity purchasing payment may be required in order to maintain the plan's degree of solvency, or to restore it to 100%. If such a payment is required, the employer must provide written consent for the payment to be made.
Although optional, if the annuity purchase policy so provides, the special annuity purchasing payment may be subject to special monitoring so that the employer can possibly recover it in the event of an appropriation of surplus assets.
Annual meeting and consultation of the annuity purchasing policy
Information must be provided concerning any payments that have been made in accordance with the annuity purchasing policy throughout the year to which the annual meeting relates.
The following must be on the agenda of the annual meeting:
- the number of annuity purchase transactions and the premium required by the insurance company for each transaction
- the selection criteria of annuities and the choice of insurance company
- for each annuity purchase, the plan's degree of solvency before and after the purchase and, if any, the amount of the special annuity purchasing payments related to that purchase
- an overview of the main changes made to the annuity purchasing policy since the last annual meeting.
Lastly, pursuant to the Supplemental Pension Plans Act, members and beneficiaries may consult the pension plan's annuity purchasing policy.
Plan termination and withdrawal of the employer
Even if the purchase of an annuity under the plan's annuity purchasing policy constitutes a payment of benefits and, as a result, the member or beneficiary whose entire pension was purchased is no longer a member or beneficiary of the plan, that person retains his or her status as a member or beneficiary for a three‑year period.
If the plan is terminated, or during a period that an employer to whom a person had employment ties withdraws from a multi-employer plan, and the amounts cannot be recovered because the employer is insolvent, that person will be considered as a member or beneficiary for the purposes of the termination procedure and will therefore have his or her pension reduced as that of the other members and beneficiaries.
If the plan is terminated during that period and there are surplus assets, the person will be considered as a member or beneficiary for the allocation of the surplus.
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