Are your annual pension statements audit-proof?
Communications consultant Steven Laird is the editor for Buck Exchange. He works with an advisory board with representatives from each of Buck’s consulting practices: Health & Productivity, Retirement, Investments & DC Plans, Communications, Global HR Technology, and Research & Compliance.
Feel free to comment on any of these stories; comments will be posted after a brief review. Or you can contact the editor directly at steven.laird@buckconsultants.com. Steven will direct your questions and comments to the appropriate consulting practice for response.
In this issue:
Retirement
- CRA to accept higher surplus threshold under Pension Plans
- The need to keep adequate pension records
- Are your annual pension statements audit-proof?
Retirement
CRA to accept higher surplus threshold under Pension Plans
By Anne-Marie Lainesse, FCIA, FSA, Consulting Actuary
On October 27, 2009, the Federal Finance Minister announced a proposed change to increase the pension surplus threshold allowed under the Income Tax Act from 10 per cent to 25 per cent. The proposed change is intended to apply to employer current service contributions made to Registered Pension Plans after 2009. The change applies to both provincially and federally registered pension plans.
While legislation has not been passed to implement the change, the Canada Revenue Agency (CRA) has now announced that the higher surplus threshold can be reflected in determining eligible contributions for actuarial valuation reports with an effective date of December 31, 2009 or later.
CRA’s recent announcement clarifies and confirms the timing of the application of the higher surplus threshold for registered pension plans.
This is welcome news for pension plan sponsors and beneficiaries, effectively allowing greater flexibility to plan sponsors and offering a potential for improved benefit security to plan beneficiaries.
For more information please consult the Frequently Asked Questions of the CRA Registered Pension Plans website, which can be accessed here.
Action: Plan sponsors should discuss the application and implications of this change with your actuary to determine whether these new measures could be reflected in your eligible contributions for 2010.
The need to keep adequate pension records
By David Blundell, Director, Research & Compliance and Veronica Alexander, Senior Pension Analyst
Two documents have been released in Ontario that, in different ways, address the same issue –maintaining adequate pension plan records. Plan sponsors and administrators who are facing the largest generation of retirements in history over the next ten years need to pay attention to the issues raised in these documents in order to control the risk and governance issues related to potentially erroneous retiree pension claims.
The first is an Ontario Financial Services Tribunal decision regarding a former member of a terminated pension plan. This member claimed that a monthly pension was owing to him as a result of the plan termination 20 years earlier. The plan was a non-contributory defined benefit plan, terminated in 1989 due to a plant closure. At that time, the member was entitled to either a locked-in commuted value transfer or a deferred monthly pension. He asserted that he didn’t request the commuted value transfer, but instead elected to receive a monthly pension. While no clear evidence was presented to the Tribunal that the individual was or was not entitled to a monthly pension, insurance company records showed that a commuted value transfer was made from the plan in early 1990 to his locked-in RRSP account. The Tribunal eventually concluded that in the absence of proper records, the probability based on “best evidence” was that the member was paid his commuted value.
The second document is a recently released draft policy from the Financial Services Commission of Ontario (FSCO) titled “Management and Retention of Pension Plan Records by the Administrator”. The Tribunal case discussed above clearly demonstrates the importance for administrators to retain certain records. The FSCO draft policy picks up on this theme and outlines its expectations that plan administrators create and maintain a formal and comprehensive written records management and retention policy. This policy should address such obvious issues as how the plan records are managed, how long the records are retained, and the person(s) responsible for maintaining the records.
Currently, pension laws in Ontario do not specify the types of pension records that should be retained. However that will change once Bill 236 (An Act to amend the Pension Benefits Act) is adopted and the Regulations are released. The new Regulations under Bill 236 will require an administrator to retain certain types of records for the periods of time specified by the Regulations. All administrators will be impacted by this change to pension law, large or small.
FSCO draft policy at a glance ….
- General pension plan records should be retained for the life of the plan.
- Individual plan member records should be retained as long as these individuals or their beneficiaries have a potential entitlement under the pension plan.
- A written records management and retention policy should be prepared. Some of the issues to be addressed in the policy include the form in which the documents will be stored, contractual agreements with service providers, the processes for notifying members of their obligations to retain their own individual plan records, the process for disposing of the documents at the end of their retention period and the process for maintaining back-up records.
- A person(s) should be designated to be responsible for maintaining plan records.
- Enrolment information should be retained which can demonstrate a member’s decision to join or decline membership in the plan as well supporting plan membership entry dates.
In the event of a pension plan termination, the administrator must be able to demonstrate that the payments from the pension fund have been made in accordance with the plan terms and pension law.
Are your annual pension statements audit-proof?
Are your annual pension statements audit-proof?
By Mary Cover, F.S.A., F.C.I.A. Consulting Actuary
Are your annual pension statements an unavoidable evil, or a fresh opportunity to inform, educate, and engage your employees? Are they simply a compliance checklist item or do they help build your value as an employer?
Section 106(4) of the Pension Benefits Act (Ontario) is not particularly well known, but it should be on all pension plan sponsors’ radar screens. This section of the PBA allows the regulator, FSCO, to examine virtually everything related to your pension plan. Their mission is to ensure your plan’s compliance with the Act. They will typically do an on-site visit and review items such as employee data, benefit calculations and related statements for terminations and retirements, documentation surrounding investment decisions …and the annual employee pension statement.
Each province defines what must be included on the annual statements. That means that if you have Alberta employees in your Ontario registered pension plan, you need to ensure that you meet the disclosure requirements outlined in the Alberta act. A FSCO audit would very quickly note any compliance deficiencies in your communications material. Would you be ready for such an audit?
For most plans in Ontario, June 30th is the deadline for sending out annual pension statements. Work is commencing on this year’s batch, so now is an opportune time to consider doing a compliance audit. But why stop at compliance? You should think about using this opportunity to educate your employees and improve their understanding and appreciation of their pension benefits. This is a perfect time to build a strong link between the statements and your corporate vision, messaging and branding.
For instance, if you have a defined benefit plan with an employee in Quebec, you’re required to show the lump sum commuted value of the pension on the annual statement at least once every three years. Why not show the value of the benefit for all your employees every year? If an employee is currently 45 and entitled to receive a lifetime pension at 65 of $1,000 a month, let them know that the lump sum value today is in the range of $53,000(1). That lump sum value is much more tangible than a benefit that won’t even commence for 20 years.
Some employers (and actuaries for that matter!) resist providing this information because the value can fluctuate. It can even decrease. But that’s part of the educational process. Explain how the value is determined and how it may change. Add your caveats that the amount is not guaranteed and, in fact, may decrease. It will likely take some time, but employees will start to understand – and have a greater appreciation for – the value of their pension benefits.
Quebec also requires you to show the amount of employer contributions made in the plan year. British Columbia requires disclosure on plan assets as of the fiscal year-end as well as a brief description of the plan’s investment policy. Many employers make significant cash contributions to their pension plans. Why not share this with all of your employees – regardless of whether or not you have Quebec or BC employees in your plan? Tell them about the contributions you’ve made. Show them the amounts as a percentage of payroll too. For defined benefit pension plans, when you factor in amortization payments that many plans currently have to make due to the poor market returns in 2008, that cash contribution can be a significant number. This is a very easy way to help your employees see just how the pension plan fits into their overall compensation.
Effective communication is all about transferring knowledge and understanding, not just the passing on of information. It’s about helping to engage and retain your best people. Let’s stop viewing annual pension statements as a necessary evil on the to-do list and instead view them as an opportunity. The goal is to have greater employee appreciation of the financial security that your pension benefits give them. The result is greater employee engagement.
1) Assumes pension payable for life only with no ancillary benefits.
