As DC pension plans become more prevalent in Canada, DC sponsors have been focusing primarily on the accumulation and management of assets for active plan members. However, with more DC members approaching retirement, sponsors should also focus on how the assets accumulated in DC plans will be paid out to beneficiaries and what legal complications can arise when members leave the plan.
That was the main message at a Blake, Cassels & Graydon LLP seminar in Toronto on Tuesday.
Risks for members
As administrators think about de-accumulation, they need to realize that most members want at least some predictability in their stream of retirement income, but this predictability can be threatened by various circumstances, said Blakes partner Elizabeth Boyd.
As Canadians live longer, they face the likelihood of outliving their savings. They also face the possibility of their retirement savings being eroded by inflation. And if their money has to remain invested in retirement, they can end up with poor returns due to market volatility.
Unexpected costs, especially those related to healthcare, are an issue, too. “More and more healthcare expenses are being offloaded from government systems,” Boyd explained.
Sponsors also need to be mindful that retirement can occur at different times for different individuals and that each person has unique cash-flow needs in retirement, she added.
Portability
Additionally, administrators need to remember that accessing DC account values generally requires the member to transfer out of the employer plan and move into a different financial vehicle. This portability is regulated by both pension standards legislation on the provincial level and the federal Income Tax Act. These laws allow the transfer to a locked-in retirement savings or income account or an annuity.
“Historically, all amounts were required to be fully locked in,” Boyd said. But more recently, she explained, some unlocking has been permitted either at the time of retirement or due to severe financial hardship, serious illness or no longer residing in Canada.
The Income Tax Act was amended a few years ago to allow DC plans to self-annuitize by providing registered retirement income fund-like payments from a member’s pension plan account. But not all provinces allow self-annuitization. For example, Ontario still doesn’t.
The portability of each DC plan depends on the terms of the plan—not all plans provide for all portability options in all cases—and on the applicable pension standards legislation.
Responsibility
Additionally, administrators need to know how long they will have a responsibility towards their members, Boyd explained. If a plan member is entitled to choose a portability option and does so, the administrator can be discharged under the law—meaning, it no longer has responsibility towards the member.
But the sponsor may not receive a statutory discharge in situations where the DC account balance is transferred out of the plan without any guidance from the member.
If the member hasn’t withdrawn money from the plan after retirement, then the administrator will continue to have fiduciary responsibilities and other obligations, such as the duty to educate plan members about de-accumulation options, according to Boyd.
Claims
Finally, sponsors of both DC and DB plans should be prepared to deal with claims from past members and, potentially, litigation, said Caroline Helbronner, also a partner at Blakes.
Lately, there has been an increase in instances where plan members come forward with old claims. For example, the individual may claim that their benefits weren’t calculated correctly or they didn’t receive certain payments they were supposed to receive, she explained.
“In certain instances, these claims become litigious because the administrator has no paper trail,” said Helbronner. This underscores the need for keeping indefinitely all pension documents since the establishment of the plan—including records pertaining to individual beneficiaries and the money paid to them, she added. “It is important for the administrator to retain the [personal] records or at least the summaries of individual members.”
While the burden of proof rests with the individual who puts forth the claim, the administrator also needs to have documents, Helbronner explained.
She added that even if administrators outsource record keeping to a third party, they are still the ones bearing ultimate responsibility for the documentation—not the third party.
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