Pensions and Retirement
There are many ways to save for retirement, including various pension plans. Some of these pension plans apply to all New Brunswickers, and are operated by the Canadian government. Others are benefits that some employers offer their employees. If your employer does not offer a pension plan, you should consider alternative ways to save for retirement—such as RRSPs or other investments.
Employer-sponsored pension plans are an important source of retirement income for many employees. FCNB is responsible for enforcing the Pension Benefits Act, the Nursing Homes Pension Plans Act, and their Regulations. They are designed to protect the interests of New Brunswick pension plan members by setting minimum standards for pension plans registered in New Brunswick.
Types of pensions
A pension may be earned through a Defined Benefit Plan (DB Plan), a Defined Contribution Plan (DC Plan) or a Shared Risk Plan (SRP).
Defined Benefit Plan (DB)
In a DB plan, a formula (not the performance of the money invested in the plan) determines the benefits paid at retirement. The formula takes into account the employee’s earnings, years of employment, age, and other factors. In a DB plan, the employer or plan sponsor assumes all the investment risk and portfolio management responsibility. It can be contributory (employees and employers make contributions) or non-contributory (only the employer contributes).
An individual pension plan (IPP) is a type of defined benefit pension plan for one person, typically the owner or a highly paid employee (such as an executive) of an incorporated company. Typically, the company makes all the contributions as part of the employee’s compensation. An IPP is intended for people with higher incomes as it allows for higher tax-deductible contributions than an RRSP. IPPs must conform to the Canadian Income Tax Act (ITA) and the Canada Revenue Agency’s requirements for defined benefit pension plans.
The benefit payments from an Individual Pension Plan (IPP) cannot be paid out as if the assets were held in a Registered Retirement Income Fund (RRIF). An IPP is a registered defined benefit pension plan under the Act, and the IPP must comply with the provisions of the Act. The Act does not allow for RRIF type payments from a pension plan. However, there may be circumstances when surplus assets, if any, under the IPP may be used to bring the pension being paid to the retired member up to the required RRIF level. For example, this could be done where the plan terms permit payment of surplus from the ongoing plan to the retired member(s) of the plan.
Defined Contribution Plan (DC)
In a DC plan, the final benefits depend on the contributions made and the performance of the money invested in the plan. Each employee or retiree assumes the investment risk and longevity risk (the potential to outlive your pension income), not the employer or plan sponsor. The employer or both employer and employee make fixed contributions which are invested on the employees’ behalf, and investment choices and portfolio management are also often the employee’s responsibility.
Shared Risk Plan (SRP)
The SRP is a type of target benefit plan with mandated risk management principles. The key characteristics of an SRP are:
- fixed contributions (or variable only within a narrow, pre-determined margin)
- targeted benefit at retirement
- the ability to reduce benefits if necessary to balance the plan’s funding
- mandated risk management principles to help ensure the targeted benefits can be provided in the vast majority of economic scenarios
There are two types of benefits under an SRP:
- Base Benefits must be funded so that there is a 97.5% probability that they will not be reduced over a 20-year period.
- Ancillary benefits must be funded so that, on average, at least 75% of their targeted value will be paid over the same 20-year period (example, Indexing).
Contributions into the SRP are set at a level that will allow the plan to pay for the projected benefits and meet the risk management tests.
Under the SRP, generally both employers and employees contribute to the plan. Employee contributions cannot be more than half of the total amount of contributions. The financial state of the plan must be reviewed each year. If necessary, predefined actions must be taken. An SRP is governed by a funding policy that may allow or require changes to contributions in certain circumstances. The funding policy lays out the steps to take and their order of priority, in order to deal with funding deficits and funding surpluses that may develop.
Pension wind up
An employer or plan sponsor, in most cases, can choose to terminate a pension plan at any time. This is called winding up the pension plan. A pension plan wind-up can happen for a number of different reasons, such as business reorganization or downsizing. Regardless of the reason for terminating the plan, the process of winding up a pension plan is subject to certain requirements under the Pension Benefits Act.
If your pension plan is winding up you will receive a notice from your employer or the administrator of the plan letting you know about the process. Your pension plan administrator must file a wind-up report to the Superintendent of Pensions that includes information such as the assets and liabilities of the pension plan, the benefits under the plan that will be provided to members, former members and others and how they will allocate and distribute the assets and the priorities for payment of benefits. This report is available for viewing and comments for 30 days. Once the Superintendent approves the report, your employer or the administrator of the plan will provide you with a statement of your benefits. Pensions will continue to be paid during this period.
If you are currently receiving a pension, an annuity will be purchased from a financial institution on your behalf and you will continue to receive your pension cheque as you normally would, just from a different source.
If you are a former member who is not currently receiving a pension (for example, your funds remain in the pension plan), once the wind-up is approved by the Superintendent, the administrator of the pension plan will provide you with an option statement and you will choose from one of the options available to you.
Canada Pension Plan (CPP)
The Canada Pension Plan (CPP) is a Government of Canada program. Almost everyone who works in Canada (outside of Quebec) contributes to the CPP. The CPP is a percentage of your gross income that is paid by you and your employer. If you are self-employed, you pay both the employee’s and employer’s share. Each year you contribute a percentage of your gross income up to a maximum amount (Year's Maximum Pensionable Earnings). The CPP provides contributors and their families with partial replacement of earnings in the case of retirement, disability or death.
For more information about the CPP program, visit the Government of Canada’s website.
Old Age Security (OAS)
The Old Age Security (OAS) program is a Government of Canada pension program. You do not pay directly into it. General revenues of the Government of Canada fund it. The OAS Pension is available to most Canadians 65 years of age and older. You must apply to receive the monthly payment, and meet the residence and other status requirements.
For more information about the OAS program, visit the Government of Canada’s website.
Registered Retirement Income Fund (RRIF)
A Registered Retirement Income Fund (RRIF) is a federally registered fund that pays out income to a beneficiary (or a number of beneficiaries) during retirement. While your RRSP is used to put money into savings for your retirement, your RRIF is used to withdraw money to provide you with income once you are retired. A RRIF allows for tax-deferred growth of the investments. A major difference between RRSPs and RRIFs is that once you convert your RRSP into an RRIF, you cannot make any further contributions and there are minimum withdrawal amounts that you must take out each year. The Canada Revenue Agency (CRA) regulates RRIFs.
To learn more about RRIFs, visit the Government of Canada’s website.
View FCNB’s current Examples of Calculation:
- Transfer from LIF to RRIF (PDF) effective January 1st 2020
- LIF Withdrawal Table 2020
- Maximum Asset Limits for Small Pensions and LIRA 2020