The Trend Towards Immediate Vesting on Pensions

On July 1, 2012, Ontario became the latest province to introduce immediate vesting. Ontario followed in the footsteps of provinces like Manitoba and Quebec in an effort to modernize its pension legislation. Alberta also went to immediate vesting as of September 1, 2014. As a plan sponsor offering a pension plan, it’s important to be aware of the trend towards immediate vesting and its impact on your pension plan.

What is Immediate Vesting and Why Does it Matter?

Before you can start to comprehend the impact of immediate vesting, you need to first understand what vesting is. In simple terms, vesting mean a member is entitled to the full value of his or her accrued pension when he or she leaves the pension plan.

Before immediate vesting took effective in Ontario, members would need to stay in the plan for two full years before they were considered vested. If a member left even one day before his or her vesting date, all he or she would be entitled to is his or her contributions with interest (CWI) –  the member wouldn’t receive the commuted value.  In a Defined Contribution Pension, the member would only get their contributions plus investment growth but not the employer contributions.

With immediate vesting in place, members that terminate their employment (voluntarily or involuntarily) receive pension benefits whether they stay for 10 days or 10 years. As you can see, immediate vesting can be costly for plan sponsors – instead of paying a member with less than two years of credited service no benefit benefits, the member now receives a payout upon termination.

Changing Membership Eligibility

Plan sponsors with members spread across the different provinces face a bigger challenge. In Canada there are 11 different pension bodies – 10 provincial and one federal – each with its own unique pension legislation. This can make it difficult and costly for plan sponsors to keep up-to-date on the latest changes in pension legislation. As a plan sponsor, it’s your responsibility to ensure your plan provides for at least the minimum standards in each province.

In light of the trend towards immediate vesting, plan sponsors may consider getting ahead of the curve by altering membership eligibility. If members are allowed to join your plan immediately upon employment, perhaps you would consider lengthening the eligibility period for joining the plan. In Ontario, you can make members wait as long as two years before joining the plan. If they terminate their employment before two years, they aren’t a member of the pension plan and despite immediate vesting, receive no pension benefits.

Immediately Vesting Across the Board

With most provinces heading towards immediate vesting, from a pension administration perspective, it may be easier to offer immediate vesting to all members. Even though provinces like Alberta don’t require immediate vesting, you can still offer it, as long as it’s above the minimum standards (Alberta is, however,  also moving to immediate vesting).

When it comes time to prepare annual statements of pension benefits for members, you’ll have one less thing to worry about, as you don’t have to look at the province of employment for each member to see if they’re vested. It also makes explaining the pension a lot easier for human resource staff, who won’t have to worry about the vesting rules in the different provinces.

Getting Small Benefits Off the Books

Immediate vesting introduces a new issue – small benefits. For years plan sponsors have struggled with hidden pensioners, otherwise known as deferred vested members. A member leaves the pension plan 10 years ago and it’s up to the plan sponsor to track them down at their normal retirement date. With provinces moving towards mandating annual statements of pension benefits for inactive members, it can be beneficial to get pensioners off the books before they disappear.

With the introduction of immediate vesting, most provinces have lowered their small benefit threshold. In Ontario the small benefit threshold was lowered to four per cent of the Years Maximum Pensionable Earnings (YMPE) to two per cent for a member’s accrued annual pension benefit.  In Alberta, the small benefit threshold is 20% of YMPE.

For example, in 2014 the YMPE is $52,500. If a plan member has accrued an annual pension less than $2,100, they can be forced out by being offered a cash lump sum or a transfer to a non-locked in RRSP. It’s a win-win situation for plan sponsors and members – plans are able to clear their books of small benefits, and the pension for members with small benefits aren’t locked-in until retirement.

The Choice is Up to Plan Sponsors

At the end of the day, it’s up the plan sponsor whether they want to offer immediate vesting in provinces which haven’t yet made it mandatory. For plan sponsors with members in each of the provinces, it may be worthwhile to introduce immediate vesting across the board to simply pension administration. Other plan sponsors may want to think long and hard on whether they want to offer immediate vesting, or in provinces where immediate vesting is already mandatory, extend membership eligibility to the full two years.

Written by Sean Cooper

Sean Cooper is a Pension Analyst with a global pension and benefits consulting firm. He is a financial journalist with articles featured in major publications, including the Toronto Star, the Globe and Mail and MoneySense. His areas of expertise include pensions, retirement and health benefits. He has made several media appearances, including Bell Media, Newstalk 1010 and CTV. Follow Sean on Twitter @SeanCooperWrite and check out his personal finance blog at www.seancooperwriter.com.

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