3 important pension plan changes for Alberta
There are big changes on the way for pension plans in the province of Alberta. Alberta is the latest province to modernize its pension legislation, following in the footsteps of Ontario. These pension plan changes have been on the works for quite some time. B.C. will soon come out with new rules of its own.
Effective September 1, 2014, a number of new rules come into effect in Alberta. The new rules are far-reaching, impacting not only pensions plans registered in Alberta, but any provincially-regulated pension plans with Alberta members.
If you’re a plan sponsor with employees in Alberta, you’ll need to start following the rules. There are many pension plan changes but in this post, I highlight three key changes plan sponsors will need to follow effective immediately.
Following provinces like Manitoba, Ontario, and Quebec, effective September 1, 2014, Alberta members are now immediately vested. What is vesting? It means members are entitled to their full pension benefits when they leave an employer. Before the new rules, Alberta members had to wait two years to become vested. If an employee leaves on or after September 1, 2014, they’ll receive a pension payout. The new rules make it more costly for plan sponsors – members who were previously non-vested will receive a payout.
Related article: The trend towards immediate vesting for pensions
There are a number of things plan sponsors can do counteract the change. Plan sponsors may want to extended membership eligibility to two years. That way a member will have to accrue service for two full years before they can join the pension plan and be entitled to a payout. With the trend towards immediate vesting, to make pension administration easier, plan sponsors may want to consider offering immediate vesting across the board.
Unlocking: Small pensions
The small benefit test has been changed in Alberta. If a member is vested and terminate their employment before their earliest retirement date, they’ll be able to choose to receive a pension payout in the form of a deferred pension or the commuted value. Normally a member’s pension is locked-in until retirement, unless it falls under the small pensions threshold.
Previously, there were two tests to see if a pension would be considered a small benefit. The first test that compared to the current year’s YMPE (Years Maximum Pensionable Earnings) to the annual pension at normal retirement date (NRD) has been eliminated.
The only test to see if a pension qualifies as a small benefit is now whether the commuted value is 20% or less of the YMPE in the year of termination. For example, if the annual pension at NRD is less than $10,500 (2014 YMPE: $52,500 X 20% = $10,500), then it’s considered a small benefit and the member is entitled to receive is as a cash lump sum or transfer their pension to a non-locked in savings vehicle like their RRSP. The new rules means there will be less small pensions, which means a greater number of plan members on the books.
Effective December 31, 2014, pension plans with Alberta members must start issuing inactive statements. The new rules require that annual statements are to be provided to retirees in pay (pensioners and surviving spouses). Similar to active statements, inactive statements must be provided 180 days after the pension plan’s year end (starting June 2015). Although this will create additional work for plan sponsors, the good news is that statements are not required for deferred vested members like Quebec.