Similar to last year’s pension changes in Alberta, Nova Scotia is undergoing pension reform of its own. These changes are designed to help modernize the province’s outdated pension legislation by introducing a number of improvements, including updating its benefit standards and improving plan administration.
Coming into effect June 1, 2015, there are a new number of new rules that pension plan sponsors need to be aware of. Although Nova Scotia is one of Canada’s smallest province, these rules may affect your pension plan. If you’re a plan sponsor with employees in Nova Scotia, you’ll need to follow the rules. Here are a couple of pension plan changes for Nova Scotia that plan sponsors need to pay attention to.
Similar to Alberta, Manitoba, Ontario, and Quebec, starting June 1, 2015, Nova Scotia 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, Nova Scotia members needed to wait two years to become vested. If an employee leaves on or after June 1, 2015, they’ll receive a pension payout. In a nutshell, the new rules are an added cost for plan sponsors – members who used to be non-vested are now entitled to a payout.
Related article: The trend towards immediate vesting for pensions
Plan sponsors can offset this change in a couple of ways. Plan sponsors may consider extending membership eligibility to two years. By doing that, members must accrue service for two years before joining the pension plan and being entitled to a payout. With most provinces moving towards immediate vesting, to simplify pension administration, plan sponsors may consider offering immediate vesting in all provinces (even if it isn’t required by pension legislation).
Unlocking: Small Pensions
The small benefit test has been updated in Nova Scotia. A member who is vested and terminate his employment before his earliest retirement date has the option of receiving a pension payout as a deferred pension or the commuted value. Under normal circumstances a member’s pension is locked-in until retirement. The exception is if the pension falls under the small pensions threshold.
In Nova Scotia there are two tests to see whether a pension qualifies as a small benefit. The first test compares to the current year’s YMPE (Years Maximum Pensionable Earnings) to the annual pension at normal retirement date (NRD). If the annual pension is 4% or less of the Year’s Maximum Pensionable Earnings (YMPE) in the year of termination, it’s considered a small benefit. The member has the option of receiving their pension payout as a cash lump sum or transferring to a non-locked in savings vehicle like an RRSP. This test remains the same and is still in effect.
The second test compares the commuted value to the YMPE in the year of termination. The small benefit threshold has been increased to 20% of the YMPE from 10%. For example, if a member’s annual pension at NRD is less than $10,720 (2015 YMPE: $53,600 X 20% = $10,720), then it’s considered a small benefit.
Related article: Unlocking locked in pension money
It’s important for plan sponsors to review their plan documents. If your plan document specifically references the previous 10% commuted value test, an amendment must be filed before the new 20% threshold can be used. The new rules means there will more small pensions, which translates to fewer deferred pensions on the books. With the trend towards inactive statements, this will help reduce the cost of plan sponsors.