Announcement:
On March 31, 2009, changes to the Pension Benefits Standards Act (PBSA) were brought into force to accommodate phased retirement. In addition, amendments to the Pension Benefits Standards Regulations (PBSR) were passed that set out disclosure requirements for phased retirement.
The order bringing the PBSA changes into force, and the regulations were published in the Canada Gazette on April 15, 2009.
Phased Retirement- Qs and As
1. What is phased retirement?
Phased retirement is when you receive a portion of pension while at the same time continuing to accrue pension benefits in the same pension plan. This was prohibited by the Income Tax Regulations (ITR) until amendments were passed on December 14, 2007. In order to accommodate the ITR amendments, changes to the Pension Benefits Standards Act (PBSA) and the Pension Benefits Standards Regulations (PBSR) were made to permit phased retirement. These changes to the pension legislation came into force on March 31, 2009.
2. Who is eligible for phased retirement?
A person is eligible to be offered a phased retirement benefit at age 55 or older where entitled to an unreduced immediate pension under the terms of their pension plan, or at age 60 or older where entitled to a reduced immediate pension.
In addition, current retirees receiving a pension will be able to return to work under a phased retirement arrangement.
Phased retirement applies only to members of federally regulated pension plans classified as a “defined benefit” plan. Members of “defined contribution” plans are not eligible. (N.B. Some provincially regulated plans may adopt similar legislation. Please consult your provincial regulator for more information)
3. Must phased retirement be made available to any eligible member?
No. It is the employer’s decision whether to provide the option of phased retirement. Further, phased retirement may be offered on a case-by-case basis on varying terms. In exercising this discretion, employers must fulfill their duty of good faith, and must not discriminate in a manner prohibited under Human Rights laws.
4. What can be offered?
Employers can offer a phased retirement benefit that is a portion of an employee's current pension entitlement with continued accrual of pension benefits. If a plan offers bridging benefits, these can be paid on a stand alone basis, or in combination with a portion of the current pension entitlement.
The amount an employee receives while in phased retirement cannot exceed 60% of the employee's current pension entitlement.
5. Does an employee on phased retirement need to reduce work time?
No. This may be subject to negotiation between the employer and employee. A common arrangement may be to reduce work time (and salary), in proportion to the phased retirement benefit. Alternatively, an employee could have no reduction in work time or salary, and receive a phased retirement benefit.
6. What does the employer need to do in order to implement phased retirement?
The pension plan text will need to be amended to permit the payment of phased retirement benefits. The plan administrator must meet certain disclosure requirements. At that point, the employer may enter into written agreements with employees to implement phased retirement.
7. What are the minimum disclosure requirements?
Amendments to the PBSR set out the minimum required disclosure to help ensure that members or former members can make an informed choice about whether to enter into a phased retirement arrangement, as compared to their options of either continuing to work without receiving any pension benefit or fully retiring. The disclosures are to be provided to the member or former member and their spouse or common-law partner.
Members shall be provided with a retirement statement, and a statement containing information about the phased retirement benefit and information necessary to estimate their future pension at full retirement (i.e. after phased retirement).
Former members shall be provided with a statement containing information about the phased retirement benefit and information necessary to estimate their future pension at full retirement (i.e. after phased retirement). In addition, where the former member is in receipt of a joint and survivor benefit, consent of that former member’s spouse or common-law partner is required prior to the cessation of the joint and survivor benefit, which is a necessary condition prior to the payment of a phased retirement benefit. The regulations specify the form and content for the consent.