Minutes of the Registered Pension Plan Consultation
November 21, 2002

Thirty-eight delegates from 33 companies in the pension industry in Canada attended this annual all-day consultation session at the RA Centre in Ottawa.

Opening Remarks

Ms. Enikö Vermes, Acting Director General of RPD, welcomed participants to the annual Registered Pension Plan Consultation Session for 2002. She explained that she was replacing Mr. Fred O'Riordan who is on a temporary assignment in CCRA's Quebec regional office. She commented briefly on her professional background, the use of the official languages at the session, the unusual number of attendees, and the absence of several Directors who were on language training.

Report on the Directorate

Ms. Vermes then gave an overview of the Directorate's current initiatives, chief among them being Business Process Re-engineering (BPR).

In the first phase of this project, we plan, among other things, to publish a technical manual on CCRA's website, to improve the speed of service, and to give more attention to risk management. In the second phase, now underway, we are studying the feasibility of three specific innovations. Currently, we are focussing a large part of our energies on registering plans under the Income Tax Act (ITA). We refer to our efforts on this side of our business as "front-end" registration activities. The three innovations would have us shift our energies further down the continuum to "back-end" compliance, in other words, monitoring whether plans are actually administered in accordance with their registered terms. We are currently consulting with affected parties about this shift in focus. As it happens, BPR also fits well into a CCRA initiative called "Future Directions," which is essentially aimed at taking maximum advantage of advances in technology to transform the way we serve our clients.

Ms. Vermes summarized the client satisfaction survey conducted in 2001.

• A little more than 50% of respondents were happy with RPD's services. We conclude that there is room for much improvement.
• Respondents ranked our services in order of importance to them:

First:"Replies to written inquiries"
Second:"Initial review"
Third:"Approval of eligible contributions"

Our current priorities are aligned with these preferences.

• 70% were satisfied with 180 days as a standard for completion of reviews of amendments to existing plans and approvals of eligible contributions, but only 50% were happy applying the same standard to funding approvals.
• Respondents indicated that our website was useful to them and favoured the expanded use of electronic messaging. Client endorsement of these modes of communication will be taken into account in the BPR initiative.

Divisional Reports

After her report, Ms. Vermes turned the podium over to RPD's four Divisional Directors.

As Director of RD, Ms. Annelisa Gillespie gave an overview of her area of responsibility.

Structure and Responsibilities

With a complement of 87 staff, RD is responsible for registering submissions under seven deferred income programs, as well as answering written submissions and telephone enquiries. They also have to invest significantly in the training and coaching of new staff because of a high rate of staff turnover.

RD is organized into eight groups. Two handle about 30,500 calls a year related to deferred income programs, pension adjustments (PAs), past service pension adjustments [PSPAs], and pension adjustment reversals (PARs). One group specializes in Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs) and Registered Educational Savings Plans (RESPs). The remaining groups handle the most complex of RD's programs, applications to register, amend, or terminate registration of pension plans (RPPs).

In the past year, in addition to BPR work, we have pursued initiatives to improve service in three areas: risk management, quality control, and integrated actuarial valuation reports.

Judicious use of scarce resources demands that we employ a risk-based approach to plan supervision. We are applying this approach to RPPs and are gradually expanding it to all deferred income programs - most recently to RRSPs and, in the near future, to Deferred Profit Sharing Plans (DPSPs). We are working with the Compliance Division (CD) to ensure plans with the highest risk of non-compliance are systematically identified and dealt with appropriately.

In the past year, we implemented a formal quality control process. Quality control is meant to ensure that we are dealing with registration issues consistently. Staff turnover presents a challenge for consistent application of registration rules. Ms. Gillespie invited attendees to assist in identifying areas of inconsistency. For example, she proposed inserting questionnaires in outgoing mail to solicit feedback on consistency and timeliness.

The division also worked with Actuarial Division (AD) to build a faster process for handling actuarial valuation reports.

On March 28, 2002, we published a revision of the client service standards originally published in 1995 [Newsletters 95-2R]. We wanted the industry to be aware of our timeframes for replies, and we wanted to monitor our performance from year to year. For example, we reduced our standard for reviewing plan amendments to registered pension plans from two years to nine months. By using such a visible standard, we can demonstrate that we are on the way to meeting the preferred standard of six months. In the coming year, we are also committed to meeting our standards for the deemed registration, registration, and termination of pension plans and for the registration of educational savings plans. We also want to publish new standards for DPSPs and Registered Investments (RIs).

Ms. Gillespie explained our performance in relation to the new standards. The good news is in the area of pension plan amendments. The standard is to process 80% of RPP amendments, including defined contribution and defined benefit amendments, within 9 months. On the defined contribution side, 88% of amendments were completed in the target time frame. We completed 6% more amendments than we did in 2001 while reducing the average time to complete them by 44 days from 242 days to 198 days. On the defined benefit side, we completed 77% of amendments in nine months. Though not at the target level of 80%, our performance was a 13% improvement over 2001. We reduced the average completion time by 86 days from 319 days to 233. We also pushed our average completion time closer to our next target of 180 days or six months. Older, more complex plans requiring the assistance of our Technical Services Section are the main reason for higher overall processing times. However, we have stopped banking client replies to our requests for changes. The analyst who originally requests a change is the one who deals with the reply. The result has been greater efficiency.

While 88% of the new applications for pension plan registration were processed in 180 days, only 59% of deemed registrations were within the target of 60 days. Loss of experienced staff is the likely reason. New procedures related to acknowledgement letters should result in immediate improvement. 85% of RPP terminations were completed within the one-year standard. 80% of RESP submissions were processed within the 60-day standard. We consider the date applicants record on their submissions as our start date.

Processing times for our various workloads vary greatly depending on the nature of submissions. In general, we try to ensure that all submissions over 180 days old are given priority. As a result, we reduced the number of submissions in our inventory for more than 180 days from 7,000 in September 1999 to 3,700 in September 2002. Overall, outstanding inventory for 1999-2000 numbered almost 12,000 submissions. This figure dipped in 2000-2001, and then increased steadily to the current number of 10,000. We expect this number to be at 2000-2001 levels by the end of March 2003. The RPP workload accounts for half of all submissions; the other 6 deferred income programs account for the rest. We continue to examine new ways to reduce our inventory.

One of the enquiries we received in the lead-up to this session related to the government online initiative (GOL) that Mr. Ray Bradley reported on in 2001. RPD put forward several proposals but none were approved. Our proposals included conversion of the Annual Information Return and other forms to secure, online e-forms. However, much of the government's budget for GOL was diverted to security measures related to the 9/11 tragedy. In spite of this setback, we have continued with other initiatives. For example, we set up the RESP program to operate in a totally electronic environment. We worked with the Human Resources Development Canada and Canada Education Savings Program (CESG) to ensure plan issuers could submit plans to CESG, RPD could register them, and CESG could pay out grants in a completely electronic environment.

As well, the concept of electronic filing is also going forward on the RRSP front. In the initial phase, 13 RSP-issuing companies filed listings electronically. We received 214,000 records on 5 CDs. This equates to almost 10,700 pages of paper. Eight more companies are now in a test phase. We have invited the rest of the RRSP industry to submit listings electronically. In the near future, we will be working to handle RSP administrative relief electronically as well.

By the end of the fiscal year in March 2003, we would also like to be able to receive general enquiries via email. We have little difficulty in receiving email, but responding by email will remain problematic until our outgoing email can be encrypted. In the interim, we must continue to reply by post. The CCRA's technical experts are hard at work on this issue. As soon as we have a secure two-way email system in place, we will test its use for general enquiries.

To conclude this presentation, we would like to remind those filing documents with us that doing so in the "prescribed manner" avoids delay. Please pay close attention to the following:

• Documents have to be originals or certified, true copies of the originals. If there is a board resolution, it must be submitted. If there is none, the plan administrator must authorize the amendment either by certifying relevant documents or signing the T920 form. Unless we have requested specific changes to a plan, the T920 form should accompany every amendment to both "deemed registered" and registered plans.
• Adhering to these requirements is particularly important for new applications because delays may affect the effective date of the plan.The plan changes we request have to be submitted as soon as possible and have effective dates that are consistent.
• Where we request changes to a specimen plan text, plans already using the text should also be changed without delay.

Asked if RD would accept submissions of prototype plans and amendments, Ms. Gillespie replied that Newsletter 95-6 was issued for this precise purpose. Use of prototype plans encourages efficiency. An audience member commented that consultants sometimes receive inconsistent comments from RD plan analysts. Ms. Gillespie invited submitters to contact group managers when this occurs. They can then raise the issue to a higher level, gain consensus and provide further guidance.

Policy and Communications Division (P&C)

Mr. Michael Godwin, who is replacing Ms. Patricia Spice as Director of P&C while she is on language training, gave an update on initiatives in his area of responsibility.

For those new to these sessions, P&C is structured as follows. An administrative assistant and a translator report to the Director. Two managers heading two sections also report to the Director. Right now, the Technical Services Section is made up of three officers, and the Policy and Systems Section has seven officers (one of whom is now acting as manager), and two systems liaison officers. We expect to fill a few vacancies in our ranks in the near future.

Technical Services Section's main job is to provide advice to RD on complex issues and plans. They also review legislated plans. They handled over 800 questions and file reviews last year. They usually write 30 to 50 ministerial letters in response to queries related to deferred income programs. They also monitor media for deferred income issues, write question period responses, and brief senior executives on sensitive issues.

The Policy and Systems Section handles publications and policy development and serves as our main contact with the provinces on policy issues. They also provide internal systems support and application development and liaise with the provinces on annual information returns and information sharing.

Mr. Godwin then reported on the progress that Ms. Spice promised last year. We accomplished five of the six items she listed as goals for 2001. We revised the RRIF, SUBP, and RESP Circulars as well as the questions and answers on our Web site regarding Common-law Partners and PA, PSPA, and PAR. We were not able to up-date the RPP Guide but we will be moving forward on it soon.

In the lead-up to this session, we were asked to up-date you on progress regarding changes to the Flexible Plan Newsletter. Unfortunately, we are not able to report much progress because of lack of resources. However, we are committed to moving this issue forward as one of our major priorities as soon as this session is over. A member of the audience underlined the significance of allowing employers to fund flexible benefits and asked whether it was possible for us to bank plans with such amendments in them. Mr. Godwin confirmed that we would bank such submissions until they could be reviewed against our new rules.

We were also asked for an up-date on our promise to make our RPP technical manual available online. We had hoped to announce at this session that we had fulfilled our promise, but we are unable to do so. We undertook a complete, three-stage review of the manual to ensure it was broadly applicable, consistent, and accurate. We have already removed material of narrow interest and have corrected conflicts with published positions. RD is now in the process of reviewing the manual to ensure technical accuracy. It should be available in late winter or early spring.

The Commissioner signed a memorandum of understanding with the Régie des Rentes du Québec under which plan administrators in that province can now file annual information returns to us using the Régie des Rentes as their one-stop access point. The CCRA as a whole has initiated Individual Learning Plans (ILPs) to promote employee career advancement and personal growth. We have taken the ILP paper form a step further and made it electronic. The e-form also supports a new database that we use for training management purposes. We will soon be offering this tool to other areas of our Branch. As well, we have developed an application called "Suggestion Box Online" (SBOL). By allowing everyone to view suggestions and management responses on an internal Web site, SBOL facilitates staff-management communication. We also revised two newsletters: the Specimen Plan Newsletter and the Service Standards Newsletter.

Actuarial Division

Mr. Luc Taillon, who is replacing Ms. Janice Laird as Director of AD, gave an overview of his organization and its initiatives.

AD consists of three closely related areas: Actuarial Section, Actuarial Analyst Section, and Clerical Assistance. In the Actuarial Section, staff prepare and deliver actuarial training to the whole Directorate. They also answer actuarial enquiries, develop systems, research issues, and are involved in risk management. The Actuarial Analyst Section reviews valuation reports referred from RD and wind-up reports referred from CD. The clerical assistant administers our actuarial database collecting data from the valuation reports we review. This data is used to prepare reports on work, risk management, and compliance activities. Last year, two analysts and an actuarial student joined AD to raise our staff complement to 13. We hope to hire another actuarial student in the near future.

Our division is responsible for assessing client applications for contributions to and transfers from defined benefit pension plans. Last year, we developed a tool to analyze funding requests. Using it, we identify low-risk actuarial valuation reports for easy processing. We also helped establish a risk-based assessment tool for CD. We provided technical analysis and advice on actuarial issues to the other divisions and to external clients. We answered over a 1,000 internal and external enquiries, oversaw or directly reviewed approximately 5,000 actuarial valuation reports, and analyzed employer eligible contribution room and commuted values.

Last year we also developed service standards for responding to actuarial valuation reports, referrals from within the Directorate, telephone and written actuarial enquiries. The service standard established for reviewing actuarial valuation reports is to complete 80% of them within nine months of their receipt or within nine months of the registration or amendment of the pension plan.

We also continued to work closely with the other divisions within the Directorate. For example, we uncovered issues of non-compliance during actuarial assessments of commuted values and contributions, and we referred several cases to CD for tax recovery. We also trained new recruits in RD to use our risk-based worksheet to analyze funding requests of low-risk plans. We worked with RD to establish procedures to allow us to review (and, where appropriate, approve) requests for contributions even before outstanding amendments were accepted.

We developed and implemented an electronic spreadsheet to calculate the present value test stipulated in the proportionality newsletter (Newsletter 99-1). We developed a new actuarial worksheet for reviews of valuation reports for designated plans, a large part of our workload. This tool promoted faster service, greater consistency in actuarial advice, reduced training and file review time and enhanced quality control. We automated the analysis of flexible pension plans to test the appropriateness of the requested funding.

We provided actuarial input to P&C and commented on legislative amendments proposed by the Department of Finance.

We are committed to continuing to improve our risk assessment tools to better profile new risks and to enhance targeted review of valuation reports. We have to monitor our comprehensive risk indicators to ensure that valuation reports needing more in-depth review are identified. These measures should help us to improve our service standards.

Compliance Division

Mr. André Martin gave an up-date on his area of responsibility. He will be replacing Mr. John O'Meara as Director of CD while he is on language training.

Our Division is responsible for monitoring compliance in all seven deferred income programs. We focus mainly on RPPs and DPSPs. We have a keen audit presence in the RESP and RRSP programs and a minor presence in the RRIF, RI and SUBP programs.

In the RPP program, we focus on three general areas: contributions, benefits, and plan administration. Of interest within these areas are PA and PSPAs, eligible service, pensionable earnings, employer-employee relationship, transfers in and out of plans, benefits paid from plans, purchase of annuities, and surplus allocations. Program update and expansion

To maintain current audit coverage and expand it further, we plan to hire more Field Audit Advisors, Desk Auditors and Desk Audit Advisors. We will use these additional resources to maintain current levels of service and to support some 50 field auditors in the Tax Services Offices across Canada. Desk Auditors select plans for risk of non-compliance and then engage Field Auditors for follow-up. We are also responsible for the training of Field Auditors in all deferred income areas. Desk Auditors also conduct plan audits from our offices in Ottawa. Our Division have grown steadily since 1997 because of significant recoveries.

We conduct audits as a means of monitoring and promoting compliance with the ITA. We provide plan administrators with the technical information and assistance they need to meet their obligations. We are also looking at publishing an annual compliance bulletin in the near future. Among other things, we want to provide administrators with educational tips, compliance pressure points, non-compliance items we have observed, instructions on where to get help and general compliance information.

We would like to now focus on patterns of non-compliance in the RPP program. Specifically, we encounter a very high incidence of unreported and incorrectly reported PAs and PSPAs, particularly in closely held plans and non-contributory plans. Non-reporting or under-reporting in this area accounts for over 50% of all non-compliance.

We are also finding that plans are not adhering to the transfer limits of regulation 8517 where defined benefit plans have been wound up or where plans have converted retroactively from defined benefit to money purchase. Transfers in excess what regulation 8517 allows account for approximately 25% of all non-compliance.

Plan administrators are still having difficulty with the eligible service provisions of the legislation. Heavily favoured, because of lack of PA implications, are upgrades to pre-reform service. Ineligible service recognition accounts for approximately 10% of all non-compliance.

Some plan sponsors make contributions in excess of what the plan's terms require and others make contributions when their plans are in an "excess surplus" position. Ineligible contributions account for approximately 10% of all non-compliance.

Some administrators do not administer their plans "as registered" in accordance with subsection 147.1(15) of the ITA. They neglect to file plan amendments, even amendments that change crucial definitions or the plan's benefit formula. Even though they may be permissible benefits under the regulations, it is incorrect to assume that a plan can pay such benefits without specific plan provisions to allow them to be paid. Plan terms have to accurately reflect the employer's obligations toward employees as well as the plan administrator's duty. For example, where a defined benefit plan allows members to make voluntary contributions, the plan administrator has to ensure that these contributions are treated like contributions to a money purchase provision and that they are dealt with appropriately. The same can be said of bridging benefits. If an employer wants provide them, the plan must contain terms to allow their payment.

Asked what criteria are involved in a "high risk" assessment, Mr. Martin replied that plans allowing for few members, executive membership, or connected persons would meet the criteria.

RPD Re-engineering

Mr. Carl Finniss, Manager of the BPR project, gave a report on RPD's re-engineering exercise as a follow-up to the report he gave at the RPP consultation session in 2001.

In the lead up to BPR we learned a valuable lesson from an initiative we called "Process Review." We learned that only marginal gains in efficiency could be had through procedural refinements. Substantial improvement in the speed and quality of our services could only be achieved through more radical change.

This kind of change forces us to take a fresh look at the blueprint of our current operations. Roughly, what we do is register and monitor the administration of seven types of deferred income plans to ensure their compliance with the ITA and CCRA's administrative rules. We currently dedicate most of our resources to the first phase of our mandate: plan registration. In essence, BPR explores the idea of shifting some of our resources to the second phase of our mandate, monitoring how plans are actually administered.

The seven deferred income programs RPD is responsible for are: RPPs, RRSPs, RRIFs, RESPs, DPSPs, SUBPs and RIs. BPR hopes to start with our major programs: RPPs, RRSPs and RESPs, and eventually include the others. RPD's resources are strategically allocated as follows. RD reviews and registers plans, and answers phone and written enquiries (87 positions). CD co-ordinates and performs plan audits (17 positions). AD reviews actuarial reports and identifies issues of non-compliance (13 positions). And, P&C handles technical interpretations, policy issues, publications and systems support (17 positions).

With relatively few resources we accomplish a great deal. For example, in 2001-2002 RD alone dealt with: 30,523 telephone enquiries, 2,429 written enquiries, 5,025 actuarial funding requests, 1,178 new pension plan registrations, 14,861 pension plan amendments, 4,880 RRSP amendments and approvals, 1,545 RRIF amendments and approvals, and 1,039 RESP submissions.

Why now? What are the major drivers for change? Drivers for change include:

• The difficulty we have in meeting our current client service standards with great consistency over the long term;
• Pressure from clients to improve processing times and to pay more attention to how plans are administered and less attention to how they are written;
• Pressure to mirror provincial regulators' shift to risk-based supervision;
• CCRA requirement that performance is measured by qualitative outcomes rather than quantative outputs; and
• Need to expand audit coverage of how plans are administered.

BPR is RPD's response to all of these drivers. It uses a phased approach: an initial phase to identify options, a second to evaluate the feasibility of those options and a third to implement viable options. We are now approaching the end of the second phase, reporting on the feasibility of three options. Our report contains the results of in-depth discussions with stakeholders within and outside RPD.

BPR in detail

Our management team has assigned a full-time manager to the project and has retained Mr. Adrian Foster through Consulting and Audit Canada to assist us through the first two phases. We have engaged RPD staff and clients and have looked into best practices in other jurisdictions especially in Canada, the U.K., Australia and the U.S.A.

In the first phase we identified improvements and innovations. Improvements were defined as those changes we could make to service delivery over the short term using current resources. Innovations were defined as more wide-ranging and radical changes requiring substantial effort and unspecified resources.

The improvements we identified and have decided to implement are as follows:

• Update procedures and advise staff
• Publish the RPP technical manual on the CCRA website
• Review publications to identify deficiencies
• Develop an on-going consultation strategy
• Apply a risk management approach to program areas not previously covered
• Improve workflow
• Harmonize compliance activities within the Directorate
• Integrate procedures for valuation reports

The above options imply a shift on two levels in our current approach to registration. The first moves the onus for compliance from us to plan submitters. Of course, we are assuming that submitters will have access to all the information they need to submit compliant applications. The second moves RPD's attention from a detailed review of plan documents as they come in to assessing potential for non-compliance and monitoring plan administration more intensively. The three innovative options, whose feasibility we decided to assess, are: client self-assessment, certification and risk-based supervision.

"Client self-assessment" means that plan submitters declare their submissions to be compliant with relevant tax rules. Since submitters need comprehensive and detailed information for such declarations to be credible, we are studying such ideas as giving submitters access to technical manuals and having them use check sheets.

With this innovation, we are exploring the idea of a program through which RPD would sanction pension consulting firms, plan administrators, or both. For example, we could look at certifying submitter firms that consistently produce compliant submissions. We could even consider that if a plan administrator can show us that their plans are well-administered, that they have training programs in place, that they use reliable systems, and that they practice peer review, we could recognize this effort by issuing a CCRA certificate of compliance to the plan sponsor. Our current registration process gives equal treatment to submitters who submit compliant plan text and to those who do not. For example, submitters who use pro-forma plan texts that we can easily process have to wait in the same line as submitters who are less careful about wording and whose submissions consume more of our time. We would like to devise ways of rewarding the former.

This innovation means that we can focus our energies on plans that really need our attention while paying less attention to those that are consistently compliant. The idea here is driven by a need to use scarce resources to maximum advantage. Again, we now treat highly compliant plans and submissions in the same way we treat those at high risk of non-compliance. We may consider a system of cyclical review where plans or submissions at high risk of non-compliance would be examined with greater frequency than those at lower risk. Our purpose is not to catch people making mistakes. We simply want to help them become compliant. We assume this is our shared goal.

While we have assessed the viability of our innovative options, we still have to consult with the Department of Finance on the legislative implications of implementing them. Of course, we would prefer to fit our renewed service delivery model within the framework of the current rules, because by so doing we would avoid the lengthy process of seeking legislative change. We also have to develop an IT strategy to support our new model. We don't yet know how the new model will be designed, but we are focusing on measuring outcomes rather than output.

Our next steps include benchmarking (relating our model to that of other regulators in Canada, the U.K., U.S.A., and Australia) and consulting further with clients, staff, and other stakeholders. Our expected completion date for Phase 2 is December 15, 2002.

We expect that our innovations will not simply lead to incremental gains but to radical improvement in the overall level and quality of our services. Thus, as a consequence of BPR, we expect to:

• Become pro-active in the resolution of our clients' issues and needs
• Increase job satisfaction and staff retention with greater opportunities
• Focus on areas of greatest compliance risk
• Supply our clients with better tools to support compliance
• Provide quicker decisions and more consistent answers
• Consult more frequently with stakeholders
• Provide more information on the web site
• Focus on outcomes, not outputs
• Improve and expand electronic communications with our clients

By way of a postscript to this last point, we have recently discovered that the IRS has the same difficulty with two-way e-mail. They, like us, can receive e-mail but they have to reply by post because of security concerns.

An audience member, speaking on behalf of the audience, expressed enthusiastic support for BPR.

Quebec's New Indexing Benefit

Since there were several questions on Quebec's indexing benefit in the lead up to this session, Mr. Godwin returned to the podium to give a presentation on the topic.

Originally, the province of Quebec made an amendment to the Supplemental Pension Plans Act requiring employers to provide to members terminating employment more than 10 years prior to normal retirement date an indexing benefit that is the lesser of ½ Consumer Price Index [CPI] and 2% between the date of termination and 10 years prior to normal retirement age. (Plans already providing indexing are exempt from the requirement.) This benefit would have attracted a PSPA. So, on March 21, 2002, Quebec passed another amendment to require plans to provide lifetime retirement benefits whose value equals the indexing benefit. If the benefit produced a PSPA, the plan could pay it as a lump sum.

We found that even the lump sum payment caused a conflict with the Income Tax Regulations [ITR]. Since the lump sum amount did not represent the value of a specific benefit under the plan, it was not a permissible distribution under subsection 8502(d) of the ITR. We asked the Department of Finance to look at the matter and they decided they would propose a change to the ITR. We have received a letter of comfort in this regard and are now able to accept plans that provide for lump sum payments of these benefits.

To re-iterate, we will accept plan terms that provide a benefit equal in value to indexing the lifetime retirements benefits of members who terminate employment more than 10 years prior to normal retirement date to the lesser of ½ CPI and 2% between the date of termination and 10 years prior to normal retirement age. The additional benefits can take any form acceptable under the ITA. If all or a portion of the upgrade cannot be provided without generating a PSPA, then it can be paid in a lump sum.

The following are forms of benefits that do not generate a PSPA:

• Any indexing of benefits reflective of an increase in the average wages or CPI;
• A reduction of the early retirement reduction (e.g., from ½% per month to normal retirement to ¼% per month);
• Lowering the age at which an unreduced pension can be paid within the requirements of paragraph 8503(3)(c) of the ITR; and
• A reduction in the number of years used to determine final average earnings.

It will also be up to Quebec to determine which benefits they will permit as possible upgrades.

If the plan provided for it, we would even accept terms that allowed individuals to choose from among several forms of increase, not unlike what we accept in flexible pension plans.

We would expect that the plan text would include Quebec's requirements clearly setting out how additional benefits are to be established. Any increases in the plan's benefit accrual rate would have to be specifically provided for in the plan text. Mr. God

Individual Pension Plan Issues

Since we received several questions related to Individual Pension Plans [IPPs] and since we have noticed a trend of members leaving large public plans to set up their own IPPs, Ms. Gillespie gave a presentation on the issue.

We divided the presentation into three inter-related topics: transfers of defined benefits, transfers of funds and the meaning of "plan as registered."

It is very important to carefully consider the purpose of a pension plan when setting up an IPP and transferring funds to it. We say this because we have had several requests from plan members to abandon registration of their pension plans. They tell us that an IPP is not what they wanted; or they misunderstood the consequences of registration; or they did not anticipate the high cost of administration; or they never intended to actually work for the corporation that was set up. In fact, one recent letter from a plan sponsor stated that the only reason he wanted his funds transferred into an IPP was to provide income security for an ill dependent. Apparently, a Financial Planner had advised him to set up a company to sponsor an IPP for himself. He claimed that the company never did any business and that no salaries were ever paid to him. He said that he found another way to provide for his dependent and wanted to abandon registration.

This kind of plan makes us wonder just how many other IPPs apply for registration with scant regard for the primary purpose of a pension plan. That purpose is for an employer to provide periodic payments to individuals after retirement for their service as employees.

In addition to primary purpose, two other important issues need to be raised. First, for a person to be a participant in an RPP there has to be a bona fide employer-employee relationship. Several CCRA publications provide guidance on this issue. Second, when defined benefits are transferred from one RPP to another and the former employer does not make a "contribution" to the recipient plan. The benefits paid out of the recipient plan must be based on compensation received from the new employer not the former employer. Benefits accrued under the former plan cannot be guaranteed under the new plan, not even in the form of a flat benefit. The maximum in regulation 8504(1) is based on pensionable earnings received from an employer who participates in the plan for the benefit of the member. It is not based on pensionable earnings with the former employer unless that former employer is a participating employer in the new plan.

The benefits ultimately provided from the IPP must be determined based on the terms of the IPP. Therefore, if the new employee cannot provide sufficient pensionable compensation, the benefits paid from the IPP may be much lower than what the original plan would have paid. In such cases, it may be advisable to leave accrued benefits in the former plan to provide retirement benefits or a deferred annuity (if the plan terms permit). If the benefits provided by the IPP were significantly lower as consequence of a transfer from a public plan with higher benefits, we would question if the IPP respected the primary purpose rule because of the large surplus that would likely flow from the transfer.

We also received questions concerning the applicable maximum for connected members in IPPs. Since earnings from a former employer cannot be used to determine benefits in an IPP, the career average maximum for the years of service with the former employer could be nil. However, a connected person's career average maximum may not have to be used for the service with the former employer. The final average maximum based on the earnings with a participating former employer can be applied to those years. The career average maximum is only needed for years in which the member is connected with an employer who participated in the plan in the year.

The former employer of a member does not become a participating employer in the new IPP simply because funds were transferred from the former plan to the IPP. The definition of "participating employer" under subsection 147.1(1) of the ITA is "an employer who has made, or is required to make, contributions to the plan in respect of the employer's employees or former employees..." While it is true that a transfer is a "permissible contribution" under paragraph 8502(b)(iv) of the regulations, there is a clear distinction in the ITA between a "contribution" made by an employer or member on the one hand and a "transfer" from another registered plan on the other. The definition of "participating employer" clearly indicates that an employer becomes a participating employer only but virtue of a contribution to the plan. Therefore, a transfer from a prior employer's plan is an insufficient basis to make the employer in the receiving plan a "participating employer." This distinction also makes sense administratively. Employers would be reluctant to allow funds to be transferred from their own plan to their former employees' new plans if that transfer would burden them with all of the responsibilities of a participating employer in the new plan.

The expression "plan as registered" is an important legislative concept. What constitutes a plan "as registered" according to subsection 147.1(15) of the ITA are:

(a.)Plan terms that are registered with CCRA and amendments made to the plan terms that are registerable, and

(b.)Terms included by reason of the Pension Benefits Standards Act, 1985 or a similar law of a province even if they are not contained in the plan text.

Inclusion of terms required by the provincial legislation is important because a plan is revocable if it is not administered in accordance with its terms "as registered." Subsection 147.1(15) of the ITA means that an administrator has to administer a plan in accordance with the provincial legislation even if the plan has not yet been amended to comply with it. And ultimately, plans have to comply in their entirety with the ITA - plan terms must comply and plans themselves have to be administered in such a way as to comply. If they do not comply on both scores, their registration becomes revocable under subsection 147.1(11) of the ITA. Even where we have registered non-compliant plan terms in error and the plan is administered accordingly, subsection 147.1(15) does not save the plan's registration. Federal and provincial regulators work closely to ensure that their requirements do not conflict with each other, so the automatic inclusion of provincial requirements in plan terms under subsection 147.1(15) should never become a reason for worry about the plan's registration.

Technical Questions

We received 28 replies to our call for technical questions in the run up to this session. We addressed most of your questions either in our presentations or in the question and answer segment of the session. We invite your input to ensure our final answers are clear and useful. A simplified version of original questions and our answers will appear on CCRA's website. Subject matter experts prepared draft answers and presented them verbally at the session. You may read the final version of the questions and answers by clicking here.

Closing Remarks

Ms. Vermes thanked attendees and guest speakers for their contributions and reminded them to complete session evaluation reports.

Session evaluation results

66% of industry participants completed the feedback form. The feedback results indicated attendees rated their satisfaction with the session at 78.4%. They appreciated in particular the technical question and answer section and the BPR presentation. They also indicated that they were not fully satisfied with the format of the technical questions segment, the presentation on Quebec's new indexing benefit and the use of official languages.