Access to locked-in retirement accounts

July, 1998

Access to locked-in retirement accounts


TABLE OF CONTENTS
EXECUTIVE SUMMARY  
BACKGROUND  
Locked-in Retirement Accounts  
Life Income Funds  
IDENTIFYING THE NEED FOR ACCESS TO LOCKED-IN RETIREMENT ACCOUNTS IN SITUATIONS OF HARDSHIP  
COMMITMENT: THE 1998 BUDGET STATEMENT  
KEY OBJECTIVES  
POSSIBLE APPROACHES -- IDENTIFYING HARDSHIP SITUATIONS  
1(a) Presumed hardship standard: The “formula-based” approach  
1(b) Presumed hardship standard: Deemed hardship situations  
2 Discretionary approval for demonstrated “hardship”  
3 Combination of presumed hardship and discretion  
4 Approval of borrowing funds from locked-in accounts in cases of demonstrated “hardship”  
POSSIBLE ACCESS FOR SHORTENED LIFE EXPECTANCY  
NEXT STEPS  

EXECUTIVE SUMMARY

In the May 5, 1998 Ontario Budget Papers, Finance Minister Ernie Eves announced the Government's intention to consult on ways to provide Ontarians with access to money in locked-in retirement accounts when faced with hardship.

The Minister's statement responds to concerns expressed by many Ontarians. The Government and the Pension Commission of Ontario have heard from individuals frustrated at their inability to gain access to commuted pension benefits in locked-in retirement accounts during hardship. Many raised this issue during the 1997 consultation on pension issues conducted by the Minister's Parliamentary Assistant.

The Government also recognizes that individuals facing a shortened life expectancy have a compelling reason to seek access to locked-in retirement savings. Under existing rules, the ability of people in this situation to obtain access to these funds depends on the provisions in the pension plan that was the source of the retirement savings.

The Government wants to use this consultation process to gauge the needs of Ontarians for access to locked-in retirement savings in these circumstances. This consultation is led by the Finance Minister's Parliamentary Assistant, Mr. Terence Young, MPP.

Ontario does not currently provide for early withdrawal of funds from a locked-in savings arrangement for reason of hardship.

Under the Pension Benefits Act (Ontario) and regulations, former pension plan members who terminate employment before retirement are allowed to commute the value of their deferred pension but must transfer the value to a permitted retirement savings vehicle, such as a Locked-in Retirement Account or a Life Income Fund, transfer it to another pension plan, or direct that it be applied to purchase a life annuity. Under every option, the general principle that the funds are “locked-in” to provide a stream of income at retirement continues to apply.

This consultation paper suggests possible ways to recognize the hardship situations that may enable a person to gain access to locked-in retirement savings, and invites comments to help address these needs in the most appropriate way. In particular, the paper invites input to help develop access measures which:

  • are easily understood and accessible;
  • are administratively efficient, and do not impose undue costs or complicated process requirements;
  • facilitate the harmonization of Ontario's pension rules with those of other Canadian jurisdictions; and
  • protect survivor benefits and minimize the impact on the rights and interests of other persons.

This paper assumes that the reason for providing access to these funds is to help Ontarians deal with material economic hardship. Different approaches to the identification of hardship are described:

  • an objective measure assuming hardship to be indicated by (a) an economic test or (b) the occurrence of prescribed events or situations;
  • a subjective measure requiring a determination of hardship in the exercise of discretion;
  • a measure combining these two approaches.

In addition to the possibility of allowing the withdrawal of retirement savings from the locked-in savings arrangement, this paper also raises the possibility of allowing people in hardship situations to borrow the funds.

This consultation paper identifies a number of issues and questions that are likely to arise in the development of these approaches. These include issues related to the protection of survivor's benefits and the administration of the means of access.

The possible enhancement of access to locked-in retirement savings in cases of shortened life expectancy also raises questions concerning the scope and kind of access to be provided, the protection of survivor's benefits and the administrative aspects.

The Ministry of Finance invites comments on the policy approaches and issues outlined in this paper. Interested parties are asked to provide their submissions to the Ministry of Finance by August 31, 1998. After a review of these submissions, Ministry staff will hold focussed discussions on policy and technical issues, in preparation for the introduction of legislative amendments.

Submissions should be forwarded to:

Mr. Terence Young, MPP
Parliamentary Assistant to the Minister of Finance
7th Fl. Frost Building South
7 Queen's Park Crescent
Toronto ON M7A 1Y7

Telephone:(416) 325-2274
Fax: (416) 325-2337
E-mail: terence_young@ontla.ola.org


BACKGROUND

Under the Pension Benefits Act (Ontario) (the “PBA”), a former member of a pension plan who terminates employment or ceases to be a member of a pension plan (on or after January 1, 1988) and who is entitled to a deferred pension under the plan may require the pension plan administrator to pay the commuted value of the deferred pension entitlement (earned after 1986). The commuted value of the deferred pension is calculated using recommendations issued by the Canadian Institute of Actuaries. Under the existing rules, the former member may direct the plan administrator to pay this amount:

  1. to the pension fund of another pension plan if the administrator of the other plan will accept the transfer;
  2. into a prescribed retirement savings arrangement; or
  3. for the purchase of a life annuity for the former member that will not commence before the earliest date on which pension benefits would have been payable under the pension plan.

The general regulation (the “Regulation”) under the PBA recognizes four types of 'prescribed retirement savings arrangements':

  1. a locked-in retirement account (LIRA);
  2. a life income fund (LIF);
  3. a registered retirement savings plan (RRSP); and
  4. a registered retirement income fund (RRIF).

LIRAs and LIFs are locked-in savings arrangements, while RRSPs and RRIFs are not.

Under current Ontario rules, if the commuted value of the deferred pension is paid into a savings arrangement it must be paid into one of these two ?locked-in' types, subject to Revenue Canada limits.

Ontario does not currently provide for early withdrawal of funds from a locked-in savings arrangement for reason of hardship.

Under the PBA, pension contributions to a plan for a member whose benefits have been vested are ?locked-in' in order to provide for a stream of income at retirement. This general principle continues to apply even when the PBA provides a measure of portability of the deferred pension benefit, such as the provision which allows former plan members who terminate employment before retirement to commute the value of their deferred pension and transfer it to a permitted savings vehicle. The PBA provides only very limited exceptions to the locking-in principle.

Locked-in Retirement Accounts

In the case of a locked-in retirement account (LIRA), the Regulation does not permit the account holder to withdraw or transfer any funds (including investment earnings) prior to maturity except by transferring the funds to the pension fund of a registered pension plan, to another LIRA, or to a LIF, or by using the funds to purchase an immediate or deferred life annuity.

The money transferred into the LIRA (representing the commuted value of the deferred pension), and interest earned on that money, may not be assigned, anticipated or encumbered except by an order under the Family Law Act (Ontario) or by a domestic contract as defined in Part IV of that Act (such as a separation agreement). On the death of the holder of a LIRA, the institution where the LIRA is kept must administer the money in accordance with the provisions of the PBA respecting payment rights of the former member's spouse on the date of death.

Life Income Funds

In the case of a life income fund (LIF), the Regulation requires annual payments from the fund. These periodic withdrawals must not be less than the minimum amount prescribed for RRIFs under the Income Tax Act (Canada) and may not exceed the maximum calculated using a formula set out in the Regulation. Otherwise, the holder of the LIF may only transfer fund assets to another LIF use the LIF funds to purchase an immediate life annuity or (before the end of the year in which the purchaser reaches age 69) transfer the fund assets to a LIRA. Existing rules require the owner of the LIF to use the assets remaining in the fund at the end of the year in which the owner reaches age 80 to purchase an immediate life annuity.

Before purchasing a LIF, a member or former member of a pension plan must obtain the written consent of his or her spouse, if any. A LIF may also be purchased by the spouse or former spouse of a member or former member if the spouse or former spouse is entitled to a pension benefit as a result of the death of the member or former member or as a result of marriage breakdown. Money payable under a LIF may not be assigned, anticipated or encumbered except by an order under the Family Law Act (Ontario) or by a domestic contract as defined in Part IV of that Act. Payments out of a LIF are subject to division in accordance with the terms of an order made under Part I of the Family Law Act or a domestic contract under Part IV.

The rules for LIFs permit some flexibility in planning for succession on death. If the purchaser of the LIF is a member or former member of the pension plan, and the purchaser dies before the balance of the fund is used to purchase a life annuity, then the purchaser's spouse, or the purchaser's named beneficiary, or the purchaser's estate is entitled to receive a benefit equal to the balance of the fund. Spousal status is determined on the date of death of the purchaser. A spouse living separate and apart from the purchaser on the date of the purchaser's death is not entitled to receive the balance of the fund. The spouse of the purchaser of a LIF may waive survivor's benefits before the balance is used to purchase an immediate life annuity.

IDENTIFYING THE NEED FOR ACCESS TO LOCKED-IN RETIREMENT ACCOUNTS IN SITUATIONS OF HARDSHIP

The Minister of Finance has received many letters and inquiries from people seeking access to pension money in locked-in savings arrangements when they found themselves in hardship situations.

The Pension Commission of Ontario (now the Financial Services Commission of Ontario) has also received many such inquiries.

The Ministry of Finance and the Pension Commission have also received inquiries from people seeking early access to these locked-in savings because they have been told that they have a shortened life expectancy and the prospect of providing for an income at retirement age has lost its promise and meaning.

The possibility of providing access to locked-in retirement accounts was a key issue raised by individuals during the consultation led by the Minister's Parliamentary Assistant, Mr. Bill Grimmett, MPP, during the Summer of 1997.

The locking-in requirements for LIRAs and LIFs are intended to ensure that savings which originated as deferred pension benefits must be used to provide for an income stream at retirement, or be paid when the original benefit would have been payable.

To provide for exceptions to these rules in hardship situations may be justified on the basis of achieving a better balance between pressing present needs and future retirement needs. Statutory protection of survivor benefits is an important consideration. The rights and interests of other persons would also have to be considered and addressed.

The calls and correspondence received by the Ministry of Finance and the Pension Commission have come from people who have found themselves in very difficult personal situations. Individuals heard from in last Summer's pension consultation also supplied anecdotal evidence of the need to provide for access to savings in locked-in accounts in situations of hardship.

A shortened life expectancy is certainly a type of hardship that may profoundly affect the balance of present and future needs.

An appropriate response should have the benefit of a more specific consultation to gauge the needs of Ontarians.

COMMITMENT: THE 1998 BUDGET STATEMENT

On May 5, 1998, in the Budget Papers, the Minister of Finance announced that:

The Government will be consulting on and responding with specific legislative options to provide Ontarians with appropriate and efficient access to locked-in retirement accounts when they are faced with hardship.

This paper sets out several possible approaches to the identification of hardship and invites comments about the application of these standards in the design of a new rule that would allow a former pension plan member to withdraw locked-in funds from a LIRA or LIF. Specifically, the paper invites comments on aspects that would need to be addressed in the Government's specific response to the issue, such as financial thresholds, limits on withdrawals, tax treatment of withdrawn funds and the impact on social assistance eligibility, survivor or spousal benefits and other interests.

KEY OBJECTIVES

The Government's response to this issue will seek to reflect several objectives:

  • The measure should be focussed on the relief of hardship, and should not create opportunities to gain access to locked-in funds where there is no hardship.
  • The measure should be easily understood and accessible to those it is intended to help.
  • The measure should be administratively efficient, and should not impose undue costs or complicated process requirements.
  • If possible, the measure should facilitate the harmonization of Ontario's pension rules with those of other Canadian jurisdictions.
  • The measure should protect survivor benefits and minimize the impact on the rights and interests of other persons.

POSSIBLE APPROACHES -- IDENTIFYING HARDSHIP SITUATIONS

The Government has identified different approaches to the threshold question of how to identify “hardship” for the purposes of providing access to locked-in retirement savings in cases of hardship.

This paper illustrates these approaches by referring to other jurisdictions which use a version of each approach. Each approach may be seen to have its potential advantages and disadvantages. In addition to understanding these possible advantages and limitations, it is important to assess which approach is most likely to address Ontarians' need for access and achieve the Government's other key objectives.

“Hardship” is difficult to define. There are different kinds and degrees of hardship. This paper assumes that the measure should address material, undue hardship or unforeseen, catastrophic contingencies experienced by Ontarians. We would welcome comments on this assumption.

The different conceptual approaches are:

  1. An objective measure that presumes hardship to exist if the requirements of the measure are met, such as by (a) applying an economic test or (b) deeming hardship to exist if a specific event or situation has occurred;
  2. A subjective measure that requires a determination of hardship in the exercise of discretion;
  3. A measure that combines the two approaches.

There is also the possibility that, in a number of situations, allowing people to borrow the locked-in funds, subject to rules governing the subsequent repayment of the money, would be an effective remedy for people in hardship situations.

Hardship is not an objective condition. The term itself is often modified to indicate its nature or severity. The relief to be provided is financial and the approaches described in this paper address financial hardship. But what should be the degree of hardship used as the threshold before access to locked-in retirement accounts should be allowed?

The Ministry is inviting comments on the many questions involved in this issue.

  • Should the Government's response permit access to both LIRAs and LIFs, or just one or the other?
  • Should a person be able to gain access to the full amount in the locked- in retirement savings arrangement or just part?
  • How frequently should a person be permitted to gain access to locked-in retirement savings?
  • Should an applicant be required to pursue other sources of funds or use other assets before seeking access to locked-in retirement savings and, if so, how should this be done and demonstrated?
  • Should the accessed funds be payable in a lump sum, regularized payments or as elected by the applicant?

We expect some answers to these basic questions will be found in the unique needs and situations of individual Ontarians.

Comments related to the administrative impact of the measure should address the objective of administrative ease while facilitating compliance and providing for an appropriate level of operational control.

1(a) Presumed hardship standard: The “formula-based” approach

Permit the applicant to withdraw an amount on the basis of a formula.

  • Example of methodQuebec permits pre-retirement access to a Life Income Fund (LIF) for certain account holders whose projected income for the following twelve months is less than 40% of Yearly Maximum Pensionable Earnings (YMPE) (i.e. a projected income of less than $14,760 in 1998). The measure provides a temporary income. Applications to withdraw funds may be made annually. The applicant may withdraw an amount up to 40% of YMPE less 75% of taxable income. The withdrawn funds are paid in monthly tranches which may not exceed one-twelfth of the annual amount. Application is made to the financial institution holding the locked-in account. The applicant makes a declaration addressing the formula-requirements and agrees to request a suspension of payments if his or her income reaches the threshold level (40% of YMPE). The financial institution may rely on the information and documentation supplied by the applicant. The application may be processed quickly because there is no need for independent verification of the information. There is no appeal for those who do not qualify and no discretion to allow greater withdrawals. Quebec's provision came into effect January, 1998. It has since been modified once.
  • The YMPE is a concept employed by the Canada Pension Plan that is based on the average industrial wage and is adjusted annually. Canada's public pension plans (the CPP and Old Age Security) are designed to provide annual income at age 65 equal to approximately 40% of YMPE. In 1998, YMPE has been set at $36,900 and 40% of this amount is $14,760.
  • It appears that such a formula-based model, if applied to LIRAs under Ontario's rules, would have assisted a great number of the particular cases brought to the attention of the Ministry and the Pension Commission.
  • A formula-based approach would not question the purpose to which the funds would be put, and might permit some withdrawals when there is no actual hardship.
  • A formula is more user-friendly, and more comprehensive, than a finite list of deemed hardship situations.

Related questions

  • In a formula-based approach:
    • Would the use of the YMPE be appropriate as an entitlement factor, or would another indicator or measurement be preferred?
    • Would an income-based offset be appropriate while permitting the measure to respond to appropriate situations of need?
    • Is reliance upon an applicant's declaration appropriate or should supporting data, documentation or inquiry be required?
    • Should the process be administered by the financial institution holding the LIRA or LIF and, if so, what would be the anticipated impact on the institution's record-keeping and account administration systems and the anticipated costs to the customer?

1(b) Presumed hardship standard: Deemed hardship situations

Permit the applicant to withdraw funds for specific purposes presumed to represent a hardship.

  • Example of method The United States permits withdrawals from 401(k) pension plans (a type of defined contribution plan) when the plan holder has an “immediate and heavy financial need”. The following expenditures are deemed to constitute an immediate and heavy financial need:
    • the purchase of a principal residence,
    • payment to prevent eviction or foreclosure,
    • payment of a dependent's post-secondary tuition,
    • payment of unreimbursed medical expenses

    The holder may not withdraw more than is necessary to satisfy that need and must first use all other sources of funds from the employer. There is administrative discretion to recognize other situations of deemed immediate and heavy financial need, by recognizing new situations generally and not on a case by case basis.
  • We invite comments about the appropriateness of these or other situations of deemed hardship in Ontario.
  • Such an approach would question the specific purpose to which the funds would be put. It could, but need not, question the account holder's income from other sources.

Related questions

  • In a deemed hardship approach:
    • Should other sources of funds or personal wealth have to be declared?
    • Is reliance upon an applicant's declaration appropriate or should supporting data, documentation or inquiry be required?
    • Should the process be administered by the financial institution holding the LIRA or LIF and, if so, what would be the anticipated impact on the institution's record-keeping and account administration systems and the anticipated costs to the customer?

2. Discretionary approval for demonstrated “hardship”

Permit withdrawal of funds by an applicant who demonstrates hardship.

  • Example of method The United States also permits withdrawals of amounts in 401(k) pension plans by employees who demonstrate to their employers that they have an “immediate and heavy financial need” and have exhausted other means.
  • Such an approach provides flexibility in addressing hardship cases. The Ministry is inviting comments about the need for discretion to permit access and about how great a person's need must be before such discretion is exercised.
  • A statutory or regulatory measure providing administrative discretion is able to address unforeseen, catastrophic situations encountered by the applicant, and to frame the process for approval. Prescribed standards to guide the exercise of discretion would offset some of the flexibility that complete discretion would afford.
  • Discretionary authority could be conferred on the financial institution where the savings arrangement is maintained, an authority such as Ontario's Superintendent of Financial Services or the courts. Reliance on a financial institution to make the decision should involve less discretion and would require more explicit policy direction.
  • Process considerations are likely to affect the willingness and ability of possible applicants to begin the process. For example, process formalities could involve costs to the applicant, delays in obtaining a decision, and may be intimidating to some potential applicants. Process design would have to address these issues.

3. Combination of presumed hardship and discretion

Permit withdrawal of a base amount using a formula-based or deemed hardship approach, plus the withdrawal of an additional amount on a discretionary basis if hardship is demonstrated.

  • This approach would combine the presumed hardship and discretionary approaches to provide routine access for basic cases while permitting flexibility for exceptional cases.

4. Approval of borrowing funds from locked-in accounts in cases of demonstrated “hardship”

Permit applicants in hardship situations to borrow funds from their locked-in accounts tax free, provided that the amount borrowed is repaid into the locked-in account.

  • Example The federal government's current “RRSP Home Buyers' Plan” permits first-time home buyers to borrow up to $20,000 from their RRSPs to purchase a home. Under the federal program:
    • repayments, by instalment, must begin within 2 years.
    • the amount withdrawn is not subject to income tax, provided that the money is repaid within a maximum of 15 years.
    • individuals who do not repay all or part of a scheduled instalment must include the unpaid amount in their income and pay income tax on it.
  • The agreement of the federal government would be required to provide access to LIRAs or LIFs using a similar approach.
  • Such an approach would provide applicants with the opportunity and incentive to restore their retirement savings after dealing with hardship. Under this approach the opportunity for tax-sheltered growth of retirement funds would be regained when the borrowed funds are repaid. The approach could also provide that borrowed amounts would not be taxed provided repayment is made.
  • We ask that comments about the possible use of such an approach also address the means of measuring hardship, the maximum amount that could be borrowed, the length of time within which repayments must be made to avoid taxation, administration and creditor issues.

POSSIBLE ACCESS FOR SHORTENED LIFE EXPECTANCY

The PBA currently provides that pension plans may permit variation in the terms of payment of a pension or deferred pension by reason of mental or physical disability that is likely to shorten the life expectancy of a member or a former member. LIRA rules allow payment of commuted value of money transferred into a LIRA for such reasons of shortened life expectancy if so provided in the originating pension plan. Because relatively few plans permit such variation in the terms of payment, few members or former members with a shortened life expectancy are able to take advantage of the existing relief offered by the PBA and Regulation.

Current provisions might be amended to provide access to locked-in retirement savings arrangements when the former plan member has a shortened life expectancy.

Such an approach could:

Permit former pension plan members with a shortened life expectancy, evidenced by a certificate from a qualified medical practitioner, to gain access to their Locked-in Retirement Account.

Under this approach, a number of questions need to be addressed:

  • What measure of a shortened life expectancy should form the threshold criterion for access?
  • Should such an access provision apply only when the applicant faces a significant shortening of life expectancy, when the applicant suffers a terminal condition or when the impact on life expectancy is qualified in some other way?
  • Should the criterion of a shortened life expectancy be considered to be met if the shortened life expectancy is that of a dependent of the account holder?
  • Should the measure permit a lump sum withdrawal or provide for early access to an income stream?

Quebec recently amended its requirements for LIRAs to permit access if a medical practitioner certifies that a mental or physical disability reduces the life expectancy of the account holder. The holder is permitted to withdraw all or part of the LIRA balance in a single payment or series of payments.

Allowing the former member to commute the benefit could mean that a spouse would lose survivor benefits. A requirement for the spouse to consent would provide a measure of protection for the spouse's interest.

Related questions

  • Would it be appropriate to rely only upon the certificate of a medical practitioner or should supporting data, documentation or inquiry be required?
  • Should the process be administered by the financial institution holding the LIRA or LIF? If so, what would be the anticipated impact on the institution's record-keeping and account administration systems and the anticipated costs to the customer?

NEXT STEPS

The Ministry of Finance invites comments on the policy approaches and issues outlined in this paper. Interested parties are asked to provide their submissions to the Ministry of Finance by August 31, 1998. After a review of these submissions, Ministry staff will hold focussed discussions on policy and technical issues, in preparation for the introduction of legislative amendments.

Submissions should be forwarded to:

Mr. Terence Young, MPP
Parliamentary Assistant to the Minister of Finance
7th Fl. Frost Building South
7 Queen's Park Crescent
Toronto ON M7A 1Y7

Telephone:(416) 325-2274
Fax: (416) 325-2337
E-mail: terence_young@ontla.ola.org

Disponible en français

For more information visit www.fin.gov.on.ca

Page: 1296  |