Events That May Affect Your Pension
If You Leave Your Job
If your employment or membership in a pension plan ends because you leave your job, you may be eligible for one or more of the following options:
- receive a full pension from the pension plan starting on your normal retirement date;
- get a reduced pension from the pension plan starting on an early retirement date;
- receive a refund of certain contributions; or
- transfer the commuted value of your pension benefits to another approved retirement arrangement.
Within 30 days of the date that your employment or membership in a pension plan ends, the pension plan administrator must provide you with a written statement.
This statement must include:
- details about the pension benefits payable to you from the plan;
- the options you have;
- the deadlines for choosing an option; and
- information about any refund(s), plus interest, that you are eligible for (e.g., if your pension benefit is small, or if you made additional voluntary contributions (AVCs) to your plan).
Your options will vary, depending on what type of member you are:
If You are a Member of a Multi-Employer Pension Plan (MEPP)
If you leave your job and are a member of a MEPP, your plan membership does not automatically end because you left your job. To end your plan membership, you need to submit an application to your plan administrator 24 months after pension plan contributions have stopped being made on your behalf, or any shorter period set out in the MEPP.
For example, if you left your job on December 1, 2010 and no further contributions were made to the MEPP on your behalf, you may apply to end your membership on December 1, 2012. In this case, your termination date will be December 1, 2012—not December 1, 2010. It is important to know that you will not be able to transfer the value of your pension benefits to another plan or LIRA, until your termination date.
If You Leave Your Job - Options for Vested Members
If your employment ends, and you are a vested member of your pension plan, you are entitled to receive a pension from the plan when you reach retirement age. If you are contributing to the plan, you may also be eligible for a refund of certain contributions, and may be able to transfer the commuted value of your pension benefits out of the plan, instead of receiving a pension from the plan in the future.
Your options depend on several different factors, including whether or not you are eligible for early retirement.
Eligibility for a Refund of Your Contributions
You are entitled to a refund of a portion of your pension contributions, plus interest, if you meet the following two criteria (known as the "50 per cent cost rule"):
- you belong to a defined benefit pension plan and you were required to make contributions to that plan (contributory plan); and
- the value of your pension contributions made after December 31, 1986, plus interest, is more than 50 per cent of the commuted value of the pension, or deferred pension you accumulated after that date (also known as excess contributions).
You may take this refund as a taxable lump sum payment, or you may be able to transfer all or a portion of these excess contributions directly to your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) on a tax sheltered basis. Keep in mind that any cash payments from a pension plan are taxable.
Additional Voluntary Contributions (AVCs)
If your pension plan allowed you to make AVCs to your plan, you are entitled to a refund of these contributions, plus accrued interest or investment income. You may take this refund as a taxable lump sum, or you may be able to transfer all or a portion to your RRSP or RRIF, as noted above (see the section on the 50 Percent Cost Rule).
Eligibility for Transferring Money and Other Options
If you are a vested member when your employment ends, but you are not yet eligible for an early retirement pension, you may:
- leave your accrued pension benefits in the pension plan to provide for a deferred pension ; or
- transfer the commuted value of your pension benefits out of the plan.
If you are eligible for early retirement under your plan (usually at age 55), you may be able to transfer the commuted value of your pension benefits out of your pension plan only if:
- your plan allows this, or
- the plan is being wound up.
If You Choose to Transfer Money
You may transfer the commuted value of your pension benefits out of the plan to any of the following, where it will remain locked-in :
- another pension plan (if certain conditions are satisfied and if the other pension plan accepts the transfer);
- a Locked-in Retirement Account (LIRA) or a Life Income Fund (LIF) (if certain conditions are satisfied);
- an insurance company to buy a life annuity, if the plan's terms allow this option.
It should be noted that federal tax law limits the amount of money that can be transferred on a tax-sheltered basis to a LIRA or LIF. The amount of the commuted value that exceeds this limit must be paid to you as a taxable lump sum payment, or you may be able to transfer all or some of it to your RRSP or RRIF on a tax sheltered basis.
Once all of the commuted value has been paid or transferred from the pension plan, you will have no further entitlement to pension benefits under the pension plan (e.g., future benefit increases).
Restrictions on Transferring Money
The pension plan administrator cannot transfer the full commuted value of your pension benefits out of the plan immediately, if the pension plan is not fully funded. This may be the case for some defined benefit plans from time to time.
If this is the case, the plan administrator may transfer the money in two steps:
- The plan administrator will first transfer a portion of the commuted value of your pension benefits based on the funding level of the pension plan (e.g., if the pension plan transfer ratio is 75 per cent, the plan administrator will transfer up to 75 per cent of the commuted value in the first step).
- The plan administrator will then transfer the remainder of the commuted value, plus interest, within five years of the date that the first transfer took place.
You will be advised if the full amount of the commuted value cannot be transferred all at once.
Payment of Small Amounts
If your annual defined benefit pension is not more than four per cent of the Year's Maximum Pensionable Earnings (YMPE) when you leave the plan, or the commuted value of your pension is less than 20 per cent of the YMPE, you may be entitled (or required by the plan's terms) to:
- receive the commuted value of your pension benefits in cash; or
- transfer the commuted value of your pension benefits into your RRSP or RRIF.
To understand how this process works, read Luke's Story.
Once you receive the cash payment, or transfer it to your RRSP or RRIF, you will have no further entitlement to pension benefits under the pension plan. Note that any cash payments are taxable.
If You Leave Your Job - Options for Non-Vested Members
If your employment ended before July 1, 2012 and your benefits were not yet vested, you would not be entitled to receive any pension benefits from the pension plan. However, if you made contributions (mandatory or voluntary) to the pension plan, you would be entitled to a cash payment of those contributions, plus accrued interest or investment income. You may also transfer these amounts to your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF). (Note that any cash payment is taxable.)
Luke was a member of a defined benefit pension plan from 1998 to 2011. During his membership, both Luke and his employer made pension contributions. When he left his employer in 2011, he was 39 years of age and the commuted value of his pension benefit was $50,000.
After Luke’s employment ended, his plan administrator provided him a termination statement that listed the following options:
- receive a deferred pension starting on his normal retirement date;
- get a reduced pension starting on his early retirement date;
- transfer the commuted value of his pension benefits ($50,000) to his Locked-in Retirement Account (LIRA); or
- transfer the commuted value of his pension benefits ($50,000) out of the plan to buy a life annuity from an insurance company (as permitted by his pension plan).
Luke is also entitled to an additional payment resulting from the 50 per cent cost rule. Under this rule, Luke’s total contributions, plus interest, should not be more than 50 per cent of $50,000, or $25,000. However, his actual contributions, plus interest, total $30,000. Since Luke contributed an extra $5,000 into his pension plan, he is entitled to receive this excess amount as a lump sum payment. He may choose to receive this excess amount as a cash payment, or direct the plan administrator to transfer this amount directly to his Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF).
Luke must advise the plan administrator of his decision within 60 days of the date he received his termination statement.
If You Take a Leave of Absence
There are several reasons why you may need to take a leave of absence from work:
- pregnancy or parental leave due to a new addition to your family;
- emergency leave due to an illness or other emergency; or
- an injury that took place on the job.
Absences Due to Pregnancy, Parental or Emergency Leave
If you are normally required to contribute to the pension plan, you will continue to participate in the plan while you are on leave. During your absence, you will keep earning (or accruing) pension benefits and your employer will still make contributions throughout this period, unless:
- you give written notice to your employer that you do not intend to make contributions for this period; or
- you provide written notice that you will not participate in the plan during your leave.
If you intend to earn benefits under the plan for this period of time, you and your plan administrator must come to an agreement about how your contributions will be paid.
Even if you decide not to make contributions during your absence, you will still continue to be a member of the pension plan. However, your employer will not make contributions to the plan and you will not earn pension benefits while you are on leave.
If you are not required to make contributions to the plan, you will still continue to participate in the pension plan and earn pension benefits during your absence.
Absences Due to Injury (and You are on Workers’ Compensation)
If you are required to contribute to the pension plan, you will continue to participate in the plan while you are on leave. During your absence, you will keep earning pension benefits for up to one year after the date of your injury, or any longer period set out in your plan’s terms. You and your employer will still make contributions throughout this period.
Even if pension contributions are not a requirement, you will keep participating in the pension plan during your absence. While you are on leave, you will still earn pension benefits for up to one year after the date of your injury, or any longer period set out in your plan’s terms. Your employer’s contributions must continue to be made during this period.
If Your Employer Becomes Bankrupt or Insolvent
If your employer becomes bankrupt, any pension plan that is sponsored by your employer would generally be wound up.
In cases of insolvency, the pension plan may not be wound up, depending on whether or not the business continues.
The winding up of a pension plan usually tends to be a lengthy process. The pension plan administrator must provide a notice of proposal to wind up the pension plan to the Superintendent of Financial Services, and to all those active members, former members or retired members who are affected by the proposed wind up. The Superintendent may appoint an administrator to wind up the plan in cases where the plan sponsor is insolvent or bankrupt, and there is no administrator to complete the wind up of the plan, or the administrator fails to act. Despite the wind up, retired members will continue to receive their pensions. In addition, before the wind up is approved, the plan administrator may submit an application to the Superintendent to:
- begin paying new retired members their pension benefits.
- start paying death benefits to a spouse or plan beneficiary, if a plan member has died; or
- continue to pay plan expenses from the pension fund.
However, no other payments may be made from the pension plan until the Superintendent approves the wind up report.
When a pension plan is wound up there may not be enough money in the pension fund to pay all of the promised pension benefits. In this situation, the Pension Benefits Guarantee Fund (PBGF) guarantees payment of certain defined benefits earned in respect of employment in Ontario, subject to a number of limitations.
- For more information on the wind up process, please see FSCO's policy on wind up.
- To learn more about the insolvency or bankruptcy process, refer to the federal Companies’ Creditors Arrangement Act and the federal Bankruptcy and Insolvency Act.
- To find out which types of plans may be covered by the PBGF, read about the PBGF in this guide.