Pension Commutations, Including Copycat Annuity Solutions

When working in the pension consulting arena, it became clear that the primary focus of pension consultants was to provide expert advice to employers sponsoring various retirement arrangements.  There was a void as it related to employees who sought competent advice as to their entitlements under plans.

Lea has considerable experience in this area, and has advised on significant number of cases.  For members of large plans (for example, OMERS, OPG, Hydro One, OPTrust), the commuted value is often the plan member’s largest asset.  The amount of the commuted value may even exceed the value of the home, even in the GTA!  A plan member will want comprehensive advice in this area.

Plan members will want to make informed decisions as to what to do with their pension asset.  For example, plan members will want to understand the provisions of their pension plan that relate to when a pension may be commuted.

More over, when contemplating retirement, the appropriate planning is essential. In some situations, the best strategy may be to remain in the pension plan. In other circumstances, choosing to commute may be appropriate.

Options that a plan member may have in respect of the commuted value may include:

• Doing a direct transfer to another registered plan (provisions of the tax laws typically cap the amount of the transfer),
• Purchasing a “copycat” annuity, or
• Transferring the amount to a (locked-in) RRSP, subject to limits and paying tax on the balance, or
• Transferring the amount to an Individual Pension Plan (where still permitted after 2019 Federal Budget changes).

The appropriate course of action can only be determined by reviewing the plan member’s specific circumstances. It is also critical that the requirements of the pension supervisory authorities (for example Financial Services Regulatory Authority of Ontario – FSRA) and Canada Revenue Agency (CRA) be complied with, as mistakes in planning can lead to significant tax liabilities for the plan member.

When we use the term “copycat” annuity we mean a life annuity that has rights that CRA are not “materially different” from what the benefits under the pension plan would have been. While at Standard Life, Lea recognized that there were gaps in both pension and tax legislation as it related to commuted value transfers to “copycat” annuities.  She worked assiduously to have these issues resolved, and as a consequence of this, many plan members (for example in the automotive industry) were able to acquire annuities where this otherwise might not have been the case.

Lea has spoken at a number of forums on this topic.