Locked Or Unlocked – What’s Your Pleasure?
By: Marilyn Lurz
If one of the reasons for locking in of retirement funds is to minimize the impact on the public purse by ensuring retirees have retirement savings, why are regulators across Canada considering unlocking? Marilyn Lurz examines the current attitudes towards this across the country.
The turn of the century has apparently made some lawmakers and regulators restless when it comes to the issue of locking in (and unlocking) of pension funds.
Ontario started things off when, in early 2000, it changed the Ontario Pension Benefits Act to permit access to funds held in Locked-in Retirement Accounts (LIRA) or locked-in Registered Retirement Income Fund (RRIF) under certain circumstances, including:
- Shortened life expectancy
- Total assets in the locked-in vehicle which are less than $16,200 and the individual is at least age 55
- The individual risks eviction from his/her home
- Funds are needed to cover first and last months’ rent
- Funds are needed for medical treatment
- Funds are needed for renovations related to the use of a wheelchair or other disability-related need.
The amount of money that becomes unlocked differs depending on which situation applies, and a fee of from $200 to $600 has to be paid in conjunction with every application.
Form 6, the application form used for most financial hardship situations, is 20 pages long (and this is the English-only version). The explanatory notes accompanying the application are 15 pages long. Indeed, if a plan member is able to figure the application out and complete it properly, they probably deserve access to the funds.
While the Ontario government has helped some people in dire straits gain access to funds in this way, what is the cost? There’s an entire department within the Financial Services Commission of Ontario (FSCO) that works full-time administering the applications that come in. When some of these situations result in a payout of only a couple of thousand dollars (or even less in some cases), and when it’s taxpayers’ or pension fund dollars that are funding the special FSCO department for the most part, one has to wonder if it’s all been worth the effort.
On to the scene comes Saskatchewan, with the most radical change in pension benefits legislation since the broad reforms of the mid-1980s. As of April 1, 2002, individuals with funds in a LIRA were able to transfer their money to a prescribed RRIF once they are retirement-eligible (which is usually age 55 but could be earlier if the person would have been retirement-eligible earlier under the pension plan from which the funds originated). Also, funds in a prescribed RRIF can be completely cashed out at any time.
Effectively, once funds are moved out of an original pension plan (which is an option when employment is terminated, unless the employee is already retirement-eligible) and an employee has reached age 55, they have complete flexibility to get 100 per cent cash or to create any type of payout schedule they wish. Of course, they pay tax on whatever they take out of their RRIF thereby losing the wondrous advantage of tax-sheltered assets and investment income. However, those who need money, do it anyway.
Interestingly, one of the “definitions of the problem,” according to the Saskatchewan consultation paper that preceded the recent changes, was “comments from those responsible for administering and advising on LIFs (Life Income Funds) and LRIFs (Locked-in Retirement Income Fund)” who said “that the products are complicated and costly to administer.” Did they have anything to gain from this change? Let’s see – people will still buy RRIFs but the companies who administer them will not need to go to the added expense of administering the LIF and LRIF rules. So they make the same money on the sale of the RRIF, but the RRIF costs them less to administer. One wonders if they may have had somewhat of a biased viewpoint. (LIFs and LRIFs are two forms of lockedin RRIFs.)
Are we a ‘carpe diem’ (seize the day or live for today) society or not? If we are, then won’t many people, given the opportunity to take cash, do just that? Consider an example of an individual with $200,000 in retirement savings. The person may not want to cash that all out at once since about half the money instantly makes its way to the Canada Revenue Agency. Still, wouldn’t he or she be tempted to take it out in, say, chunks of $50,000? The person could argue that they’d done themselves a favour by spreading out the tax hit (and perhaps lessening it overall). T
hen what? Where does a person go when they’ve exhausted their savings? They go to the taxpayers (via the government’s welfare programs) to get the money they need to live on. This may not always be the case as some of us hope to be supported by our adoring children! However, it certainly is a possibility.
Saskatchewan makes only passing reference to this possibility in the consultation paper. It said that any pressure on the public purse would be mitigated by the fact that it is self-evident “that those faced with the prospect of retirement are going to place a higher priority on using pension savings to provide pension income than younger persons.” In other words, younger people would be more prone to spend their retirement savings if they had access to the money and older people would be more likely to use their funds to provide pension income. This is arguable, and presupposes that people “get wise” in financial matters when they turn 55. Some may and some may not.
We’ll only be certain of the actual results in the fullness of time, and then only if Saskatchewan is able to statistically track a connection between pension-sourced RRIF cashouts and an increased welfare draw.
Next In Line: Alberta And Manitoba
In May 2003, Alberta added unlocking due to financial hardship (similar to Ontario’s rules) to its pre-existing list of unlocking provisions which included unlocking due to non-residency and shortened life expectancy.
Most recently, Alberta Finance issued a discussion paper for public comment in November 2003 entitled ‘Access to Locked-in Accounts.’ The Alberta paper listed a number of approaches for consideration including:
- No change
- Minor impact, which includes tweaking the LIF/LRIF maximum withdrawal limits Moderate impact, including unlocking of member contributions, access to a one-time 25 per cent lump sum and increasing the small pension payout rule
- Major impact – from using the same rules as Saskatchewan where funds are available in cash after age 55, right up to and including complete removal of the concept of locking in
Alberta asked people to respond stating their preferences and reasons. It did not disclose any particular policy issues that would drive its adoption of one approach over another. However, in the appendix entitled ‘History of Locking in,’ Alberta did refer to the fiscal policy issue of “minimizing the impact on the public purse of retirees being left without financial support.” It also acknowledged the fact that employers and unions originally wanted, and actually asked, the government for locking in to ensure that pension money was going to ultimately be used to provide lifetime retirement income.
The report which summarizes feedback in response to Alberta’s discussion paper indicates that there is strong support for adopting the Saskatchewan unlocking (at age 55) approach.
And then along comes Manitoba. It has been going through an extensive consultation before making changes to the Manitoba Pension Benefits Act. In its most recent release, authored by the Manitoba Pension Commission and released for comment in October 2003 by the Minister of Labour and Immigration, it indicates that there will not be any major reform of the locking-in rules in Manitoba. Some of the reasons:
- Unlocking alters the fundamental promise made under a pension plan, which is to provide lifetime retirement income to members
- Unlocking “may result in financial hardship being transferred to future generations and governments and, given the aging population, the impact of such an intergenerational transfer could be considerable”
- There are no statistics related to the use of retirement capital outside of pension plans and, until statistics are available and related analysis can be conducted, there are “significant concerns … regarding the potential costs to social agencies and the associated risk to the public interest”
Manitoba may give consideration to more minor changes to the rules surrounding LIFs and LRIFs (for instance, the maximum payout rules), but not until the Canadian Association of Pension Supervisory Authorities (CAPSA) completes its review of the locking-in rules across the country. Their report is due this spring, and recommendations for ‘model locking-in principles’ are anticipated. …
Marching On Towards Uniformity (??)
So where does this leave us? With the changes already enacted by Ontario, Saskatchewan, and Alberta in just this one area of locking in, we continue to move away from the concept of uniformity. And yet at virtually the same moment in history, CAPSA has released its model law, the intent of which is to move toward uniformity.
Where will these discussions land us over the next few years? Will we move closer to uniformity? Or will the provinces continue, as they seem to have done for most of the last 20 years, to go their own route? Have we come full circle on locking in? Is it no longer needed? Since there are no easy answers to satisfy all stakeholders, I suspect we’ll continue with regional variations for quite some time, unless the regulators and the lawmakers unite now to stop the creation of disparate pension laws and regulations across the country.
Marilyn Lurz is an independent pension consultant operating in the Toronto area.
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