Contributory vs
Non-contributory Pension Plans
Pension plans are designed to be either contributory or
non-contributory. When the employer and the member both contribute, it is called a
contributory plan. When only the employer contributes, the plan is said to be
non-contributory.
In the case of a defined contribution plan, interest must
be credited to employer and member contributions. The rate of interest is the gross rate
of return earned by the pension fund less any administrative expenses that are required to
be paid out of the pension fund.
In the case of a defined benefit plan, interest must be
credited to member contributions. The rate of interest is either the rate of return on the
pension fund as described in the previous paragraph or the average of five-year personal
fixed term chartered bank deposit rates. Employer contributions to a defined benefit plan
are used to fund all benefits payable from the plan and are not credited to individual
plan members.
Employer and member contributions must be held separate and
apart from the assets of the employer, usually by a trust or insurance company. In this
way, pensions are protected should the business fail.
Funding of Defined Benefit Plans
Your employer is obligated to set funds aside regularly to
pay for the pension that you and other members will receive in retirement. An actuary
estimates the cost by making certain assumptions about future salary levels, investment
returns, when members will retire, when they will die, etc.
The standards contained in The Pension Benefits Act,
1992 establish a minimum amount that must be contributed to a plan to ensure its
solvency. The Superintendent of Pensions ensures compliance by requiring the periodic
filing of documents such as annual information returns and actuarial valuations.
Pension legislation further protects benefits by setting
standards that must be followed in the investment of pension funds. For example, to ensure
diversification, no more than 10 per cent of a pension fund can be invested in the
securities of any single company. Special rules also apply to particular types of
investments like real estate.
The 50 Per Cent Rule
The 50 per cent rule applies to you if you are a member of
a contributory defined benefit pension plan and you are entitled to a pension.
Saskatchewan's legislation requires that an employer pay at least one-half of the commuted
value of your pension. The commuted value of your pension is determined, and the 50 per
cent rule applied, if you terminate membership, die prior to retirement, or retire or if
your plan is terminated.
It is important to note that the 50 per cent rule does not
mean your employer must contribute the same amount as you into the pension fund. The 50
per cent rule also does not mean that you are entitled to a pension benefit which is worth
twice as much as you have contributed. Rather, the 50 per cent rule allows you to receive
a refund of any contributions that you have made which are in excess of half of the value
of your pension.
Assume, for example, that on termination of membership from
your plan you are vested (in other words, you qualify to receive a pension). On
termination, the administrator of the plan calculates the commuted value of your defined
benefit pension to be $100,000. According to the 50 per cent rule, you should have
contributed no more than half this amount, that is $50,000. However, your contributions,
plus interest, total $60,000, that is $10,000 more than 50 per cent of the commuted value.
You receive a refund of $10,000 in cash.
You also may be able to transfer the $10,000 to an RRSP, to
another pension plan, or to an insurance company to buy a deferred life annuity or you may
be able to use the money to increase the amount of pension payable from your pension plan.
Check with your plan administrator.
