Registered Plans Directorate Newsletter, no. 93-5
December 1, 1993

Surplus Allocation on Termination or Conversion of a Defined Benefit Provision

This update is to advise you of our requirements for plan amendments when surplus is used to improve benefits under a defined benefit provision that is terminated, or converted to a money purchase provision.

If benefits have ceased to accrue on or before December 31, 1993 under a defined benefit provision, and surplus is used to increase those benefits, we will not require amendments for the increases. Instead, we will consider the plan to have been amended for purposes of the conditions for registration and transfers, as long as the following conditions are met:

• The benefit improvement is limited to benefits for pre-1990 service, and would be allowed under Information Circular 72-13R8, as modified by pension reform updates (PRUs) dealing with pre-reform service;
  
  
• It is reasonable to expect that if the plan was amended to reflect the benefit improvements, it would also comply with the conditions for registration in Regulation 8501 and with any known conditions imposed by Revenue Canada under subsection 147.1(5) of the Income Tax Act.
  
  
• The plan is not:
  • a pre-October 1968 or a 1980 shareholder plan;
    a designated plan;
  • an individual pension plan;
  • a plan registered in accordance with a specimen plan;
  • a plan in which partners or proprietors participate.
  
  
• The value of the improvements is not more than the amount of the surplus;
  
  
• The plan, if amended to reflect the benefit improvements, would comply with the 50-50 shareholder rule (as described in PRU 91-1).
  
  For purposes of this rule:
  • the members to be taken into account are those who are "active members" (as defined in subsection 8500(1) of the Regulations), in the year in which the benefits cease to accrue under the provision, and,
  • the present value of benefits is to be determined as of the effective date of the valuation report outlining the termination or conversion.
    
    
• The valuation report outlining the termination or conversion is effective on or before December 31, 1993, and contains a statement identifying which benefits have been improved.

The following examples outline several of the benefit improvements that may be provided.

• The benefit formula may be upgraded to the maximums permitted under the Regulations.
  
  
• Indexed pre- and post-retirement benefits may be provided.
  
  
• The normal retirement age may be lowered to 60 to allow an unreduced retirement benefit to be paid out.
  
  
• Bridge benefits permitted under paragraph 8503(2)(b) of the Regulations may be provided.
  
  
• Contributory plans may be considered retroactively non- contributory before 1990.
  
  
• A joint and survivor pension not exceeding 66 2/3% with a guarantee period not exceeding five years may be considered the normal form.

All distributions must be made under the provision as soon as practicable, generally within one year.

Note that certain defined benefit plans do not have to file amendments to comply with the new registration requirements. Please refer to PRU 93-4 for details.