Member-funded pension plan

A member-funded pension plan (MFPP) is a defined-benefit plan under which:

  • the employer contribution is set in advance (no risk for the employer);
  • the remaining contributions required, including payments for any deficits, are paid by the active plan members;
  • all payments of benefits must be made based on the plan's degree of solvency;
  • any surplus assets belong to the plan members and beneficiaries;
  • pensions can only be indexed once the plan has a surplus of assets and it remains funded This link will open in a new window. after the indexation;
  • the indexation rate of the pension is based on the Consumer Price Index (CPI), without being less than 0% or more than 4%;
  • the employer cannot amend or terminate the plan unilaterally.

An MFPP can be:

  • a career earnings pension plan, that is, a plan in which the pension is based on remuneration for each of the defined years;
  • a dollar-per-month plan, that is, a plan in which the pension is based on a fixed amount for each of the defined years.

An MFPP is not:

  • a final average earnings plan, that is, a plan in which the pension is based on the average final salary over a defined number of years;
  • an average best earnings plan, that is, a plan in which the pension is based on the average of the highest earnings over a defined number of years;
  • a plan in which the pension is automatically indexed according to a rate or index provided for in the plan;
  • an insured This link will open in a new window. plan.

An MFPP cannot:

  • provide for the payment of benefits based on an annuity purchasing policy;
  • include defined-contribution provisions;
  • be created by converting an existing pension plan (for example, by converting a defined-benefit pension plan);
  • be amended to become another type of pension plan (for example, to become a defined-benefit pension plan);
  • be divided to form a plan other than an MFPP or merge with a plan other than an MFPP.

Potential clients

MFPPs could be of interest to unionized workers. Workers' associations have indicated their members want to have access to a defined-benefit plan. Moreover, at a time when employers are increasingly reticent about assuming the financial risks of defined-benefit plans, workers' groups say that they are ready to take on such risks. The MFPP responds to the concerns of both groups in that the plan members and beneficiaries collectively assume the risks related to the plan (for example: the longevity risks and rate of return risks). Special measures are provided to obtain the consent of plan members when the MFPP is established or regarding an amendment that would result in an increase in their contributions.

Plan funding

To limit the financial risk for active plan members, an MFPP is funded as if the pensions were indexed based on the CPI, with a maximum of 4%. This measure allows for a provision equivalent to the cost of indexation.

Furthermore, the indexation cannot actually be granted unless the MFPP has surplus assets and will still be fully funded after indexation is carried out.

Improvements to the plan

If an MFPP still has surplus assets after the members' and beneficiaries' pensions have been indexed, the plan can be improved as long as it remains fully funded or, if the associated commitments are related to prior service, it remains funded and solvent after the improvements come into effect.

Such improvements can take the form of increased pension benefits or a reduction in member contributions.

Withdrawal of an employer

When an employer no longer has active members, for the employer's withdrawal to take place, the plan must be amended at the latest at the end of the fiscal year during which the last member ceased to accrue benefits.

Please note that, the cessation of active members' eligibility resulting from a decision concerning the accreditation of an association of employees or from a decision of a group is considered to be a withdrawal of an employer.

Subject to the provisions of the plan applicable to orphaned persons:

  • the value of the members' and beneficiaries' benefits affected by the withdrawal of an employer who is a party to an MFPP must be paid in proportion to the plan's degree of solvency established in the employer withdrawal report sent to Retraite Québec;
  • for persons whose pension is in payment on the date of the withdrawal, the value of the benefits can be used for the purchase of an annuity from an insurer or be transferred into a different retirement vehicle, such as a life income fund (LIF);
  • regarding the benefits of members whose pension is not in payment, they must generally be paid by means of a transfer of the value of the benefits into a different retirement vehicle, such as a locked-in retirement account (LIRA).

Maintaining the benefits of certain members and beneficiaries in the plan

An MFPP with a funding level equal to or higher than 100% may offer certain persons the option of maintaining their entitlement under the plan in the event of a withdrawal of the employer. The persons, considered orphans, are those who receive a pension on the date of the employer's withdrawal and, subject to what is provided for under the funding policy, those who are eligible for a pension if they filed an application on that date.

To do so:

  • the plan provisions must clearly indicate the persons who can maintain their benefits under the plan when an employer withdraws. That is:
    • persons who are receiving a pension;
    • persons who are receiving a pension as well as persons eligible for a pension on the date of the withdrawal;
  • the funding policy must set:
    • the minimum funding level of the plan in order for this option to be available on the date of the employer's withdrawal (e.g.: 110%);
    • the funding level at which all orphaned persons must be paid (e.g.: 105%);
  • during the annual meeting, the plan administrator must present the main risk associated with maintaining the benefits of orphaned persons and the measures taken during each of the pension plan's fiscal years to manage these risks.

Note that...

The funding level to consider in the funding policy is the one established in the most recent actuarial valuation sent to Retraite Québec, without taking into account the assumption for the indexation of pensions.

Payment of benefits

Under an MFPP, payment of the value of the benefits of a person after his or her active membership in a plan has ended is made in proportion to the plan's degree of solvency, even if it is higher than 100%. When the degree used is less than 100%, the balance of the value of the benefits that could not be paid does not have to be paid.

Information for members and beneficiaries

Members and beneficiaries of an MFPP must be informed of the financial risk involved in such a plan. This is why special rules are provided for regarding the information to be provided to them, for example, in the written summary of the plan, that is, the pension plan's information booklet, and in the Statements of Benefits.

Legal references

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