Archived - Regulatory Impact Analysis Statement
Archived information is provided for reference, research or recordkeeping purposes. It is not subject to the Government of Canada Web Standards and has not been altered or updated since it was archived. Please contact us to request a format other than those available.
Current annual withdrawal limits on Life Income Funds (LIFs) and the limited scope for special withdrawals from both LIFs and locked-in Registered Retirement Savings Plans (RRSPs), all of which are set out in regulations, constrain the options available for individuals to manage their retirement savings.
The initiative is relieving in nature and will provide three additional options to those individuals who hold federally-regulated LIFs, either to move the funds contained in them to an unlocked tax-deferred savings vehicle with no maximum withdrawal limits or, in certain circumstances, to convert them to cash. An additional option is also provided to those individuals with locked-in RRSPs who are facing financial hardship.
The benefit of these measures to those individuals who hold these funds is enhanced flexibility in managing their own retirement assets according to their own circumstances. The dollar costs of these measures, both short- and long-term, are likely to be less than $5 million annually.
Business and consumer impacts:
These changes will provide consumers with enhanced flexibility with respect to repositioning their retirement assets among various retirement savings vehicles or withdrawing them in special circumstances. There will be relatively little effect upon the investment industry; those businesses that provide management services for these assets may see a rationalisation in the number of very small funds under management, and a re-allocation between financial products for larger asset holders, but no significant decrease in funds under management.
Domestic and international coordination and cooperation:
This is purely a domestic issue. Some provinces have provided enhanced flexibility to similar assets that lie within their jurisdiction; the changes to the federal regulations will provide a broadly similar regime.
Performance measurement and evaluation plan:
Both the Department of Finance and the Office of the Superintendent of Financial Institutions (OSFI) monitor pension-related market developments on an ongoing basis. Continuous oversight and market monitoring by Finance and OSFI will be used to gauge the impact of the changes.
Many seniors and other Canadians want increased flexibility as to when and how they can use their retirement savings to better reflect the wide range of employment and leisure choices available to them today. Increased flexibility can also be important when financial circumstances change, and an individual requires access to his or her retirement savings to help meet current financial needs.
Currently, there is a risk that the limitations placed on withdrawals from these retirement savings vehicles prevent those individuals who hold them from using their retirement savings as they see fit and from addressing unanticipated special needs, as well as managing their retirement savings in a cost effective-manner. Over time, a number of provinces, under whose jurisdiction the majority of tax-deferred locked-in retirement savings vehicles fall, have enhanced the flexibility that is provided to individuals that hold such assets: it is the responsibility of the federal government to ensure that its own regulatory regime adequately serve the needs of those who are federally regulated.
The objective of this initiative is to improve the quality of life of some individuals with federally-regulated LIFs and locked-in RRSPs by increasing the flexibility they have to manage these assets to meet their needs, while at the same time maintaining the security of their retirement incomes.
One of the options available to individuals who work in federally-regulated industries and change employment, with respect to their vested pension benefits, is to take the vested pension benefits they have acquired under a federally-regulated registered pension plan in the form of a locked-in RRSP. Typically, this option is chosen by those individuals who cannot transfer these vested benefits into the registered pension plan of a subsequent employer, and would prefer not to take them in the form of an annuity or a deferred pension.
To provide an income stream during an individual's retirement years, a locked-in RRSP may be used either to acquire a life annuity (a contract sold by a financial institution which provides fixed payments to the holder at specified intervals) or converted into a LIF, which allows for more flexibility in the amount of income the holder receives in a given year. The Pension Benefits Standards Regulations, 1985 (the "Regulations") set limits - based upon the age of the holder - on the maximum percentage of the fund that may be withdrawn in any given year, (which increases as the holder ages), in order to ensure that these funds last through retirement.
Except in two limited circumstances described below, individuals are not permitted to make withdrawals from locked-in RRSPs, other than to purchase a life annuity, a LIF or pension benefit credits with another federally-regulated pension plan. Similarly, withdrawals from a LIF are only permitted for the purposes of transferring funds to locked-in RRSPs or other LIFs, the purchase of a life annuity, the purchase of pension benefit credits with another federally-regulated pension plan, or providing the permitted annual income stream. At present, the Regulations permit lump-sum withdrawals from locked-in RRSPs and LIFs only where an individual can demonstrate a permanent departure from Canada or where a physician certifies that the holder, owing to a mental or physical condition, has a considerably reduced life expectancy.
These amendments to the Regulations, which arise from a commitment made in Budget 2008, will significantly enhance the flexibility that individuals have in managing their federally-regulated LIFs, while at the same time maintaining the security of their retirement incomes. The amendments will require that any new LIF contracts (between the financial institution that administers the LIF and the holder of the LIF) must provide for three additional options regarding access to the funds in the LIF:
1. Individuals 55 or older with total holdings of up to $22,450 in federally-regulated locked in funds (i.e., small holdings) will be able to wind up their accounts with the option to convert to an unlocked tax-deferred savings vehicle with no maximum withdrawal limits. The threshold for small holdings will increase with the average industrial wage.
2. All individuals, regardless of age, that are facing financial hardship resulting from low income, or high disability or medical-related costs will be entitled to withdraw up to $22,450 in a calendar year. This maximum will increase each year with the average industrial wage.
3. Individuals 55 or older will be entitled, within 60 days of the creation of a new LIF, to convert up to 50 per cent of the total value of the new LIF into an unlocked tax-deferred savings vehicle with no maximum withdrawal limits. This will be a one-time opportunity at the time of the creation of the LIF, and must be exercised within 60 days. After this point, the funds that have not been unlocked can, in the future, only be withdrawn through the normal annual withdrawal option, or through the provisions for special lump-sum withdrawals (financial hardship, small holdings, reduced life expectancy, or departure from Canada).
Moreover, in the interest of reducing the administrative burden upon some of the individuals that the changes are intended to benefit, regulatory changes providing enhanced access to individuals that are facing financial hardship are also extended to individuals with locked-in RRSPs in the same manner as under (2), above. This will save these individuals the administrative costs of first converting these funds to LIFs in order to unlock them, and, if necessary, converting them back to locked-in RRSPs. This is likely to be the case for younger individuals unlocking in the case of financial hardship who do not want to receive annual income from the asset each year, but want to preserve the option of having these funds generate retirement income at some point in the future.
Rather than creating a complicated process to assess financial hardship or to demonstrate that total holdings are small, the new regulatory environment will rely upon the best efforts of ordinary individuals to make an assessment of their own financial condition that is honest and, as accurate as possible. It is anticipated that financial services providers will retain copies of these self-assessment forms as a precaution should difficulties arise in the future.
This initiative will not change the current provisions which allow for lump-sum withdrawals from locked-in RRSPs and LIFs in cases of reduced life expectancy or permanent departure from Canada, as long-term domestic pension protection is not an overriding concern in either case.
The changes will not affect existing contracts. Those with existing contracts will, however, be able to purchase new contracts with their existing funds in the future, subject to any penalties and fees or other conditions that may be set out in their existing contracts, if they wish to avail themselves of the new measures.
Regulatory and non-regulatory options considered
The principal alternative is to maintain the status quo. Choosing this alternative would maintain the current limits on the flexibility that individuals have in managing their LIFs, and locked-in RRSPs, and would result in failing to meet a commitment made in Budget 2008.
Benefits and costs
These measures will have positive social impacts on some individuals who hold federally-regulated LIFs or locked-in RRSPs. The measures will be particularly beneficial to near seniors with such assets, who, for a variety of reasons, may be unable to work. Increased access to their LIFs will permit them to better maintain their standard of living until they become eligible for the universal Old Age Security (OAS) benefit at age 65.
Similarly, individuals facing financial hardship, irrespective of age, will be able to use their retirement savings to address their needs, be they for income, or to meet medical or disability related costs.
Those with small holdings will benefit from the ability to consolidate their assets into a single registered vehicle, thereby minimizing administrative costs.
The Income Tax Act requires financial institutions to submit any amendments to their LIF or locked in RRSP specimen documents to the Canada Revenue Agency (CRA), but any additional costs to CRA are expected to be negligible. Further, because LIFs are administered entirely by private financial institutions authorized to administer such funds, there will be no additional direct costs to the Crown as a consequence of this change. Holders and financial institutions will face a small amount of paperwork in order to take advantage of these new options, notably, the completion of information forms one or two pages in length. Financial institutions may also incur additional administrative costs in the preparation of these specimen documents, which will primarily be used for contracting with individuals under the new arrangements. A transition period of six months will ensure financial institutions are able to provide LIFs and locked in RRSPs, as required, while new specimen documents are being developed. This transition period will facilitate an orderly adjustment to the new regime. Should financial institutions, for ease of administration, opt to apply the amendments to all existing plans, they may incur additional costs for notifying plan holders.
Moreover, given that around 90 per cent of registered pension plan assets in Canada are subject to provincial rather than federal regulation, and given that this change will only affect a subset of the federally-regulated assets (those moved into locked-in RRSPs or LIFs, often due to a job change), the indirect effects on government revenues and expenditures are expected to be less than $5 million annually. For the most part, these effects will be mutually offsetting:
(a) Effects on statutory federal income support programs for seniors (two small but opposing outcomes):
1. there may be a slight reduction in current spending on the Guaranteed Income Supplement (GIS) Program, as withdrawals from locked-in funds will increase individuals' incomes and may reduce some seniors' eligibility for this type of income support, and
2. in the future, increased net expenditures may be necessary in order to make up for shortfalls in retirement income caused by people unlocking balances early (leading to (a) increased spending on the GIS, and (b) reduced Old Age Security (OAS) clawbacks).
These changes are expected to be manageable within existing administrative structures and operating systems in place for the OAS and GIS programs given the relatively small number of additional clients that may arise.
(b) Effects on income tax revenues: The overall effect on tax revenues is expected to be limited. There may be a small increase in cash-flow tax revenues as some LIF holders exercise their greater flexibility to withdraw funds from these accounts, which are tax-exempt until they are withdrawn. Since such withdrawals would reduce future cash-flow tax revenues, the net effect would likely be a small decline in present-value tax deferral costs.
Provincial welfare payments may decline very modestly as some individuals facing financial hardship, and who would otherwise be eligible for social assistance from the provinces, use their federally-regulated assets to meet their income needs.
Providing access to these funds will provide considerable flexibility to seniors and others in the management of their retirement assets, while at the same time still providing a considerable measure of security for those for whom LIFs are a significant source of retirement income.
For those individuals for whom total locked in funds represent a relatively minor asset, and for those facing difficult life events - temporary low income or major medical or disability-related expenditures - these measures will allow access to these funds for the purpose of addressing these circumstances in a manner that will lower the administrative costs related to the management of these funds.
For those individuals for whom LIFs represent a major component of their retirement savings, this measure will allow a one-time transfer of funds to an unlocked vehicle, such as an RRSP or Registered Retirement Income Fund (RRIF), in which the funds are not subject to a ceiling on annual withdrawals. These individuals could then make the choice to withdraw these funds and address other concerns - for example, to retire outstanding debt - which they themselves determine would be the best use of the funds for the purpose of providing for their own retirement. At the same time, the regulations place a prudential restriction, designed to ensure that a portion of these assets remain to generate future retirement income, on the percentage of funds that may be withdrawn.
This is in line with the overarching principle that any regulatory change to enhance flexibility must also promote the prudent management of these retirement funds.
These changes were announced in Budget 2008: the need for these changes was identified though communications (received by the Minister of Finance, the Department of Finance, and OSFI) from private citizens, market observers, and seniors' advocacy groups, who were concerned about the limitation imposed by the current requirement. The Budget 2008 announcement has met with general approval from both the financial press and from private citizens.
Further, these changes were designed after an assessment of the various recent changes to similar provincial regimes.
Implementation, enforcement and service standards
Currently, the federal government provides for the locking and unlocking of funds in federally-regulated locked-in RRSPs and LIFs by requiring (in the Pension Benefits Standards Regulations, 1985) that all contracts governing these vehicles must contain certain standard rules governing the withdrawal of funds.
This system is largely self policing - the federal government is not itself party to these contracts governing locked-in RRSPs or LIFs - but it does provide the potential for the federal government to intervene if necessary.
The method by which this initiative increases flexibility is by increasing the number of options for lump-sum withdrawals that these contracts would be required to contain.
As such, the need for oversight - to ensure that such contracts meet all other legal requirements - will remain. However, since these changes were also designed to minimize as much as possible any additional administrative burden that will be placed upon financial institutions, while at the same time limiting the potential for misuse of the system, compliance and enforcement requirements will not change markedly as a result of this amendment. As noted above, the unlocking of funds will generate a small amount of paperwork.
In summary, aside from the small additional amount of paperwork, these changes add no additional oversight requirements beyond what the Regulations already prescribe.
Performance measurement and evaluation
Both the Department of Finance and OSFI monitor pension-related market developments on an ongoing basis, and are in regular contact with their provincial counterparts and with private-sector professionals and observers. Continuous oversight and market monitoring by Finance and OSFI will be used to gauge the impact of the changes.
Senior Policy Analyst
Federal-Provincial Relations and Social Policy Branch
Ottawa, Canada K1A 0G5