Application of the 50% Rule Exception (Subsection 21(3) of the PBSA)

It has come to our attention that some plan administrators and consultants may be applying subsection 21(3) of the Pension Benefits Standards Act, 1985 (PBSA), respecting the minimum pension benefit credit, incorrectly.

Section 21 of the PBSA addresses the rights and entitlements of individual members. It does not address the provisions of the plan as a whole. Subsection 21(1) of the PBSA provides that if, on retirement, cessation of membership, death or the termination of the plan, a member's required contributions plus interest exceeds 50% of the pension benefit credit, the member's pension benefit shall be increased by the amount that can be provided by that excess.

Subsection 21(3) of the PBSA is a qualifier to subsection 21(1) of the PBSA and provides an exception to the application of this “50% rule”. Subsection 21(3) provides that the 50% rule, as described above, does not apply to the calculation of a deferred pension benefit if the plan provides for annual indexation of that deferred pension benefit up to the day on which payment begins.

It is our understanding that some plan administrators and consultants are incorrectly applying the exception in subsection 21(3) to all benefits being paid from a plan that offers indexation in the deferral period. Such plans must still apply the 50% rule to the calculation of pension benefits other than deferred pension benefits (i.e. for a member who retires from active employment or for a survivor whose pre-retirement death benefit is being paid as an immediate pension benefit).

Subsection 21(3) also does not provide an exception to the application of the 50% rule to any benefit calculation (immediate or deferred) if a pension plan offers post-retirement indexation only. The application of the 50% rule may not result in an increase in the pension benefit credit in these plans; however, the calculation must still be done to confirm this.