50% rule and benefit increases

It has come to OSFI's attention that not all plan administrators are correctly applying subsection 21(1) and paragraph 26(3)(b) of the Pension Benefits Standards Act, 1985 (PBSA) relating to what is known as the 50% rule.

Subsection 21(1) provides that the pension benefit is to be increased by the amount that can be provided by the excess contributions (i.e. the amount of member contributions in excess of 50% of the pension benefit credit). The additional benefit resulting from the application of the 50% rule is calculated only once and added to the member's pension benefit as of the date of the event leading to the benefit determination (e.g. cessation of membership, death, retirement). The benefit attributable to the 50% rule then becomes part of the pension benefit on which any subsequent calculation of a pension benefit credit is based.

Paragraph 26(3)(b) of the PBSA allows a plan to include a provision forcing a transfer of the excess contributions to one of the portability transfer options offered in this paragraph rather than increasing the pension benefit in accordance with subsection 21(1) of the PBSA.

Only if a plan's terms provide this force-out provision can the administrator include options for the transfer of excess contributions in the member's or survivor's individual statement on cessation of membership or death. If permitted by the plan's terms the transfer of excess contributions must occur at the time of the cessation of membership or death. The statement should also indicate the option that the administrator will use to force-out the transfer of excess contributions if the member or survivor fails to indicate their choice, or if the administrator will instead increase the pension benefit as a default.

The PBSA does not provide the option for excess contributions to remain in the Plan and accumulate with interest to the date of retirement. Excess contributions must either be added to the pension benefit in accordance with subsection 21(1) of the PBSA or transferred out under paragraph 26(3)(b) of the PBSA, if permitted by the terms of the plan.