Phased retirement

There will be no requirement that the partial pension be based on a reduction in work time or that there be a corresponding reduction in salary. The tax rules will allow an employer to offer an employee a partial pension of up to 60 per cent of accrued pension benefits while at the same time allowing the employee to accrue benefits in respect of post-pension commencement employment, regardless of whether the employee is working full- or part-time. The provisions of the regulations which enable benefits to accrue in respect of periods of absence or reduced pay will not apply to employees accruing benefits under this new measure.

The new regulations will place no restrictions on when, or how often, an employee’s accrued pension amount can be recalculated to take into account the employee’s additional pensionable service and increased annualized earnings (if any) during a period of simultaneous accrual and pension payment. Nor will the tax rules prevent a plan from limiting participation to specific employees identified by the employer.

The new regulations will also ensure that the prohibition against the payment of bridging benefits on a stand-alone basis (i.e. without the simultaneous payment of lifetime pension amounts) does not apply with respect to qualifying employees.

Bridging benefits are temporary pension amounts that can be paid up to the age of 65 years, the purpose of which is to bridge the gap from pension commencement until the time that public pension benefits (i.e. benefits under the Old Age Security program or under the Canada or Quebec Pension Plan) typically become payable.

This approach will give employers a great degree of flexibility in designing older-worker retention programs that meet their specific needs. It will, for example, permit employers to offer phased retirement programs that are based on a pro rated proportion of pension and salary—for example, 40 per cent of the accrued pension based on a reduction in work time of two days per week, and 60 per cent of salary based on working three days a week—or that provide for qualifying employees to receive the bridging benefits that would be payable if the employee were fully retired. It will also permit an employer to increase the reward from full-time work by offering a partial pension to those wishing to continue in employment on a full-time basis.

The prohibition on accruing additional benefits while in receipt of pension payments will continue to apply to designated plans as well as to persons who are connected with their employer. Designated plans (as defined in section 8515 of the Regulations) are generally one-person plans and small plans for groups of executives, owner-managers or other highly compensated employees. An employee is generally considered to be connected with an employer (as set out in subsection 8500(3) of the Regulations) if the employee does not deal at arm’s length with the employer, or if the employee owns, in the case of a corporate employer, 10 per cent or more of the shares of the employer or a related corporation.