RRIF plans get dose of flexibility: Proposal will aid pensioners, plan administrators

The Department of Finance yesterday proposed the introduction of a temporary 25% reduction in the minimum withdrawal requirements for registered retirement income funds (RRIFs) in 2008, as well as giving pension funds more time to fund deficits.

Both proposals will give pensioners and pension-plan administrators more flexibility to deal with the market malaise that has triggered a plunge in asset values recent months.

Aimed to allow retirees to “keep more of their savings in their RRIFs,” the measure will apply to all RRIF holders “regardless of age.”

RRIF holders who withdraw more than the reduced 2008 minimum amount will be permitted to re-contribute the excess to their RRIFs, until the latter of March 1, 2009, and 30 days after the proposal is enacted. Re-contributions will be deductible for the 2008 taxation year.

“For people who have watched their retirement savings disappear before their eyes, a 25% reduction in the mandated withdrawals is most certainly better than nothing but really doesn’t go far enough to deal with the anxiety people are feeling, A two-year moratorium is needed,” said Susan Eng, vice-president, advocacy, of CARP.

The issue of forced withdrawals is not restricted to Canada. CARP’s equivalent in the United States, the powerful American Association of Retired Persons (AARP), recently wrote to Henry Paulson, the U. S. Treasury Secretary, urging him to take “immediate action to temporarily freeze mandatory retirement account withdrawals.” Americans aged 70 and over must take distributions from their retirement accounts based on fair market value on the last day of the previous year.

Even before the crash, arguments for reducing or eliminating forced RRIF withdrawals were made in April by the Investment Funds Institute of Canada (IFIC).

The institute’s president, Joanne De Laurentiis, told the Finance department that RRIF minimum withdrawal levels should be reduced to the point where today’s longer-living seniors could generate a steady 4% annual return from ages 71 to 96.

Mr. Flaherty said the tax rules already permit “in-kind” asset transfers to meet the minimum withdrawal requirements. “They do not require the sale of assets.”

He said the government has asked financial institutions to accommodate in-kind distribution of assets from a RRIF.

Citing the impact the global credit crisis has had on global equity markets, the Finance department is also taking steps to ease the funding problems of federally regulated private pension plans.

If the current market situation remains the same at the end of the year, the decline in market value of plan assets would result in many sponsors being required to make large special payments.

“So under the present extraordinary circumstances, the government proposes to allow plans to extend their solvency funding payment schedule from five to 10 years in respect of solvency deficiencies as at December 31, 2008, subject to certain conditions.”

The government will also be initiating consultation on issues facing defined-benefit and defined-contribution pension plans regarding possible permanent changes in 2009.

“In November, Federal-Provincial-Territorial Finance Ministers agreed to make this a priority and it will be discussed when they meet again in December.”