CARP'S position on unlocking pensions

CARP’S POSITION ON UNLOCKING LIFE INCOME FUNDS/ LOCKED-IN FUNDS (LIFS)

January 16, 2007CARP’S REQUEST:

The Liberal Government supports Bill 175 which would permit unlocking 100% of the principal in a LIF. The Bill was introduced in December 2006 by Andrea Horwath (NDP) and supported by Bob Runciman (Conservative).

THE ISSUE:

When Joe Smith retired from work he was able to roll his portion of the company pension into his personal RRSP as a LIF or Locked in Registered Fund (LIRF) or Locked-In Registered Account (LIRA) – different names in different provinces for the same financial instrument.

Because Joe lives in Ontario, he can access the principal in his LIF only if he can prove a dire financial or health crisis to a group of bureaucrats in the Financial Services Commission of Ontario (FISCO). Joe will have to fill in a 23-page document to make his case for unlocking his LIF. If successful, he will have to pay a fee of $200 to $600. Between April 2003 and March 2006, 29, 821 Ontarians applied to FISCO for this purpose. Of them, 26, 296 were approved, 3,525 did not complete the process and 52 were denied access to their own money.

CARP’S RATIONALE:

Such a reform will not cost Ontario a penny! In fact, the Province will realize greater revenue from income and sales taxes when individuals are able to withdraw their LIF principal. This will increase their purchasing power which, in turn, will stimulate productivity and employment. As well, the quality of life for LIF holders will be greatly enhanced.

ONTARIO PRECEDENT FOR UNLOCKING LIFS:

In 1999, Bill 27 enabled 61 Ontario MPPs to access 100% of their occupational pension. Mr. Runciman was among them. These individuals came from all parties.

UNLOCKING LIFS IN OTHER PROVINCES:

In Saskatchewan, 100% can be withdrawn; in Alberta the amount is 50%; in Manitoba 50% with another 50% to come; in New Brunswick, 25%. Federal legislation allows those in federally regulated industries to withdraw 100% of principal at age 90.

DISPOSITION OF LIF PRINCIPAL AT DEATH

LIF principal can continue to grow during retirement. Upon death of a LIF- holder according to LIF-holder Bill Nafziger:

“[Mr. Nafziger estimates that] a LIF or an LRIF would allow me access to ¼ to 1/3 of my total pension fund during my lifetime. The remaining [balance of the LIF principal] would go to my estate/spouse after my death completely unlocked. Upon her death, the remaining [balance] would be considered income in one year and severely taxed by Revenue Canada.

”CONCERNS AND RESPONSES REGARDING UNLOCKING LIFS

In discussions on the issue of unlocking LIFs with some Ontario politicians and bureaucrats, the following concerns were raised. (It should be noted that some bureaucrats did not know what LIFs were.) As well, a recent article by Linda Leatherdale, Money Editor for The Toronto Sun, quoted retired financial columnist and financial adviser Bruce Cohen on some other concerns. Following each concern is CARP’s response.

Concern:

Squandering PensionIf Joe is given access to his LIF principal, he will squander his pension and eventually become “a ward of the state.”

CARP’s Response

This is paternalistic attitude based on prejudice and stereotyping rather than a shred of evidence. When CARP asked the Ministries of Finance in Saskatchewan, Alberta, Manitoba and New Brunswick whether they had heard about individuals getting into financial hardships due to unlocking their Locked-In Funds, they stated that they had no information about this because they had not looked into it nor had heard anything about this sort of thing happening. Moreover, there are no similar objections to enabling individuals having access to the principal in their RRSPs or RRIFs.

Concern:

Unfair to OthersOne objection raised to unlocking LIFS, is that allowing access to principal would be unfair to those who opt to allow their pension to remain in their corporate or occupational pension.

CARP’s Response

People should have the freedom to choose for themselves the course of action that they believe will best improve their independence and quality of life. In other words, they should be able to decide whether to maintain their portion of their corporate or occupation pension with the company or occupation or roll it over into their own RRSP.

If Joe rolls over his portion of a corporate or occupational pension into his RRSP as a LIF, he will assume the risk of growing this pension. Accordingly, he merits access to the fruits of their labours – that is, full access to the LIF principal that he has grown. At the same time, his decision to assume the risk absolves the corporation or occupational entity of any liability as well as reduces the entity’s pension-related expenses.

Concern’s:

Break ContractsSome opponents to unlocking Locked-In Funds argue that individuals accepted a contract that obliged them not to access LIF-principal.

CARP’s Response

Alberta, Saskatchewan, Manitoba, New Brunswsick and the Federal Government, as well the Province of Ontario in 1999, did not find this to be a barrier to unlocking LIFs for all or some of their citizens.

Furthermore, CARP has heard from LIF-holders such as Mr. Bill Nafziger that the advice on LIFs he received from the human resources specialist at the company where he worked as well as from financial advisers he consulted made no mention about not being about to access the principal in a LIF.

Concern:

Impact on Defined Benefit PensionsUnlocking LIFS will impact adversely on Defined Benefit Pensions

CARP’s Response

Many Defined Benefit Pension do not permit the rolling over of pension funds into an individual’s RRSP as a LIF.

Moreover, corporations are moving away from Defined Benefit Pensions (DBPs) to Defined Contribution Pensions (DCPs) which are akin to RRSPs. The objective of this shift in pension policy is to absolve the corporation or occupation of the responsibility and costs of ensuring payment of future defined pension income. This development has no relationship to LIFs.

Concern:

Adverse impact on Low-Income SeniorsIf low-income seniors retained their unlocked LIFs, they might not be eligible for federal and provincial benefits such as GIS, GST rebates because it could generate too much retirement income.

CARP’s Response

When the insurance companies demutualized, the Federal Government passed special legislation to protect low-income seniors who might get a one-time payment as a result of this action from adverse impacts. Similar legislation could be passed in this instance. Moreover, there is no evidence that this has happened in those provinces that have unlocked LIFs.

Concern:

CreditorsIf the LIFs are unlocked, the funds could be vulnerable to seizure by creditors.

Response

This assumes that the unlocked funds would be totally removed from the LIF. Rather, they will be transformed into Joe’s RRIF, which is protected from creditors.