Defined benefit pension plan
A defined benefit pension plan sets each member’s pension by the plan’s terms, such as a benefit formula, rather than by the balance in an account. In Ontario, the Pension Benefits Act requires the employer to pay amounts into the fund when a plan is wound up, so funding is a question for a buyer.
The Income Tax Act defines a defined benefit provision as plan terms under which each member’s benefits are determined in any way other than a money purchase provision. The CRA glossary adds that a benefit formula is the manner in which the member’s monthly or annual benefit is determined. A buyer meets the term when the target sponsors a registered pension plan of this type.
Funding shortfalls in Ontario
Ontario’s Pension Benefits Act speaks of a going concern unfunded liability and a solvency deficiency, each determined under prescribed requirements. Where a plan is wound up, section 75 requires the employer to pay amounts into the pension fund. Section 69 lets the Chief Executive Officer require a wind up on certain sales. Other provinces and the federal regime have their own statutes.
What to ask
- The latest funding valuation, and who prepared it.
- Whether the plan is open to new members or closed.
- Whether the buyer would assume the plan, and what the regulator’s approval would involve.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Government of CanadaGovernmentIncome Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
- 02Canada Revenue AgencyGovernmentRegistered Pension Plans Glossary
- 03Government of OntarioGovernmentPension Benefits Act, R.S.O. 1990, c. P.8
- 04Canada Revenue AgencyGovernmentRegistered Pension Plans (T4099)
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