Ralph Moss Limited

RETIREMENT PLANNING

November 1996
Improvement to Consumer Protection
Following extensive discussions within the life and health insurance industry, the Canadian Life and Health Insurance Compensation Corporation's (CompCorp) member-insurers agreed that the current CompCorp compensation rules should be simplified. As a result, CompCorp proposed amendments to the coverage it offers.They affect primarily Group Retirement Plans.These changes have been approved by the Board of Directors of CompCorp on September 20, 1996, and will become effective on January 1, 1997.

We wish to remind the reader that it is CompCorp and not the member-insurers who decides whether specific contributions and policies are covered in particular situations.

A Group Retirement Plan refers to any type of group retirement arrangement (registered or not), including without limitation, a group pension plan, a group RRSP and a deferred profit sharing plan (DPSP).

These changes expand and clarify the coverage afforded to Group Retirement Plans.

Below, we present the highlights of the changes.

Change in Scope of Coverage

The $60,000 coverage limit applicable to monies deposited into guaranteed funds (i.e., funds held in the general assets of an insurer) now applies separately to each of the following types of policies:

Therefore, the maximum coverage available under all types of policies combined is $240,000 (i.e., $60,000 x 4).

Previously, the $60,000 coverage limit applied to guaranteed funds held under all registered policies and non-registered policies, as two separate types of policies. Therefore, the maximum coverage was $120,000 (i.e., $60,000 x 2).

In addition, all defined benefit plans are now eligible for coverage. In the past, aside for individual pension plans (IPPs), few defined benefit plans were eligible for coverage.

The coverage applies to all group retirement plans combined with the same insurer having the same plan sponsor, whether they are defined benefit or defined contribution pension plans, RRSPs or DPSPs.

Pooled fund policies (i.e., funds segregated from the general assets of an insurer) that provide no guarantee on death or maturity are not protected by CompCorp.

To illustrate the recently adopted changes, the table appearing below compares the CompCorp coverage before and after January 1,1997. In this example, a plan sponsor has a defined contribution registered pension plan (RPP) and a group RRSP with the same insurer. One of the plan members has $48,000 accumulated in the RPP, $18,000 in the Group RRSP, $20,000 in an individual RRSP and $15,000 in a non-registered guaranteed term deposit investment with the same insurer.

Example of CompCorp Coverage

Policy types               Prior to 1-1-97                   After 31-12-96


Registered Plans        Group RPP               $48,000   Group RPP                 $48,000
                        Group RRSP              $18,000   Group RRSP                $18,000
                        Individual RRSP         $20,000
                        Total for Class         $86,000   Total for Class           $66,000


                                                          Individual RRSP           $20,000


Non-registered plans    Term Deposit Investment $15,000   Term Deposit Investment   $15,000


Maximum coverage        Registered policies     $60,000   Reg. Group policies       $60,000
per policy type         Non-registered policies $15,000   Reg. Indiv. policies      $20,000
                                                          Non-registered policies   $15,000
Total Coverage                                  $75,000                             $95,000

How Does Coverage Apply?

1. Defined Contribution (DC) Plans
A "defined contribution plan" is defined as a retirement plan in which each member's entitlement to benefits is based on specified contributions to that plan, and the income thereon, that are allocated among, and credited to, each member on an individual basis

For example, a DC plan could be one where member contributions are 2% of the salary and the employer contributions are also 2% of the salary. All these contributions earn investment income. Upon retirement, the accumulated value of these contributions is used to purchase a pension payable for life or a life income fund.

For DC plans including third party administered DC plans (as long as periodic investment allocation listings per member are supplied to the insurer), CompCorp covers guaranteed funds up to a maximum of $60,000 per member.

Third party administered DC plans refer to DC plans under which retirement funds are invested with any number of financial institutions and member investment records are maintained by an outside administrator.

2. Defined Benefit (DB) Plans

A "defined benefit plan" is defined as a retirement plan in which each member's entitlement to benefits is based on a formula, usually related to years of service and earnings, or a fixed dollar amount. For greater certainty, it excludes any combination or hybrid plan and any defined contribution plan.

For example, a DB plan could be one where member contributions are 5% of the salary. The pension promised at retirement is 2% of the member's salary for each year of service. Alternatively, the pension promised at retirement may be 40% of the member's contributions. The employer contribution is equal to the difference between the cost of the promised pension and the amount of contributions the member has paid.

Employer contributions to a DB plan, going into a guaranteed fund of an insurer, are now eligible for coverage by CompCorp up to a maximum of$60,000.

Employee contributions to a DB plan are treated in the same manner and subject to the same rules as a DC plan, i.e., eligible for coverage up to a maximum of $60,000 per member.

3. Combination or Hybrid (Combo) Plans

A "combination or hybrid pension plan" is generally a mixture of a DB pension plan and a DC pension plan. More specifically, it is defined as a retirement plan in which each member's entitlement to benefits is determined by reference to::

• a) a formula usually related to years of service and earnings, or a fixed dollar amount, and
• b) specified contributions to that plan, and the income thereon, that are allocated among, and credited to each member on an individual account basis,

including without limitation, plans in which the benefits are the greater of, or are calculated as the sum of a) and b).

Examples of Combo plans are:

1. A promised pension at retirement of 1% of the salary for each year of service totally paid for by the employer, plus member contributions of 2% of the salary. Member contributions earn investment income and at retirement, the accumulated value of member contributions is used to purchase a pension payable for life or a life income fund in addition to the pension promise already provided for by the employer.
2. A pension plan where the member contributions are 2% of the salary and the employer contributions are also 2% of the salary. All these contributions earn investment income. Upon retirement, the accumulated value of contributions is used to purchase a pension payable for life or a life income fund. However, the employer guarantees that the pension provided, by the accumulated value of contributions, will not be less than 1.5% of the salary for each year of service.

Combo plans are eligible for coverage similarly to DB plans. However, allocated contributions to individual member accounts are eligible for coverage by CompCorp as DC plans.

Summary of Coverage

The maximum coverage applicable to group retirement plans can be summarized as follows:

• $60,000 for all member allocated employee and employer contributions invested in guaranteed funds under all DC, DB and Combo plans combined, with the same insurer having the same plan sponsor.
• $60,000 for all non-allocated employer contributions invested in guaranteed funds under all DB and Combo plans combined, with the same insurer having the same plan sponsor.

The $60,000 coverage limit stated above appliesseparately to both registered and non-registered group policies, as two separate classes of policies.

Record Keeping Considerations

In order for CompCorp to determine if contributions deposited with an insurer are covered, it is necessary to determine the type of plan involved and whether there are employee contributions or not. For this purpose, insurers will seek to obtain a copy of the plan document or some other credible evidence of the plan type.

As we have mentioned, employee contributions to a DB plan as well as employee contributions to the DB component of a Combo plan are treated in the same manner and subject to the same rules as those made into a DC plan, i.e., eligible for coverage by CompCorp. Accordingly, plan sponsors are encouraged to submit annually to their insurer, within six months of the retirement plan year end, a contribution breakdown as well as a list of guaranteed investments allocated per member.

For DC and Combo plans using full service group retirement plan policies, the insurer usually maintains appropriate records for CompCorp coverage purposes.

Plan sponsors of third party administered DC plans are encouraged to provide their insurer, each year within six months of the retirement plan year end, with a list of investment allocation per member with respect to guaranteed investments. Where no breakdown between guaranteed and variable funds is available or where more than one carrier is involved, insurers should be provided with a list of total plan assets allocated to each member. CompCorp's protection will apply on a pro-rata basis of each insurer's guaranteed funds to the total funds held under the plan.

As an example, assume that a Registered Pension Plan has $750,000 in total assets. One insurer holds $500,000 in guaranteed funds; the balance is held by another insurer. A particular member has $25,000 in his pension plan account. In this case, the CompCorp coverage is calculated as follows:

($500,000/$750,000) x $25,000 = $16,666.67.

In the unlikely event of the wind-up of a member insurer, plan sponsors (including third party administrators) will have 60 days to update the investment membership records from the date of the wind-up order of the member-insurer. For plans that did not, at least, submit investment membership records within the 12 month period preceding the issuance of the wind-up order, the coverage will be limited to $60,000 per plan with no individual member coverage provided.