Annuity contracts guaranteed by an insurance company
What is an annuity contract guaranteed by an insurance company?
The
annuity contract guaranteed by an insurance company described in this section is a contract between the pension plan administrator and an insurance company, which allows for the transfer of financial risks paid by the pension plan to an insurance company. The contracts are usually used to reduce the exposure of pension plans to pension benefit risks, by paying the insurance company a premium.
The types of annuity contracts guaranteed by an insurance company described in this section are the following:
Please note that this section does not concern the cases in which a person who participates in a plan can use the value of the transfer of his or her benefits in order to purchase an annuity contract guaranteed by an insurance company.
General characteristics
This section describes the main characteristics of annuity buy-in or buy-out contracts.
Guaranteed annuity contracts
|
Buy‑in |
Buy-out |
|---|
The holder of the contract is the pension plan. | The contract is purchased by the pension plan. A paid-up annuities certificate is issued in favour of each member or beneficiary whose annuity has been paid, in whole or in part, in accordance with the pension plan's annuity purchasing policy. |
The benefits of members and beneficiaries that are guaranteed are not paid. They must continue participating in the pension plan. | The purchase of annuities constitutes a final payment of the benefits of the members and beneficiaries, who lose their status as such. |
This type of contract is not established in accordance with the plan's annuity purchasing policy, since there is no final payment of the benefits of the members and beneficiaries. | This type of contract must be established in accordance with the plan's
annuity purchasing policy so that the final payment of benefits of the members and beneficiaries can be carried out. |
The administrator of any defined-benefit plan can enter into guaranteed annuity buy-in contracts. The administrator of a target-benefit pension plan cannot enter into this type of contract. | Payment of the members' and beneficiaries' benefits can be carried out by most defined-benefit pension plans and target-benefit pension plans through the purchase of annuities according to an annuity purchasing policy. However, in the cases of
pension plans where financing is covered by an exemption regulation under section 2 of the
Supplemental Pension Plans Act, the administrator cannot proceed with the payment of benefits in the plan by purchasing annuities according to an annuity purchasing policy. The types of plans are the following: - pension plans in certain pulp and paper sector enterprises
- member-funded pension plans (MFPP)
- pension plans in the municipal and university sectors.
|
Members and beneficaries do not need to give their consent for the purchase of annuities to be carried out by the plan. | Members and beneficaries do not need to give their consent for their benefits to be paid, in whole or in part, through the purchase of annuities with an insurance company in accordance with the plan's
annuity purchasing policy. The annuity purchased from an insurance company must have the same characteristics as the annuity payable by the pension plan. However, when the annuity purchased from the insurance company is not available on the market because of its nature, the member or beneficiary must consent to his or her annuity to be replaced by an annuity with similar characteristics. |
Additional information regarding annuity buy-out contracts can be found in the
annuity purchasing policy section.
Payment of benefits through subrogation
Subrogation is a legal operation that consists in transferring the benefits that the pension fund holds in the annuity contract to the member or beneficiary.
If the pension plan's annuity purchase policy so provides, members and beneficiaries for whom an annuity was purchased by means of a buy-in contract can be subrogated as holder of the annuity contract concluded between the plan and the insurance company. The subrogation acts as a final payment of the benefits of these persons under the pension plan.
See
example 3 to find instructions regarding the presentation of the payment of benefits through subrogation in the annual information return (AIR).
Responsabilities
This section describes the main responsabilities related to annuity contracts for the various persons involved.
Guaranteed annuity contracts
|
Buy‑in |
Buy-out |
|---|
The plan is responsible for the payment of annuities. For example, when annuities are paid by the insurance company and problems occur when the payment is made, the plan could have to pay all or part of the annuities. | The insurance company is responsible for the payment of annuities and any breach of their obligations towards the pensioners. |
An actuarial valuation report regarding the purchase of annuities is not required by the
Supplemental Pension Plans Act. | A complete or partial actuarial valuation report on the date on which the agreement with the insurance company ends is required for the purpose of payment, which was carried out according to the annuity purchasing policy. The report must be prepared at the request of the plan's administrator and be sent to Retraite Québec whithin the 9 months following the date of the actuarial valuation. The report describes the effects of annuity purchases on the plan and is used to determine whether a
special annuity purchasing payment must be made by the employer into the pension fund. Under a target-benefit pension plan, an actuarial valuation report is required at the end of the year that follows the purchase of annuities. |
| No special annuity purchasing payment is required. | When the actuarial valuation on the date on which the agreement ends shows that the degree of solvency of the plan is less than 100%, a
special annuity purchasing payment is required so that the degree of solvency is maintained at the established level before the purchase of annuities. When the degree of solvency is equal to or greater than 100%, if the purchase of annuities reduces the degree of solvency below 100%, a special annuity purchasing payment is required so that the degree of solvency is maintained at 100%. The employer must provide written consent for the special annuity purchasing payment prior to the purchase of annuities. For target-benefit pension plans, rules must be provided for by regulation for payment to be made according to the plan's annuity purchasing policy. |
Note that
In the event of bankruptcy of the insurance company with which annuities had been guaranteed,
Assuris 
will ensure that annuities are paid, in whole or in part, by a solvent insurance company.
Amendments to the plan
This section describes the effects that the buy-in or buy-out annuity contracts could have in certain situations that could occur during the existence of a pension plan.
Guaranteed annuity contracts
|
Buy‑in |
Buy-out |
|---|
No amendments of the plan text are required for annuities to be guaranteed. | The plan text must be amended to indicate that the plan administrator is authorized to pay benefits to members and beneficiaries in accordance with the plan's
annuity purchasing policy. The provisions of the plan should, in general terms, provide for the circumstances under which the plan administrator, according to the conditions, must or can purchase annuities. |
Members and beneficiaries whose benefits are guaranteed continue to participate in the plan. The insolvency of the employer during the withdrawal of an employer or the termination of a plan with insufficient assets leads to the reduction in benefits of members and beneficiaries. The reduction in benefits applies to benefits that have been guaranteed as well as those that have not. | Members and beneficiaries whose benefits were paid retain their status as a member or beneficiary for a period of 3 years following the date on which the benefits were paid. The insolvency of the employer during the withdrawal of an employer or the termination of a plan with insufficient assets leads to the reduction of benefits during that period. The rules do not apply to target-benefit pension plans. |
Members and beneficiaries whose benefits are guaranteed can, under the conditions provided for by the
Supplemental Pension Plans Act, as well as those provided for in the plan text, be entitled to a certain part of the surplus assets. | Members and beneficiaries whose benefits were paid retain their status as a member or beneficiary for a period of 3 years following the date on which the benefits were paid. The termination of a defined-benefit plan with surplus assets can lead to the distribution of surplus assets to members and beneficiaries under the the conditions provided for by the
Supplemental Pension Plans Act, as well as those provided for in the plan text. This benefit applies for a period of 3 years following the purchase of the annuity contract. The rules do not apply to target-benefit pension plans. |
Section for accountants
Acquiring an annuity contract guaranteed by an insurance company will have an impact on the financial statements of the plan. Part IV of chapter 4600 of the
CPA Canada Handbook (accounting standards) describes the accounting standards applicable to the financial statements of pension plans. They stipulate that insurance contracts held by the plan that are related to benefits under the plan are considered investments by the pension fund. As a result, the fair value of buy-in annuity contracts must be presented annually in the statement of the financial situation or in the Statement of Changes in Net Assets Available for Benefits.
To measure the fair value of the buy-in annuity contracts, you have to refer to IFRS standard 13 – Fair Value Measurement, and to the definition of the level 3 input data. The evaluation will normally be done with the assistance of the actuary of the plan.
For the processing of buy-out annuity contracts in the financial statements and for more information, you can consult the
Accounting for guaranteed buy-in annuity contracts by pension plans subject to the
Supplement Pension Plans Act on the Ordre des comptables professionnels agréés du Québec (Quebec CPA Order) website .
Processing of annuity contracts in the annual information return (AIR)
This section provides the specific information regarding the production of AIRs for plans having purchased annuities guaranteed by an insurance company. The instructions regarding the subrogation of a buy-in guaranteed annuity contract are provided in example 3.
Regardless of the type of annuity contract, it will have an impact on the
AIR when it is produced, for the year in which the annuity contracts were acquired and the subsequent years.
When acquiring a buy-out annuity contract, it is important to note that the payment of benefits becomes valid as of the date of the first payment provided for by the insurance company. Members must be entered on the
AIR of the plan until the payment of benefits is valid. Furthermore, if the payment of the premium to the insurance company is not made during the same fiscal year as that of the payment, a prepaid premium must be entered on the report on the plan's financial situation, as well as on lines 364 to 365.3 of the return.
|
Lines of the
AIR | Guaranteed annuity contracts |
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| Buy-in | Buy-out |
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11
Active members, non-active members and beneficiaries | The affected members and beneficiaries must continue to be presented in the plan. | The affected members and beneficiaries must no longer be presented in the plan. |
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|
Lines of the
AIR | Guaranteed annuity contracts |
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| Buy-in | Buy-out |
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301.1
Variation in the fair value of annuity contracts guaranteed by an insurance company | The variation in the fair value must be presented annually. | The fair value does not need to be determined annually since the contracts are not held by the plan. |
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308
Special improvement and amortization payments required from the employer | No special annuity purchasing payment is required. | The special annuity purchasing payment established in the actuarial valuation report on the date on which the agreement with the insurance company ended must be presented. |
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311 to 313
Other sources of increase | For certain plans, the insurance company pays the amount that corresponds to the retirement pensions covered by the contract directly into the pension fund. This amount must be added to the other sources of increase, if any. | The payment of pensions to retirees is made directly by the insurance company and does not have to be presented, since there has been a final payment of benefits. |
|---|
320
Retirement pensions paid under the plan | For certain plans, the fund pays to retirees the amount received from the insurance company for pensions covered by the contract. This amount must be added to the other pensions covered by the plan, if any. | Payment of pensions to retirees is made directly by the insurance company and does not need to be presented since there has been a final payment of benefits. |
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323.1
Other transfers and refunds (locked‐in and not locked‐in amounts) | There is no amount to enter since there has not been a final payment of benefits. | Enter the amount of the premium paid to the insurance company during the fiscal year in which the purchase was made. This amount must be added to the other transfers or refunds made by the plan, if any. |
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|
Lines of the
AIR | Guaranteed annuity contracts |
|---|
| Buy-in | Buy-out |
|---|
| 345.1
Annuity contracts guaranteed by an insurance company | The guaranteed annuity contracts must be presented annually at their fair value. It is an investment of the pension fund. | These contracts are not part of the plan's assets. They are concluded as a final settlement of the pension plan's obligations towards the persons for whom annuities are purchased. It is not an investment of the pension fund. |
|---|
Examples
Example 1: Presentation of a buy-in annuity contract
The administrator of a defined-benefit pension plan purchased a buy-in annuity contract from an insurance company in the fiscal year covered by the return. The fair value of the contract is $1 000 000 at the end of the fiscal year covered by the return. The contract will be used to immunize the pension plan against financial risks and it covers 100 plan members and beneficiaries.
AIR of the year of the contract acquisition
|
Line number |
Title of the line |
Amount |
|---|
|
345.1 | Annuity contracts guaranteed by an insurance company | $1 000 000 |
There is no impact on the participation in the pension plan because the 100 plan members and beneficiaries maintain their participation in the plan. They will remain entered on line 11.
During the following year, the value of the contract decreases by $100 000.
AIR of the following year
|
Line number |
Title of the line |
Amount |
|---|
|
301.1 | Variation in the fair value of annuity contracts guaranteed by an insurance company | - $100 000 ($900 000 - $1 000 000) |
|
345.1 | Annuity contracts guaranteed by an insurance company | $900 000 |
There is no impact on participation because there was no death of members or beneficiaries covered by the contract during the fiscal year. Members and beneficiaries will remain entered on line 11.
In some plans, the insurance company pays directly into the plan the amount that corresponds to the retirees' pensions covered by the contract. The plan then pays the pensions to the retirees. The additional information must therefore be presented as follows:
AIR of the concerned fiscal year
|
Line number |
Title of the line |
Amount |
|---|
|
311 à 313 | Other sources of increase (specify) Select: "Retirement pensions paid by an insurance company into the pension fund" | $75 000 |
|
320 | Retirement pensions paid under the plan | + $75 000 |
Example 2: Adjustment of the assets to present a buy-in annuity contract made in a previous fiscal year
A defined-benefit plan has had a guaranteed annuity contract for several fiscal years, but it was not presented in previous returns. The contract has a fair value of $2 000 000 for the fiscal year covered by the annual information return and the members were already included on line 11 of previous returns. The adjustment should be presented as follows:
AIR of the year during which buy-in guaranteed annuity contracts must be added
|
Line number |
Title of the line |
Amount |
|---|
|
311 à 313 | Other sources of increase (specify) Select: "Adjustment of assets" | $2 000 000 |
|
345.1 | Annuity contracts guaranteed by an insurance company | $2 000 000 |
Example 3: Presentation of a buy-in annuity contract during a subrogation
A defined-benefit plan has had a buy-in annuity contract for 5 years. An annuity purchasing policy was established for the plan. During the fiscal year covered by the return, the subrogation of the buy-in annuity contract was carried out by the plan in accordance with the policy. The fair value of the contract is $6 000 000 for the fiscal year covered by the return and was $6 500 000 for the previous return. No special annuity purchasing payment is required. This operation, carried out in accordance with the plan's annuity purchasing policy, allowed for the benefits of 500 inactive members and beneficiaries of the plan to be paid.
AIR of the fiscal year covered by the subrogation
|
Line number |
Title of the line |
Amount to enter |
|---|
|
301.1 | Variation in the fair value of annuity contracts guaranteed by an insurance company | - $500 000 |
|
323.1 | Other transfers and refunds (locked‐in and not locked‐in amounts) | + $6 000 000 |
|
11 | Number of active members, non-active members and beneficiaries at the end of the fiscal year | - 500 |
|
345.1 | Annuity contracts guaranteed by an insurance company | $0 |
AIR of the following years
|
There is no impact on the return because the benefits were paid. |
|---|
Exemple 4: Presentation of a buy-out annuity contract
During the fiscal year covered by the return, the administrator of a defined-benefit pension plan purchased a buy-out annuity contract from an insurance company. The contract, carried out in accordance with the plan's annuity purchasing policy, allowed for the benefits of 200 members and beneficiaries of the plan to be paid. The fair value of the contract, which represents the amount paid to the insurance company, is $5 000 000. The special annuity purchasing payment established in the actuarial valuation report on the date on which the agreement was closed is $500 000 and was paid to the fund by the employer.
AIR of the year during which the contract was purchased
|
Line number |
Title of the line |
Amount to enter |
|---|
|
308 | Special improvement and amortization payments required from the employer | $500 000 |
|
323.1 | Other transfers and refunds (locked‐in and not locked‐in amounts) | $5 000 000 |
|
11 | Number of active members, non-active members and beneficiaries at the end of the fiscal year | - 200 |
AIR of the following years
|
There is no impact on the return because the benefits were paid. |
|---|
Presentation of buy-in guaranteed annuity contracts in the plan's investment policy
Given that buy-in annuity contracts are pension plan investments, their use must be provided for in the plan's investment policy. They must be indicated in the permitted categories of investments of the plan's investment policy. However, they do not need to be included in the target distribution setting the proportion of assets that must be invested in the debt securities and equity securities.
Furthermore, the investment policy should specify the process and the criteria for selecting the insurance company. For example, it could be the size and financial strength of the insurance company or the fact that it is authorized to do business in Canada.
During the process of elaborating and reviewing the investment policy, the plan administrator must take into account the plan's funding goals provided in the plan's
funding policy. In the policy, it may be suggested to the administrator, among other things, to use buy-in annuity contracts regarding the management of certain risks, such as rising life expectancy or the plan's maturity. There should therefore be coherence between these two policies.
The effects of buy-in annuity contracts on the calculation of the pension plan's rate of return
The guaranteed portion of the plan's investments, consisting of buy-in annuity contracts, does not need to be taken into account in the calculation of the rate of return of the pension fund.
As a result, the rate of return must be calculated on the invested assets according to the target of the plan investment policy. The rate will be used to calculate the interest payable to the plan on late contributions or on amounts payable with interest to members and beneficiaries, if any.
Please note that, the method for calculating rates of return used to determine the interest payable is chosen by the actuary or the accountant designated by the plan committee, unless it is provided for in the pension plan text. The method must aim to ensure that the pension fund is in the same condition had the contributions been paid on time.
References
Références juridiques
Other references