Locked-in accounts are designed to preserve funds for retirement income by imposing limits on withdrawals.wassam siddique/iStockPhoto / Getty Images
The Ontario government is moving to establish a more flexible regime for unlocking locked-in retirement funds, a plan that’s raising concerns among some pension and retirement planners.
In proposed amendments to regulations under Ontario’s Pension Benefits Act, the Ministry of Finance said it plans to allow full unlocking of life income funds (LIF) and locked-in retirement income funds (LRIF) – two common destinations for transferred pension funds after someone leaves an employer ahead of retirement – as long as the employee has reached the earliest pension commencement date under the originating plan.
Locked-in accounts are designed to preserve funds for retirement income by imposing limits on withdrawals. In its rationale for the changes, the provincial government said extra flexibility is needed for people facing “affordability challenges.”
Lea Koiv, president of advisory firm Lea Koiv & Associates Inc. in Toronto, says she found the proposals, which are open for public comment until Oct. 2, “baffling.”
“I don’t know if giving someone access to funds they might squander is wise,” she says. “I have a real fear that there are pension plan members who forget that a plan is meant to provide life-long income and are eager to access the funds for some immediate purpose.”
She says the rules could have been eased for those facing financial difficulty instead of “loosening restrictions for locked-in funds generally.”
As pensions are regulated at the provincial level, Jeff Sommers, practice leader of the pensions and benefits group at law firm Blake, Cassels and Graydon LLP in Toronto, says every jurisdiction’s unlocking rules are a function of their own trade-off between financial flexibility and fund dissipation risk.
Over the years, Ontario has carved out exceptions for situations when people might need unfettered access to their retirement savings, he says.
For example, the province’s current regulations allow locked-in LIF and LRIF holders to unlock their funds when they can demonstrate shortened life expectancy, non-residency, financial hardship or small balances in the accounts (worth less than 40 per cent of the year’s maximum pensionable earnings, and only those who are aged 55 and older are eligible).
Ontario also allows a one-time withdrawal from locked-in LIFs of up to 50 per cent of the balance once the owner is 55 years of age, but the opportunity is time-limited: fund holders must apply for the lump-sum withdrawal within 60 days of opening the locked-in account.
The proposed new rules would effectively replace these exceptions with blanket unlocking for locked-in LIF and LRIF holders who have reached retirement age, Mr. Sommers says.
The old unlocking rules would still apply to non-retirees with locked-in retirement accounts, except that unlocking for small balances would become available at any age rather than just for those who are aged 55 and older.
“There’s been a trend toward more unlocking, which is not unique to Ontario,” Mr. Sommers says. “Assuming this goes ahead, my sense is that this will make Ontario the most flexible province in terms of unlocking rules.”
For comparison, since 2021, Manitobans have been able to unlock 100 per cent of the balance in their locked-in accounts, but only once they’re 65 years of age. In Saskatchewan, another of the most permissive unlocking regimes, the rules allow certain holders of locked-in accounts to transfer their funds to a special kind of registered retirement income fund with no limits on withdrawals after the age of 55.
Although Ms. Koiv acknowledges that pension legislation in Canada has traditionally been “quite paternalistic,” she fears the pendulum may have swung too far in the opposite direction in Ontario. Many Canadians approaching retirement age underestimate their longevity and financial needs, she says.
Although many people are aware of Statistics Canada figures, which pegged life expectancy at 79.5 for men and 83.9 for women in 2023, these numbers are based on the chances of survival from birth.
By contrast, the Canadian pensioners’ mortality table, published by the Canadian Institute of Actuaries, shows that half of men who have already made it to age 55 can expect to live until 89, while 55-year-old women have a 50 per cent chance of living to 92. Survival rates are even longer for those with partners.
“That’s a significant life expectancy,” Ms. Koiv says. “What makes me anxious about [Ontario’s proposals] is that you’ll have a whole subset of people wanting to unlock their pension assets and deplete them much too soon.”
Alexandra Macqueen, vice-president of learning, development and professional practice at FP Canada, says loosening unlocking rules boosts the case for sound independent financial advice, particularly among defined-benefit pension plan members who are given the opportunity to take the commuted value of their balance in a locked-in account.
Investors can’t undo a commutation and “the amounts at stake are often quite high,” Ms. Macqueen says. “It’s not a DIY decision.”