Pooled Registered Pension Plans

With final regulations recently coming into force, the framework for pooled registered pension plans (PRPPs) is now complete. The federal act, along with its regulations, lays the framework for the various provinces and territories to implement their own versions of the long-awaited PRPP. Based on Quebec's most recent budget, it plans on passing a bill by the Spring of 2013 to implement its own version of the PRPP - the Voluntary Retirement Savings Plan - and it is expected that the other provinces and territories will follow shortly. 

Overview

The PRPP framework is part of the federal government’s ongoing effort to enhance the Canadian retirement system. Other recent advancements include pension income splitting between spouses, the age credit, pension income credit and the tax free savings account. It is estimated that up to 60% of working Canadians do not have access to a company pension plan, due in large part to the administration costs and difficulty in maintaining a registered pension plan (RPP) for employees. It is the government’s intention to close this gap by introducing a viable alternative that is easily accessible and cost efficient.   

Key Features

PRPPs will be maintained by approved third party administrators, which will relieve employers from the administrative and legal burdens of operating RPPs. Additionally, it is expected that savings will be generated through pooling of funds and accounts, resulting in lower overall management fees.   

The new PRPP will be available to employees and employers who do not have company pension plans, and also to self-employed individuals. Where a company has a PRPP, all employees will be enrolled in the plan automatically. They will have the choice of opting out of the plan by completing the applicable form within 60 days from automatic enrollment. Under a company PRPP, employers will be responsible for setting the default contribution rate and remitting the employee and employer contributions to the plan administrator. Each employee will have the option of choosing an investment plan that meets his or her level of investment risk. 

For self-employed individuals and employees without a company PRPP, each individual will be responsible for enrolling in a plan, setting the contribution rate and remitting the contributions to the plan administrator. However, while an employer will be required to remit the contributions on a per pay basis, employees without a company PRPP and self-employed individuals will have the option of remitting lump sum contributions on an annual basis. 

Other key features of the PRPP will include portability and locking-in. In short, portability will allow for easy transfer between plans for all members. In the event that an employer chooses to end its current plan and offer a new plan, all of the employees’ investments will be transferred to the new plan and employees will have to choose new investment options. Self-employed individuals and employees without a company PRPP will be able to transfer investments to a new plan subject to the conditions and rules of their plan administrators. Where an individual establishes new employment, he or she may choose to remain enrolled in the former PRPP or to transfer to a new plan altogether.   

Contributions will be subject to locking-in rules that will restrict plan members from withdrawing any portion of their investments until reaching the prescribed age. However, early withdrawal will be permitted in cases of divorce, disability or nominal plan balance. 

Upon reaching the prescribed age, a plan member may choose to receive variable payments directly from the PRPP or to purchase a life annuity or other retirement fund.

Contributions

Contributions under PRPPs will be limited in much the same way as with RPPs and registered retirement savings plans (RRSPs). Where an employee has contributions under an employer PRPP, the maximum contribution amounts will be set by the RPP limits and will require a corresponding pension adjustment. For self-employed individuals and employees without company PRPPs, the contribution amounts will be set by the RRSP limits. As with an RRSP, an individual will no longer be able to contribute to a PRPP after the year in which he or she turns 71. 

Employers who choose to contribute to a PRPP on behalf of their employees will be able to deduct the contributions from taxable income. Further, the contributions will not create taxable benefits to the employees. 

For the typical shareholder who is also a manger/employee of his or her corporation, any personal contributions will be deductible from income subject to available RRSP contribution room. Contributions made directly by the company will be deductible from business income and will not create a taxable benefit to the shareholder. These company contributions will also reduce future RRSP contribution room for the shareholder/manager.

Contact your Collins Barrow advisor to discuss further how the new PRPP framework might impact on you or your company.

David J. Bos, CPA, CA, is a Senior Tax Consultant and Jason J. Melo, CPA, CA, CFP, CPA (Illinois), is a Tax Partner in the Leamington office of Collins Barrow.