Pooled registered pension plans — a new retirement savings option
Canadian Tax Alert, December 23, 2011
The federal government recently introduced Bill C-25 An Act relating to pooled registered pension plans and making related amendments to other Acts, (the “Act”), which would create a new form of retirement savings vehicle – the pooled registered pension plan (PRPP). In conjunction with the Act, the federal government has also introduced legislation to amend the Income Tax Act (Canada) to accommodate PRPPs. Interested parties are invited to comment on the draft tax legislation. Submissions must be made by February 14, 2012.
Bill C-25 is the result of a lengthy consultation process with the provinces and industry. The original framework for pooled registered pension plans was announced at the meeting of Canada’s finance ministers in December, 2010; it was drafted in response to policy studies indicating that modest and middle income earners may not be saving enough for retirement.
Certainly, the concerns about whether Canadians are saving for retirement are justified. Statistics have shown that many individuals do not make full use of their registered retirement savings plan (RRSP) room. In addition, pension plan coverage in the private sector has generally declined over the last 30 years.
The PRPP is intended to encourage the expansion of pension plans in the workplace by:
- Providing a new accessible, straightforward and administratively low-cost retirement option for employers to offer their employees
- Allowing individuals who currently may not participate in a pension plan, such as the self-employed and employees of companies that do not offer a pension plan, to make use of this new type of pension plan
- Enabling more people to benefit from the lower investment management costs that result from membership in a large, pooled pension plan
What is a PRPP?
A PRPP will operate much like a defined contribution registered pension plan (RPP). However, unlike current rules pertaining to RPPs, it will allow assets of multiple employers to be easily pooled. It also allows self-employed individuals to become members.
While the PRPP framework ultimately envisions a larger number of participating employers, at this point the Act only applies to federally regulated employers (such as banking or telecommunications companies). As many federally regulated employers already sponsor RPPs, we anticipate that these plans will only become widespread once the provinces enact enabling legislation.
Key features of the PRPP
- Employers are not required to provide a PRPP or to make contributions
- The employer has the right to select the particular PRPP and the administrator
- Where employers do offer a PRPP, employees will be automatically enrolled, subject to an opting-out right
- Employers may select to offer a PRPP to a class of employees. Part-time employees can participate after 24 months of employment.
- Employee contribution rates will be set by the administrator under the terms of the particular PRPP. If an employee doesn’t select a rate, a default contribution rate may be established.
- Investments may be set by the administrator or the employee. In selecting investments, the administrator must exercise the degree of care of a “reasonably prudent person”, taking into account the skill and diligence required in the administrator’s business. In the alternative, if the plan permits the member to select investments, the administrator must offer investment options with a varying degree of risk and return appropriate for a “reasonably prudent individual who was building a retirement savings portfolio. Further, if the member fails to provide investment instructions, the plan must provide that the contributions will be invested in a default fund. We anticipate that many administrators will prefer that employees make the ultimate investment decision.
- The Act contains “safe harbour” rules applicable to employee-directed PRPPs. If the administrator offers portfolio investments of varying degrees and risks that otherwise satisfy criteria to be prescribed by regulation, the administrator will be deemed to have discharged its standard of care with respect to the investments of the PRPP.
- Benefits are immediately vested and locked-in. Benefits can be “un-locked” in limited circumstances.
- If an employee terminates employment, the employee can transfer his or her account to another registered plan (e.g., an RPP, RRSP or PRPP).
- Benefits can pass to an employee’s surviving spouse, much as in the case of current RPPs. In addition, the surviving spouse can take over the deceased member’s PRPP account.
- Registered retirement income fund-like payments can be made from the PRPP
Who is the administrator?
The proposed legislation provides that third parties, and not the employer, will be responsible for administering the plan. As a result, they will assume most of the fiduciary obligations and risks that traditionally rest with employer-sponsored RPPs. Under the Act, the administrator must be a business licenced by the Superintendent of Financial Institutions. Regulated financial institutions such banks, trust companies and insurance companies will qualify as administrators. It remains to be seen whether other organizations will qualify as administrators. For example, public pension funds that can meet the licencing criteria may qualify as an administrator and, in fact, OMERS has publicly expressed interest in becoming an administrator of PRPPs.
The administrator must offer a PRPP at a “low cost”. To date, no guidance has been provided as to what “low cost” means.
Contributions by employers, employees and self-employed individuals will generally be deductible for tax purposes. All contributions made by or on behalf of a member will be limited to the member’s aggregate unused RRSP contribution limit. In addition, an amount that an employer can contribute will be limited to the maximum RRSP dollar limit for the year unless the member directs the employer to contribute additional funds. The purpose of these provisions is to prevent contributions being made in excess of a member’s RRSP room.
Since contributions are based on the RRSP limits, no pension adjustment needs to be reported, as is required for contributions to RPPs. This will reduce the administration associated with PRPPs.
Employer contributions will not be considered compensation. This means that the employer contributions to PRPPs will be excluded from withholding requirements and payroll taxes, such as Canada Pension Plan and Employment Insurance.
PRPP investments will not be subject to the qualified investment rules for RRSPs. Instead, they will be required to offer reasonably diversified investments that do not present risks of self-dealing. For “large” PRPPs, (10 or more unrelated employers), the administrator will be required to take reasonable precautions to ensure that no more than 10% of the plan assets are invested in a particular business (or non-arm’s length group of businesses). Small PRPPs (fewer than 10 participating unrelated employers) will also have to avoid holding investments in the employers that participate in the PRPP.
PRPPs will be treated as investment plans for purposes of goods and services tax / harmonized sales tax rules; existing rules applicable to investment plans will be modified to accommodate PRPPs.
As previously mentioned, the Act only applies to federally regulated employers and self-employed individuals in the territories. Each province will need to enact enabling legislation or its own equivalent legislation. Further, the Act appoints the Federal Superintendent of Pensions as the regulator of the PRPPs. Multilateral agreements will have to be reached with provincial pension regulatory authorities in order to develop a regulatory framework for the PRPP.
Quebec has introduced its own equivalent legislation for PRPPs.
The policy objective of creating a broad based, low cost retirement savings options is admirable. However, it remains to be seen whether the PRPPs will achieve this goal.
It will be critical that provincial and federal regulation be harmonized in order to minimize the administrative complexity.
In addition, lower income Canadians may find that tax-free savings accounts (TFSAs) provide greater advantages for retirement savings, since TFSAs can be withdrawn tax free and do not impact means-tested benefits such as old age security.
This publication is produced by Deloitte & Touche LLP as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.