A number of financial institutions and other providers are now offering pooled registered pension plans (PRPPs) and voluntary registered savings plans (VRSPs), the PRPP’s Quebec equivalent. Except for VRSPs, which are mandatory for employers who don’t offer pension plans or other retirement savings plans such as group registered retirement savings plans (RRSPs),[1] how popular are PRPPs likely to be?
For the most part, the reaction of the press and the retirement industry to PRPPs has ranged from polite indifference to near hostility. Very little has been published that would help the average Canadian understand what PRPPs are, much less want to participate in one. As for employers, those who already provide retirement and other savings plans to their employees are likely better informed, but few appear to be rushing into the arms of PRPP providers. In fact, so far the reaction of various types of stakeholders, from the self-employed to small employers to large employers, seems to be in line with the pros and cons that we have identified below.
The self-employed
There seems very little to recommend PRPPs to the self-employed. This is true currently and is likely to be the case for some time to come. A review of the PRPP and VRSP features that a self-employed taxpayer would be likely to think important, and a comparison with the RRSP, until now the only game in town for the self-employed, reveals why. We have labelled each feature identified in the table below as a pro or a con to indicate how we think an individual would be likely to judge it (which would be to prefer greater flexibility).
| RRSP | PRPP[2] | VRSP | |
| Contributions | Pro: Taxpayer chooses level of contributions. | Con: Default contribution rate set by provider. | Pro: Taxpayer chooses level of contributions. |
| Income splitting | Pro: Taxpayer may contribute to spousal RRSP. | Con: Not applicable. | Con: Not applicable. |
| Withdrawals | Pro: Assets may be withdrawn any time. | Con: Assets may be withdrawn in case of disability or loss of Canadian residence, or where account is less than 20% of YMPE.[3] | Pro: Assets may be withdrawn once per 12-month period, and on disability or loss of Canadian residence. |
| Termination of membership | Pro: Cash out; transfer to other RRSP, RRIF or RPP; or annuity purchase.[4] | Con: Transfer to LIRA, LIF, RPP or other PRPP, or annuity purchase. RRIF-like payments if 55 or older and if PRPP provides.[5] | Con: Transfer to RRSP or RRIF, or annuity purchase. RRIF-like payments if 55 or older and if VRSP provides. |
| Death benefit | Pro: Account paid to designated beneficiary (or estate if no beneficiary). Rollover treatment where beneficiary is spouse. | Con: Account paid to spouse if any, otherwise to designated beneficiary (or estate if no beneficiary). | Con: Account paid to spouse if any, otherwise to successors. |
| Creditor proofing | Pro or Con: Creditor proofing depends on where the annuitant is located. Generally, RRSPs offered by insurers enjoy creditor protection.[6] In addition, certain provinces have enacted legislation protecting RRSPs from seizure.[7] | Pro: Accounts are protected from seizure and execution.[8] | Pro: Contributions and benefits cannot be seized. |
| Investments | Pro: Choice of investments is unlimited. | Con: Choice of investments depends on investment options offered by provider. Legislation requires default option. | Con: Choice of investments depends on investment options offered by provider. Legislation requires default option and 3 to 5 other options. |
| Costs | Con: Unregulated | Pro: Legislation requires that costs be at or below those incurred in defined contribution plans of at least 500 members. | Pro: Legislation requires that costs be no more than 1.25% for default investment option and 1.5% for other investment options. |
The RRSP offers maximum flexibility and the fewest restrictions. The extent to which the limit on costs in PRPPs and VRSPs is a pro will depend on how much better these costs are compared with the costs that would be incurred in an RRSP. So unless the costs in a PRPP or a VRSP are substantially lower than those in an RRSP and that difference, along with any real or perceived convenience provided by the turnkey aspects of PRPPs and VRSPs over RRSPs, makes up for the restrictions imposed by those plans, a self-employed taxpayer is unlikely to choose a PRPP or a VRSP over an RRSP.
Employers
Smaller employers are less likely than larger employers to already be offering a retirement or savings plan of some sort. Presumably, if employers already had little appetite to offer such a plan to their employees, the advent of the PRPP is not likely to increase that appetite. As for employers who already provide a retirement or savings plan, PRPPs and VRSPs have to offer some sort of incentive for them to consider making the switch.
Given the mandatory nature of VRSPs, Quebec employers with at least five employees have no choice but to offer a VRSP unless they offer a plan that exempts them from having to participate in a VRSP. Quebec employers who do not currently provide a plan that would exempt them from the application of VRSPs may wish to opt out of VRSPs in favour of such a plan.
We have compared below the features of defined contribution registered pension plans (RPPs), group RRSPs, PRPPs and VRSPs that employers would find most important, and we have labelled each a pro or a con to indicate how we think an employer might view it.
| RPP[9] | Group RRSP | PRPP | VRSP | |
| Administration | Con: Typically the administrator is a pension committee (in Quebec and Manitoba) or the employer. Administrator must file annual information returns and report pension adjustments and other tax information on a yearly basis. | Con: Employer has some administrative tasks.[10] Employer has no filing or reporting obligations.[11] | Pro: Provider is the administrator. Employer has no filing or reporting obligations (but some communication and other duties). | Pro: Provider is the administrator. Employer has no filing or reporting obligations (but some communication and other duties). |
| Employee contributions | Pro: Employer decides whether employee contributions are required. | Con: Neutral Contributions count as income subject to CPP or QPP and EI.[12] | Pro: Neutral Default contribution rate set by provider. Contributions do not count as income subject to CPP and EI. | Pro: Neutral Default contribution rate set by provider. Contributions do not count as income subject to QPP and EI. |
| Employer contributions | Con: Required. | Pro: Not required unless group RRSP is combined with DPSP.[13] | Pro: Not required. | Pro: Not required. |
| In-service withdrawals | Pro: No withdrawals while employed.[14] | Con: Generally assets may be withdrawn any time but may be restricted by suspension of employer contributions to group RRSP or DPSP.[15] | Con: Assets may not be withdrawn except in case of disability or loss of Canadian residence, or where account is less than 20% of YMPE. | Con: Assets resulting from employee contributions may be withdrawn once per 12-month period, and on termination of employment, disability or loss of Canadian residence. |
| Termination of employment | Pro: Limited withdrawals on termination of employment; transfer to LIRA, LIF, PRPP or other RPP; or annuity purchase. RRIF-like payments if 55 or older and if RPP provides. | Con: Neutral Cash out; transfer to RRIF, RPP or other RRSP; or annuity purchase. | Pro: Cash out if account is less than 20% of YMPE. Transfer to LIRA, LIF, RPP or other PRPP, or annuity purchase. RRIF-like payments if 55 or older and if PRPP provides. | Pro: For assets resulting from taxpayer contributions, cash out, transfer to RRSP or RRIF, or annuity purchase. For assets resulting from employer contributions, transfer to LIRA, LIF, RPP or other VRSP, or annuity purchase. RRIF-like payments if 55 or older and if VRSP provides. Cash out if retirement savings are less than 40% of YMPE and member is 65 or older. |
| Control/flexibility | Pro: Employer designs plan and selects (i) investments or (ii) menu of investment options from which employees select. | Pro: Employer designs plan and selects menu of investment options from which employees select. | Con: Employer is limited to what provider offers. | Con: Employer is limited to what provider offers. |
| Costs | Con: Unregulated. | Con: Unregulated. | Pro: Legislation requires that costs be at or below those incurred in defined contribution plans of 500 members or more. | Pro: Legislation requires that costs be no more than 1.25% for default investment options and 1.5% for all other investment options. |
Proponents of PRPPs and VRSPs have touted these plans as employer-friendly primarily because of the off-loading of administrative duties to the provider and the legislated “low-cost” requirements. As discussed above, the impact of the limit on costs of PRPPs and VRSPs remains to be seen. However, the scope of the role of the PRPP and VRSP provider and the fact that they are licensed and overseen by regulators and are subject to fiduciary-like statutory standards of care should add to their appeal.[16] In addition, it should be kept in mind that employers who select among competing PRPPs or VRSPs must do so with care (although no more so than if they were selecting a group RRSP provider). Given this need to act carefully, PRPPs and VRSPs could well be viewed more favourably than other plans by employers.
Please call me with any questions you may have concerning PRPPs or VRSPs. My colleagues and I can also help you with any other benefit-related questions or issues you may have.
[1] The term “group RRSP” denotes an employer-facilitated arrangement administered on a group basis, where each eligible employee contributes to his or her RRSP through regular payroll deductions, typically on a pre-tax basis.
[2] The PRPP analysis in this document is based on the federal Pooled Registered Pension Plans Act. Provincial PRPP legislation that has already been issued (see the Alberta and British Columbia Pooled Registered Pension Plans Acts, not yet in force; Saskatchewan Bill 92, The Pooled Registered Pension Plans (Saskatchewan) Act; and Ontario Bill 57, Pooled Registered Pension Plans Act) generally follows this model, and it is expected that other provincial PRPP legislation will do the same.
[3] YMPE (year’s maximum pensionable earnings) is the maximum pensionable earnings on which contributions can be made to the Canada Pension Plan (CPP) and the Quebec Pension Plan (QPP).
[4] A RRIF is a registered retirement income fund. Transfers to another RRSP or a registered pension plan (RPP) are available only if the individual has not yet attained age 71.
[5] A LIRA (locked-in retirement account) is an RRSP, and a LIF (life income fund) is a RRIF; both are locked in under pension standards legislation. Transfers to a LIRA, an RPP or another PRPP are available only if the individual has not yet attained age 71.
[6] Insurance legislation generally provides that where there is a designated beneficiary, the insurance money is not part of the insured’s estate nor subject to creditor claims, and where the designation is in favour of a spouse, child, grandchild or parent of the insured, the insurance money as well as the insured’s rights and interests are exempt from execution and seizure.
[7] See s. 71.3 of the British Columbia Court Order Enforcement Act, s. 666 of the Alberta Civil Enforcement Act, s. 3 of the Saskatchewan Registered Plan (Retirement Income) Exemption Act, s. 3 of the Manitoba Registered Retirement Savings Protection Act, s. 131.1 of the Newfoundland and Labrador Judgement Enforcement Act and ss. 9 and 10 of the Prince Edward Island Designation of Beneficiaries Under Benefit Plans Act.
[8] See s. 51 of the Alberta Pooled Registered Pension Plans Act, s. 9 of the British Columbia Pooled Registered Pension Plans Act, s. 11 of Saskatchewan Bill 92, The Pooled Registered Pension Plans (Saskatchewan) Act, and s. 12 of Ontario Bill 57, Pooled Registered Pension Plans Act.
[9] This comparison does not take into account Quebec simplified pension plans.
[10] Generally, the RRSP provider has the bulk of the administrative duties.
[11] There are no such obligations unless the group RRSP is combined with a deferred profit sharing plan (DPSP). A DPSP is a group plan to which only the employer is permitted to contribute.
[12] Much like contributions to RPPs, PRPP contributions are excluded from the ambit of pensionable earnings for purposes of the CPP and QPP and are excluded from insured earnings for the purposes of employment insurance (EI).
[13] Although some group RRSPs may be described as requiring employer contributions, in fact, amounts “contributed” by the employer on behalf of a group RRSP member constitute additional salary directed to the RRSP.
[14] The limited ability of an RPP member to make withdrawals from an RPP has been identified as a pro on the assumption that the employer wishes the plan to provide a stream of income allowing the member to retire.
[15] Where a group RRSP is combined with a DPSP, withdrawals from the DPSP are typically not allowed.
[16] The administrator of a PRPP governed by the federal Pooled Registered Pension Plans Act must administer the PRPP “as a trustee” and “exercise the degree of care that a reasonably prudent person would exercise in dealing with the property of another person and the diligence and skill that it possesses, or ought to possess.” A VRSP administrator “must exercise the prudence, diligence and skill that a reasonable person would exercise in similar circumstances” and “act with honesty and fairness in the best interests of the members.”
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