On Monday December 20, 2010, Finance Minister Jim Flaherty announced that the provinces, territories and the federal government came to an agreement during their meeting in Alberta to move ahead with a new private-sector pension plan called the pooled registered pension plan (PRPP) framework. This means any talk regarding the expansion of the Canada Pension Plan (CPP) is put on hold for now.
However, the provinces of British Columbia, Prince Edward Island, Nova Scotia, New Brunswick, Manitoba and Ontario called on the federal government to keep a modest CPP enhancement on the table as part of a package of reforms that would make saving for retirement easier, more affordable and more secure for Canadians.
So how will this plan work?
PRPPs expand the options for coverage by targeting those Canadians who don’t currently have access to workplace pension plans. PRPPs are aimed squarely at the 3.5 million middle-income private-sector workers and self-employed who lack employer-provided pensions.
PRPPs will make it more attractive for small to medium-sized businesses to offer pension plans to their employees because a third-party administrator will take on most of the responsibilities that employers bear in existing pension plans.
However, each jurisdiction will make a determination as to whether it wants to require employer participation.
There will be two classes of members eligible to participate:
- Employed members: employees of an employer that offers a PRPP will participate in such a plan much like defined contribution Registered Pension Plan members do at present. The employer may make direct contributions and will remit contributions on behalf of employees.
- Individual members: self-employed and employees of an employer that does not offer a PRPP will be responsible for the tasks that the employer would otherwise bear, including making the choice to enrol, selecting contribution rates and remitting contributions to the plan.
While investments will be common across all members, there will be certain administrative and regulatory differences between the two classes.
The administrator will be responsible for the management of the pension fund and the day-to-day administration of the pension plan. This will include ensuring that the money being contributed into the plan is being managed prudently, that appropriate investment options are offered, and that plan members are informed of up-to-date plan information.
Although most of the administrative tasks will be performed by the administrator, employers who do decide to offer PRPPs to their employees would need to fulfil certain tasks such as:
- Selecting a plan and enrolling employees into that plan, which may involve a choice to move from one plan to another from time to time. Employers may be permitted to enrol their employees into a PRPP during the tenure of the employee’s employment, and not simply at the hiring stage. This may be accompanied with a provision allowing these employees to opt out shortly after being enrolled.
- Determining a level of employee and employer contributions (if the employer contributes, it will select a default contribution rate). Employers will have the ability to increase the employee’s default contribution rate from time to time in order to allow contributions to increase along with salary, potentially subject to the employee’s ability to opt out.
- Collecting and remitting contributions to the plan. Employed members will make contributions on a regular, paycheque deduction basis (as is the case with Registered Pension Plans), but individual members may have the opportunity to make single, lump sum contributions in addition to the option of making periodic contributions.
- Informing the administrator of new members and terminations of employment.
Disclosure requirements will be largely borne by the administrator, but employers that offer a PRPP will be responsible for, among other things, informing their employees of any new participation in a PRPP or whether the employer has chosen to move to a new plan.
In addition, employers will have the choice to cease offering a particular plan to their employees. This could be done by ceasing offering a PRPP altogether, or by choosing a new plan to offer employees. If the employer chooses to offer a new plan, then it will have the right to transfer all of its employees’ accounts to the new plan, whereupon the employees will need to follow a new enrolment process by selecting new investments, among other things. This approach reflects the fact that it will be the employer’s responsibility to select a particular plan.
If an employed member terminates employment with a particular employer, that member could choose to remain in the particular PRPP or move his or her assets to another plan or another retirement savings vehicle.
Individual members participating in a PRPP on a voluntary basis could choose to move their assets at any time to another plan or retirement savings vehicle, subject to a minimum investment period that an administrator may wish to set.
Employers contributing directly to a PRPP will also have certain administrative responsibilities in relation to compliance with the pension tax rules. Employers contributing directly to a PRPP and their employees will be permitted to make contributions under the RPP limits, with the corresponding requirement to report a pension adjustment in respect of those contributions, so as to parallel current treatment under the money purchase RPP rules. Self-employed persons and other employees will contribute on the basis of their available RRSP limit.
Employer contributions will be locked-in under PRPPs. Locking-in provisions are intended to ensure that funds are available for retirement income purposes. Some jurisdictions may also choose to allow employees to unlock their contributions under certain circumstances (e.g. small amounts, financial hardship).
“This new private-sector retirement savings vehicle will improve the range of retirement savings options available to Canadians by providing a low-cost retirement savings opportunity for employees—with or without a participating employer—and the self-employed. PRPPs will be a major breakthrough for the Canadian pension market”, said Flaherty.
Benefits of the PRPP
The Great-West Life Assurance Company has stated that PRPPs will benefit Canadians by making pension coverage more broadly available:
- The PRPP provides a plan structure to pool smaller employers’ assets together to allow the plan to benefit from economies of scale.
- The proposed PRPP structure makes it administratively attractive to the sponsoring employer as a majority of the complex pension administration will be performed by the financial institution providing the plan.
- Effective retirement savings requires that employees keep their contributions in the plan so they can benefit from tax-effective compound growth. The PRPP proposes using a pension structure which allows locking in which will help ensure moneys set aside remain in the plan for retirement.
- The auto-enrollment feature proposed under the PRPP will promote higher retirement savings participation rates among the employees of these plans.
- The auto-escalation feature proposed under the PRPP will result in higher average retirement savings account balances among the employees of these plans.
At the earliest, the new plan could be in place in each jurisdiction by the end of 2011.
I applaud this initiative, however, I do not agree with the fact that employers have the unilateral right to decide if they will offer the plan to employees. It defeats the point this new private sector pension plan wants to address: the issue of many Canadians in their 20s, 30s and 40s who don’t regularly put away enough savings for their retirement years.
First Reference Human Resources and Compliance Managing Editor