Framework for Pooled Registered Pension Plans
Finance Ministers have made significant progress in reviewing and ascertaining where improvements may be made to retirement income adequacy in Canada. At the December 2009 Finance Ministers’ Meeting in Whitehorse, Ministers received a summary report on retirement income adequacy research that was prepared by the Research Working Group, which Ministers created to expand the knowledge base underpinning the subject of retirement income adequacy. The report noted that certain Canadians may not be saving enough for retirement.
In order to address this, Ministers tasked federal, provincial and territorial officials to work collaboratively to examine, among other things, changes that would be required to permit defined contribution Pooled Registered Pension Plans (PRPPs) across Canada in order to improve the range of retirement saving options for Canadians.
Moving forward on PRPPs will provide Canadians with a new, low-cost, accessible vehicle to meet their retirement objectives. This will be particularly beneficial to Canadians that do not have the benefit of an employer sponsored pension plan, including the self-employed. This will allow more Canadians to access the benefits of being members of a Registered Pension Plan thereby supporting Canadians in retirement.
Examples: How PRPPs Will Benefit Canadians
John owns and operates a company that employs 10 people. John would like to offer a pension plan to his employees to help them prepare for retirement. However, given the small size of his business he does not have the expertise or resources to set up a plan.
PRPPs will be administered by a regulated financial institution thereby decreasing the cost and complexity for small employers in setting up such a plan. As a result, John will now be able to offer a pension plan to his employees, which will help them meet their retirement saving objectives.
Suzie is self-employed and is concerned that she does not have access to an employer sponsored pension plan to save for her retirement.
PRPPs will be accessible to those without an employer-employee relationship. As a result, Suzie will have the ability to participate in a large scale, pooled pension plan. This will allow her to better prepare for retirement benefiting from the advantages of PRPPs, including lower costs that result from large pooled funds.
This backgrounder sets out a framework for defined contribution PRPPs across Canada that will improve the range of retirement saving options to Canadians 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;
- Allowing for the portability of benefits that will facilitate an easy transfer between plans; and
- Ensuring that funds are invested in the best interest of plan members.
A high level of regulatory harmonization across the federal and provincial governments will be instrumental in increasing the scale of these plans and achieving low costs.
The potential tax changes that will be required to accommodate these plans will be developed and implemented by the federal government.
Administrators and Their Role
PRPPs will make it more attractive for employers, particularly SMEs, 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. 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.
Regulated financial institutions that are capable of taking on a fiduciary role will be eligible administrators of PRPPs.
- Regulated financial institutions that are capable of taking on a fiduciary role in order to act in the best interests of plan members will be eligible administrators of PRPPs. Regulated financial institutions are subject to a regulatory framework that promotes their sound operation and governance.
- Administrators will have the ability to provide plans suited to different types of members.
Duty of the Administrator
In order to protect the interests of plan members, the administrator will have a fiduciary duty to plan members.
- It is important to ensure that the best interests of plan members are protected. In light of this, the framework will provide for administrators to bear a fiduciary role in respect of the plan members.
Investments and Costs of Investments
PRPPs will be designed to result in large pools of capital with low costs, while helping members to construct portfolios consistent with each member’s particular investment needs and objectives.
- Administrators will be responsible for investing the assets. While assets invested under a PRPP will be co-mingled for investment purposes, participants will have personal accounts for record‑keeping purposes.
- Administrators will be responsible for evaluating and offering investment funds that permit a reasonable and prudent person to create an appropriate portfolio in respect of his or her own investment objectives and risk preferences including a low cost option. There will be a suitable low-cost default option for a broad group, and a manageable number of other investment options for members to choose from. A default option will be permitted to have some risk exposure and still be considered prudent under this framework for the purpose of the fiduciary duty.
- Upon enrolment, members will be given the opportunity to select an investment mix consistent with their retirement savings objectives. The administrator will provide the member with educational tools and other resources to permit him or her to make an informed choice.
Plain language disclosure of plan provisions and investment performance is critical for members to understand the nature of their participation in a PRPP.
- Administrators will be responsible for providing all members with certain information on a regular, periodic basis, including:
- An annual statement;
- Investment performance and relative risks;
- All costs and fees;
- Contributions, broken down between employer and employees where applicable;
- Notice of any amendments to the plan;
- An illustration of the level of retirement income that could be generated through the purchase of an annuity given the member’s plan assets; and
- Informing employees that are leaving the employer of their right to either keep their plan assets with the existing plan, or transfer the assets to some other retirement savings vehicle.
Management and Operational Responsibilities of Administrators
Administrators will generally be responsible for performing all of the required management and operational functions of a plan operating as a PRPP.
- Administrators will generally be responsible for performing the management and operational functions of a plan operating as a PRPP. This will include:
- Receiving contributions to a PRPP from both employers and individuals who participate; and
- Responding to any enquiries from plan members on any element of the plan and their participation therein.
- Administrators will also be largely responsible for ensuring compliance with the tax rules, particularly in respect of administrative and reporting requirements related to contributions.
Responsibilities of Employers
Employers that choose to offer a PRPP will be responsible for selecting a particular plan for their employees and enrolling their employees into the plan.
- An employer can choose to offer a PRPP to its employees, which could include making direct employer contributions to the plan, along with remitting contributions from the employee.
- Despite the intention to have the majority of administrative tasks performed by the administrator, there will be certain residual tasks that an employer that chooses to offer a PRPP would need to fulfill. These include:
- Selecting a plan and enrolling its employees into that plan, which may involve a choice to move from one plan to another from time to time;
- Determining a level of contributions at the employee level and, if applicable, the employer level;
- Collecting and remitting contributions to the plan; and
- Informing the administrator of new members and terminations of employment.
- Disclosure requirements will be largely borne by the administrator, but certain tasks would be necessarily assumed by the employer. 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.
- Employers contributing directly to a PRPP will also have certain administrative responsibilities in relation to compliance with the pension tax rules.
Participation and Operation
Classes of Plan Members
There will be two classes of members eligible to participate: Employed Members will include employees of an employer that offers a PRPP and Individual Members will include the self-employed and employees of an employer that does not offer a PRPP. While investments will be common across all members, there will be certain administrative and regulatory differences between the two classes.
- While any individual will be eligible to join a particular plan, members who join by the virtue of an employment relationship with an employer will have somewhat differing administrative treatment. These plan members are referred to as "Employed Members".
- Employed Members will participate in such a PRPP 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.
- The self-employed and employees of an employer that does not offer a PRPP are referred to as "Individual Members". In general, these members will be responsible for the tasks that would otherwise be borne by an employer, including making the choice to enrol, selecting contribution rates and remitting contributions to the plan.
Enrolment and Contributions
Where there is an employer that offers a PRPP, the employees of that employer may be enrolled in the plan and contributions will be made at a default level set by the employer. Individual Members will have to make a choice on their own on whether to join.
- An employer that chooses to offer a PRPP will enrol its employees (or certain classes thereof) into the plan it has chosen. The employer will select a default contribution rate.
- 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.
- 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.
- The framework will also provide that 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.
Portability of Member Benefits
The right of portability of member benefits will be required, subject to certain terms and conditions, similar to the present Registered Pension Plan framework (for Employed Members). There will be fewer restrictions on portability for Individual Members. An employer that offers a PRPP will have the ability to move to a new plan at its discretion.
- Portability of pension benefits is a key component of the PRPP framework and will facilitate an easy transfer between plans.
- Employers will have the ability to cease offering a particular plan to their employees at their discretion. This could be done by choosing to cease offering a PRPP altogether, or by choosing a new plan to offer its 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.
Locking-in provisions are intended to ensure that funds are available for retirement income purposes. Employer contributions will be locked-in. Some jurisdictions may also choose to allow employees to unlock their contributions under certain circumstances.
- There is a trade-off between encouraging take-up, providing flexibility, and promoting lower administrative costs of PRPPs. Under existing pension standards rules, contributions/savings are locked-in. Locking-in provisions are intended to ensure that funds are available for retirement income purposes.
- Employer contributions will be locked-in under PRPPs. Some jurisdictions may also choose to allow employees to unlock their contributions under certain circumstances (e.g. small amounts, financial hardship).
Mandatory Employer Participation
PRPPs will provide a vehicle for those jurisdictions that wish to require some employers to offer their employees access to a pension plan.
- Each jurisdiction will make a determination as to whether it wants to require employer participation.
Potential Tax Rule Modifications
The federal government will develop modifications to the tax rules to accommodate PRPPs, with the objective of ensuring that such plans fit within the basic system of rules and limits for Registered Pension Plans (RPPs) and Registered Retirement Savings Plans (RRSPs). The tax rule framework will apply to PRPPs in all jurisdictions.
- The basic approach will be to set out in the Income Tax Act the conditions for establishing a broad-based pension plan, which will essentially be a new type of defined contribution RPP. A PRPP will be subject to most of the existing rules applying to defined contribution RPPs (referred to as money purchase RPPs in the tax rules), but with some exceptions as well as new requirements to deal with its broad-based nature.
- The principal differences are that it will generally be administered by a third-party (consistent with the definition of eligible administrator under pension benefits standards rules) rather than a sponsoring employer, and it will allow contributions by self-employed persons and individuals without a participating employer. Recognizing the need to ensure ease of administration and compliance with existing RPP and RRSP limits, contributions will be permitted on the following basis:
- 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.
 This group was chaired by Ted Menzies, parliamentary secretary to Minister Flaherty, and supported by research director Jack Mintz and Finance Ministers from British Columbia, Alberta, Manitoba, Ontario and Nova Scotia.
 This would include trust and insurance companies and other financial institutions with a trust subsidiary.
 A minimum investment period would permit the administrator to avoid incurring excess expense – which would be reflected in the overall cost borne by members – due to the administrative costs of processing frequent asset transfers.