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Framework for Pooled Registered Pension Plans

December 2010

Introduction

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[1], 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

Example 1

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.

Example 2

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.

Summary

This backgrounder sets out a framework for defined contribution PRPPs across Canada that will improve the range of retirement saving options to Canadians by:  

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.

Eligible Administrators

Regulated financial institutions that are capable of taking on a fiduciary role[2] will be eligible administrators of PRPPs.

Duty of the Administrator

In order to protect the interests of plan members, the administrator will have a fiduciary duty to 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.

Disclosure

Plain language disclosure of plan provisions and investment performance is critical for members to understand the nature of their participation in a PRPP.

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.

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.

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.

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.

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.

Locking-in

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.

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.

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.


[1] 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.

[2] This would include trust and insurance companies and other financial institutions with a trust subsidiary.

[3] 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.