On November 17, 2011, the Honourable Ted Menzies, Minister of State (Finance), and the Honourable Christian Paradis, Minister of Industry, introduced the Pooled Registered Pension Plans Act (Proposed Act) as a first step in the implementation of Pooled Registered Pension Plans (PRPPs). The government describes the PRPP as a change to Canada’s pension landscape that will make saving for retirement easier for millions of Canadians. The legislation generally reflects the concepts from the December 2010 draft report entitled, Framework for Pooled Registered Retirement Savings Plans (see our December 2010 e-Alert). Provincial legislative amendments and changes to the Income Tax Act (Canada) (ITA), are also necessary to fully implement national PRPPs.
Purpose of PRPPs and Operational Overview
The PRPP is an initiative primarily directed at the roughly 60 per cent of Canadian employees and self-employed individuals (collectively, Workers) who do not presently participate in an employer registered pension plan (RPP). Nonetheless, the Proposed Act contains amendments to the federal pension standards legislation that contemplate a transfer of a registered pension plan’s assets to a PRPP.
PRPPs are expected to be large-scale, defined contribution (DC) pension plans established and maintained by a corporation licensed by the Superintendent of Financial Institutions (Canada) (Superintendent) to be a PRPP administrator (Administrator). They must also be provided at a "low cost." There is regulation-making authority for establishing criteria as to the meaning of "low cost."
An employer (presumably including a qualifying self-employed person) may enter into a contract with the Administrator pursuant to which some or all of its Workers would be eligible to participate in the PRPP. The remainder of this bulletin highlights some of the key questions the Proposed Act and the federal government’s accompanying press release address.
Who May Establish and Terminate a PRPP?
The Proposed Act currently permits a corporation that has received a special license to serve as Administrator and establish one or more PRPPs. There is regulation-making authority proposed for the licensing process, but it remains unstated as to who may qualify to become licensed. It is widely expected that the Administrators will be institutional participants in the financial services sector.
An employer is permitted, but not required, to contract with an Administrator to provide a PRPP to one or more classes of its Workers. The employer may terminate participation in a PRPP on notice (which could occur when switching to another PRPP) as, it seems, may a self-employed individual.
The Administrator may also terminate a PRPP and the Superintendent may order the termination of a PRPP.
Is a PRPP a "Registered Pension Plan" for Pension Standards Purposes?
No. However, the Proposed Act only addresses the nature of a PRPP under federal pension standards law; therefore at the moment it remains unclear as to the nature of a PRPP under applicable provincial law. The Proposed Act provides that a PRPP would be exempted from the Pension Benefits Standards Act, 1985 (Canada). Nonetheless, many of the hallmarks of a registered pension plan are reflected in the Proposed Act such as many of the duties of the Administrator (including a similar standard of care); requirements to treat employees of the same "class of employee" similarly; prohibitions on discrimination on the basis of sex; locking-in features; portability features; spousal priority on death; as well as the role and powers of the regulatory authority. Federally, the regulatory authority will be the Superintendent just as it is for RPPs. Although the tax legislation was not introduced as part of the Proposed Act; one can presume that the Pension Adjustment system will apply to both employer and Worker contributions to a PRPP.
How Does the Proposed Act, Which Is Federal Legislation, Affect the Provinces?
Separate provincial legislation will be required for PRPPs. The Proposed Act builds in the concept of a multilateral agreement just as exists for RPPs, and contemplates some co-operation between federal and provincial governments in the implementation and regulation of PRPPs. Precisely how this will work will need to await responses from provincial governments and the terms of any multilateral agreement.
Who Selects the Administrator?
It is the employer who enters into contracts with the Administrator and thus selects the Administrator. While there are "safe harbour" provisions for the Administrator, the legislation does not contain any provisions which exculpate the employer from the choice of Administrator. However, the Proposed Act makes it clear that the employer is not liable for the acts of the Administrator.
An employer is free to change Administrators/PRPPs, but all of its employees’ assets in the current PRPP must transfer to the replacement and the employer must bear any associated costs. Only time will tell whether there will be any costs and the amount thereof. Break fees for cancelling guaranteed investments is one potential area of concern.
Who Selects the Investments Available Under the PRPP?
The Administrator selects the menu of investments and, where members select the investment, will be required to designate a default investment. Interestingly, there is a "safe harbour" for Administrators who will be deemed to have complied with the standard of care, should they offer "investment options of varying degrees of risk and expected return that would allow a reasonable and prudent person to create a portfolio of investments that is appropriate for retirement savings." This feature is restricted to member-selected investments and does not specifically refer to selection of default options.
Is Worker Participation Mandatory?
The issue of coverage has been a major consideration in the development of the PRPP concept. Although the Proposed Act is not clear, it seems that all employees of an eligible class must participate in the PRPP except those who give notice of an objection to participation due to religious beliefs and those who decline participation within 60 days of receiving notice of the PRPP commencement. The question is whether two distinct categories of objectors are necessary. The same general approach applies to new hires, while part-time employees (defined merely as those working less than full-time) must be allowed to participate after 24 months of employment with no hours or earnings level requirements. The Proposed Act is silent on the ability of someone who has declined participation to later decide to participate. The Proposed Act treats participation as a once and for all test, which seems incongruous with an attempt to expand retirement savings.
What Are the Contribution Levels? Must Employers Contribute?
The Proposed Act does not prescribe minimum contribution levels but sets out that it is the Administrator who sets the contributions levels (with a right to change them). An employer is not obliged to contribute and a member may give notice to the Administrator to set his or her contribution rate at zero per cent. Accordingly, persons who do not initially want to contribute to a PRPP but are not permanently opposed to the idea may wish to not opt out, but set a zero per cent contribution rate until such time as they wish to contribute. An employer may rather wish to have more flexibility than the Proposed Act at first provides (particularly, given that it seems an employer cannot provide more than one PRPP to a class of employees). As a result, it can be expected that some PRPPs will be designed to set contributions on an employer-by-employer basis.
What Are the Next Steps?
The Federal Government will need to pass this Proposed Act and adopt regulations. At the same time, work on provincial legislation and the multilateral agreements will need to be undertaken. Moreover, given that the PRPP is not an RPP (at least under federal law), the ITA will need to be amended to provide for the tax exempt nature of the PRPP, tax-deferred inter-plan transfers, and to make the Pension Adjustment system applicable to contributions to such a plan.
Employers and self-employed individuals interested in the PRPP should keep abreast of the status of the Proposed Act, including any revisions before the bill is adopted. Moreover, it will be useful to see how Administrators structure their PRPPs and the cost structure of same. Indeed, some employers with group RRSPs and DC RPPs may wish to terminate their programs and join a quality PRPP if the cost-savings are sufficient.
Administrators who wish to provide PRPPs will have considerable work to do before making PRPPs available. They will have to apply for an appropriate license. They will have to prepare and create plan documents and administrative systems that comply with relevant legislative requirements, many of which cannot be known until federal regulations and provincial rules are revealed. This will include the creation of compliant plan terms, communications material, record-keeping systems, and where necessary, supplier agreements with third parties such as software vendors, investment managers and custodians.
When Will PRPPs Become Effective?
The timetable for implementation is unclear. But even if the Proposed Act is passed quickly, as noted above, much remains to be done in terms of additional regulation, provincial legislation, federal tax legislation, risk interpretation and assessment, product development, compliance and licensing. In our view it is unlikely PRPPs could be available before 2013.