Based on growing concern about the adequacy of employment-related retirement planning opportunities and the level of retirement savings among Canadians, in December 2010, the federal Department of Finance released its “Framework for Pooled Registered Pension Plans”. Federal and provincial Finance Ministers chose to focus on developing a framework for pooled registered pension plan (“PRPPs”) because PRPPs were seen as the best way to quickly provide an “accessible, straightforward and administratively low-cost retirement option”. The Finance Ministers also agreed to continue considering other options including enhancing the Canada Pension Plan, tax incentives and registered pension plan reform.
Since the election of the majority government, the Department of Finance Canada has issued a consultation paper entitled “Tax Rules for Pooled Registered Pension Plans (PRPPs)” (the “Consultation Paper”) requesting comments by August 12, 2011 from key stakeholders.
Federal Minister of State (Finance), Ted Menzies has stated that “all provinces have agreed that the PRPP is the best way forward”, although the Ontario government has stated that it still favours expanding the CPP. Following the responses to the Consultation Paper, the federal government expects to move forward with enabling legislation as soon as possible, although not likely before the 2012 budget.
The proposed PRPP structure would be similar to a large, pooled defined contribution (“DC”) pension plan, administered by a qualified financial institution that would take on most of the responsibilities that employers would normally bear in administering a registered pension plan (“RPPs”). The large pool is expected to lower investment management costs for participants. The role of the third party administrator is expected to reduce complexity for employers. As for RPPs and registered retirement savings plans (“RRSPs”), contributions to PRPP and investment earnings in and individual’s PRPP are tax deferred until withdrawn from the PRPP.
Overall, the PRPP concept is expected to succeed in increasing the level of retirement savings for those who have not saved enough for retirement by offering self-employed individual and employees of employers who do not provide a pension plan with a disciplined savings program and reasonable investment returns on savings.
As a general rule, PRPPs would be subject to similar tax rules that now apply to defined contribution registered pension plans (DC Plans). Not unlike with DC Plans and RRSPs, administrators of PRPPs would be limited to a restricted group of financial institutions who would be required to administer the plan in compliance with law and be responsible to various reporting and compliance requirements. The Consultation Paper seeks input on nine different technical design features including who can be an administrator, contribution limits and qualified investments for PRPPs.
While many details are yet to be finalized, an employer’s responsibility is expected to be limited to choosing an appropriate PRPP for its employees; enrolling employees in the PRPP and remitting employee contributions (and employer contributions, if any) to the PRPP Administrator - a far cry from an employer’s obligations in sponsoring and administering a defined benefit or DC RPP. Although whether or not regulations would require a PRPP to be voluntary or mandatory is within the jurisdiction of each province, the success of the concept appears to depend on requiring an employer that does not sponsor an RPP to at least provide its employees with access to a PRPP. Employer contributions would likely be voluntary. Employees, once enrolled, would be allowed to opt out of the PRPP.
Although the government anticipates that, once enrolled, individuals will not opt out of PRPPs, this presumes that lack of access to retirement savings opportunities or products kept individuals from saving for retirement prior to the advent of PRPPs. It remains to be seen whether or not the opt out rate will be minimal once employees are enrolled. That said, a PRPP does offer employers with the ability to offer employees a pension plan without the onerous employer administration issues that accompanied such an offer. Otherwise, we expect that the success of the PRPP concept in improving the adequacy of retirement savings for Canadians depends on whether the PRPP provides value in accordance with the needs and objectives of each of the key stakeholders.