PRPPs vs. VRSPs

On November 17, 2011, the federal government introduced Bill C-25, the proposed Pooled Registered Pension Plans Act and making related amendments to other Acts in Parliament as a first step to implement the federal portion of the Pooled Registered Pension Plan (PRPP) framework that will particularly be applicable to small businesses and self-employed persons across Canada.

According to the government, just over 60 percent of Canadians do not have a workplace pension plan. That is a large chunk of workers who are left behind and who could face financial troubles in their retirement years. PRPPs will offer them a new, low-cost and accessible pension option to help meet their retirement goals.

The new large-scale, defined contribution (DC) pension plans would be run by a regulated financial institution (PRPP administrator) licensed by the Superintendent of Financial Institutions of Canada and have a relatively low-cost because of their large size. The plan would not be designed or administered by the employer. Rather, the employer would decide if it wants to buy a package from an administrator, such as a financial institution, requiring set employee contribution amounts.

While the new PRPPs would not be mandatory, the federal government is setting up the system on an opt-out basis. That means if and when employers do implement a workplace PRPP, new employees would automatically be signed up and would have to choose to opt out of the savings plan (within 60 days) if they didn’t want to contribute. Employees may also choose not to participate due to religious reasons.

Interestingly, the Bill does not stipulate what happens when a person initially opts out of the plan, but later wants to participate. It would be surprising if these employees could not later join, given the goal of the Bill.

PRPPs include the following features.

  • Employees would be required to pay set premiums into the plan, but employers can decide whether they will offer the plan to a class of employees and whether they will make contributions to the plan for the benefit of the employees. An employer that enters into a contract with a PRPP administrator to provide a pooled registered pension plan to a class of employees must provide it to all the members of that class.
  • Qualification rules are a bit different for full-time and part-time workers. Full-time employees can be members of the plan right away, but part-time employees must wait to complete 24 months of continuous employment before they can join the plan.
  • Contributions made by employers, employees and self-employed individuals will generally be deductible for tax purposes. Contributions made by a PRPP member will be limited to the member’s available RRSP contribution limit for the year.
  • Employers’ contributions to an employee’s PRPP will be excluded from salaried compensation. Immediate vesting of employer PRPP contributions will be required. There will be no requirement for an employer to make a minimum contribution to a PRPP.
  • Since PRPP contributions will be made under a member’s available RRSP limit (i.e., a maximum of 18% of annual earnings), there will be no requirement for an employer to report pension adjustments in respect of employer and employee contributions, as is required in respect of employer and employee contributions to an RPP.
  • 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).
  • 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.

If enacted, Bill C-25 comes into force on a day to be fixed by order of the governor-in-council.

For these features to be enacted, provincial and territorial enabling legislation will need to be passed for the framework to become fully operational. In addition, the tax rules for PRPPs that have been developed by the Government of Canada must also come into force. The PRPP tax rules will apply to both federally and provincially regulated PRPPs.

On March 21, 2012, Quebec became the first province to set up a detailed framework of provincial rules that will apply for PRPPs. If enacted, the VRSP (Quebec version of PRPPs) requirements will be implemented as of January 1, 2013. Employers will have until January 1, 2015, to comply with these requirements. After January 1, 2015, new employers will have one year to comply.

However, contrary to the PRPPs, the VRSP will be mandatory for some employers and the Quebec government has set a default employee contribution rate that will escalate automatically.

Companies with five or more employees that do not already offer a group retirement savings plan will be required to choose a VRSP and automatically enrol all employees that have at least one year of continuous service. This will mean deducting contributions from payroll and remitting them to the VRSP administrator.

There will be no mandatory requirements for employer contributions. Voluntary employer contributions will be exempt from payroll taxes and tax-deductible to the employer. Employer contributions will be subject to the money purchase pension limits (e.g., requirement to report pension adjustment) and will be locked in until the employee reaches age 55.

Employees may voluntarily opt out by withdrawing within 60 days of auto-enrolment, after which employee contributions will commence to the VRSP. Individuals who are not auto-enrolled (e.g., self-employed and others), or who have opted out, may voluntary join the VRSP of their own choice.

Employee contributions will be subject to the same treatment as RRSP contributions and, accordingly, RRSP maximums will apply in relation to the sum of both VRSP and personal RRSP contributions. Lock-in rules will not apply to employee contributions.

The default employee contribution rate will be auto-escalated as follows:

  • Two percent of salary from January 1, to December 31, 2015
  • Three percent of salary from January 1, to December 31, 2016
  • Four percent of salary as of January 1, 2017

However, employees can chose how much they contribute and can change the amount at any time.

Each VRSP will also have to be registered with the Régie des rentes du Québec.

The Quebec government plans to table the necessary legislative provisions for VRSPs in spring of this year.

Many applaud the Quebec model and hope other provinces follow the Quebec model. However, many feel that both the federal and Quebec governments should have enhanced the existing CPP and QPP retirement systems instead rather than rely on employees to contribute to a savings-type scheme. They feel that many employees do not have the money to invest towards their retirement.

Comments

  1. Ampersand Advisory

    Enjoyed your article. Well balanced and informative.

    An important benefit of PRPPs that hasn’t received sufficient consideration and press coverage is the reduced administration, management, oversight and fiduciary risk/liability of PRPPs versus other group retirement plans such as Group RRSPs, DC and DPSPs.

    Advisors and consultants like complexity … keeps the fees and embedded compensation rolling in.

    (Disclosure: I am a Pension Consultant, yet still support employers and employees having option to choose PRPPs if it is in their best interests.