On December 14, 2012, the federal Pooled Registered Pension Plans Act (the “PRPP Act”) and the accompanying regulations (the “PRPP Regulations”) came into force.
The PRPP Act requires the federal Office of the Superintendent of Financial Institutions (“OSFI”) to regulate PRPPs, just as it regulates registered pension plans under the Pension Benefits Standards Act (“PBSA”). PRPPs will also be subject to the federal Income Tax Act. OSFI has released a Frequently Asked Questions document and other summary documents on its website.
An employer is not compelled but may choose to offer participation in a PRPP to one or more classes of its employees. All employees of an eligible class (as defined by the employer) must participate in the PRPP, except those who give notice of an objection to participation within 60 days of receiving notice of their membership in the PRPP. Part-time employees in that class must become members after no more than two years of continuous employment. Self-employed individuals and employees whose employer does not participate in the PRPP may also elect to participate in a PRPP, but only such persons who are employed in the Territories may join a federally regulated PRPP.
The administrator of a PRPP must be licensed by OSFI. To obtain a licence, a would-be administrator must be a corporation, it must submit a five-year business plan addressing its proposed PRPP offerings and it must demonstrate its capabilities to manage a PRPP.
The administrator is responsible for the day-to-day administration of the PRPP. The employer selects the PRPP offered by a particular administrator and may also change the PRPP subject to certain notice requirements. The PRPP Act states that the administrator has the duties of a trustee in respect of PRPP members, and must exercise the degree of care of a reasonably prudent person, taking into account the administrator’s business. The PRPP Act also states that the employer is not liable for the actions and omissions of the administrator.
The administrator selects the PRPP’s investments. A PRPP is not required to provide investment choice, but if it does, the investments choices are subject to regulation. The plan may offer up to six investment options of varying degrees of risk and expected return, which would allow a reasonable and prudent person to create a portfolio of investments appropriate for retirement savings.
The administrator must designate a default investment option in case a member does not make an investment choice. The default investment option must be either a balanced fund or a fund tied to the member’s age, such as a life-cycle fund.
The PRPP Act requires PRPPs to be provided at a “low cost”. The Regulations define “low cost” as costs at or below those incurred by members of defined contribution plans that provide investment options to groups of 500 or more members. The cost must be the same for all members of the PRPP. OSFI’s FAQ document states that a corporation applying for a licence to be a PRPP administrator must provide a cost estimate and demonstrate how it intends to meet the low cost requirement. The PRPP Regulations also require significant ongoing disclosure of PRPP costs to members.
PRPP contributions are determined by agreement between the administrator and the employer. An employer is not required to contribute to a PRPP, although it may elect or agree to do so. Member contributions are mandatory at the rate set by the administrator for the first 12 months of plan membership, after which a member may reduce his or her contribution rate to zero. An employer is responsible for paying its own contributions and remitting employee contributions within 30 days from the end of the month, similarly to employer requirements under other pension legislation. Contributions are immediately vested.
Income Tax Treatment
The Income Tax Act generally provides that contributions to a PRPP are included in the RRSP limit applicable to the individual employee. There is therefore no “pension adjustment”. As well, like with RRSPs, there is a penalty tax levied on over-contributions. One key advantage to PRPPs is that employer contributions to a PRPP are generally treated in the same way as employer contributions to a DC pension plan. Therefore, unlike amounts paid by an employer to an employee’s group RRSP account, employer PRPP contributions are not subject to payroll taxes, such as Canada/Quebec Pension Plan or Employment Insurance contributions.
Locking-in and Permitted Transfers
Member PRPP entitlements are locked-in in the same way that registered pension plan entitlements are locked-in. Upon termination of employment, members may transfer their PRPP entitlement to the same vehicles permitted under the PBSA. As under the PBSA, funds may also be transferred to an insurer for the purchase of a life annuity. The payment of RRIF-type variable benefits from a PRPP account is also permitted.
Exceptions to locking-in exist for members with shortened life expectancy, members with small benefits, members who have ceased to be Canadian residents and in cases of financial hardship.
The passage of the PRPP Act and Regulations will have limited significance in itself, in that its scope is limited to federally regulated employment, and employers have no obligation to offer one. It is significant, however, as a model for provinces who are considering adopting legislation to facilitate PRPPs for provincially-regulated employees. Thus far, only Quebec has committed to introduce such legislation in respect of its own version of the PRPP, the Voluntary Retirement Savings Plan.
Whether PRPPs become a viable model for expanding pension coverage remains to be seen. From an employer’s point of view, key advantages include the limitations on employer responsibility for plan administration and the exemption from payroll tax on employer contributions. It will be interesting to observe how the requirement for “low cost” plan administration and investment is met. The standardization of investment offerings and the member “opt-out” right are other provisions where PRPPs differ from standard defined contribution pension plans.