Tag: PRPP

Provincial progress on PRPPs – Quebec’s VRSP leads the way

In the midst of the recent “Great Recession,” there was much handwringing about the state of Canada’s retirement and pension system. Should the Canada Pension Plan (CPP) be revamped? Should a supplementary CPP be introduced? Should a private-sector solution be pursued?

It was the last of these three routes that the federal government chose to pursue. An agreement among the federal and provincial ministers of finance was announced mid-2012, though some of the provinces’ support was and continues to be lukewarm at best.

A year and a half has now passed since the federal government enacted legislation in December 2012 enabling the creation of pooled registered pensions plans (PRPPs), including amendments to the Income Tax Act (Canada). While this covers federal employees and the territories, the rest of the administrative implementation lies in provincial hands.

Key features of PRPPs

PRPPs are a new type of defined contribution pension plan that can be offered to employers and to self-employed persons. Contributions into such plans share the individual member’s RRSP contribution room and deduction limit, with plan assets entitled to the same tax-sheltered accumulation.

PRPP administrators

Before they can register and offer a PRPP, organizations wishing to act as PRPP administrators must obtain a licence from the Office of the Superintendent of Financial Institutions. This federal regulator will coordinate with provincial counterparts once the provinces pass their respective PRPP legislation.

Employer obligations

The federal Pooled Registered Pension Plans Act does not require an employer to offer a PRPP, and if an employer chooses to do so, employer contributions are voluntary. A participating employer’s main obligations are:

  • evaluating and selecting a licensed PRPP administrator;
  • enrolling employees and providing notice of enrolment; and
  • deducting and remitting member contributions (and employer contributions, if any).

Auto-enrolment

Employees will be automatically enrolled into a PRPP contracted by their employer, but may opt out. Alternatively, an employee could remain a member, but set the contribution rate at 0%.

Investment options

A plan may either provide that the PRPP administrator be responsible for investment decisions, or that the member may choose among an array of options. The investment options must have varying degrees of risk and return, but there can be no more than six investment options. A default investment option must be made available that is either a balanced fund or a portfolio of investments that takes into account a member’s age; for example, a target-date fund that automatically adjusts its asset mix as a “target” retirement date approaches.

Low-cost plan

The benchmark for the cost of the plan is that it be at or below the cost of defined contribution plans available to groups of 500 or more members. “Costs” means all fees, levies and other charges that reduce a plan member’s return on investment other than those that are triggered by the actions of the member.

Quebec’s Voluntary Retirement Savings Plan (VRSP)

Out of the gate, even ahead of its federal counterpart, the Quebec government proposed its VRSP in its 2012 Budget in the spring of that year. The province now has both legislation and regulations in place. Rules for VRSPs differ from the federal ones in some respects. In particular, it is mandatory for employers of certain sizes to participate. Commencement dates are:

  • December 30, 2016 for employers with 20 or more eligible employees on June 30, 2016
  • December 31, 2017 for employers with 10 to 19 eligible employees on June 30, 2017
  • For employers with five to nine eligible employees, a date will be set no later than January 1, 2018

Other territories and provinces

As the territories fall under federal jurisdiction for these purposes, PRPPs may now be established in Yukon, Northwest Territories and Nunavut.

Two provinces have passed PRPP legislation: Saskatchewan and Alberta. After an initial bill died on the order paper when British Columbia went to the polls in 2013, the B.C. government retabled legislation earlier this year that is working its way forward.

While not outright refusing to join the PRPP party, the Ontario government has publicly stated its preference for first considering revisions to the CPP. In a similar vein, Prince Edward Island has offered a proposal for CPP reform, supported at least for discussion by Ontario and some of the other holdouts.

Given the expectation – and indeed the requirement – of low cost, this fractured support looms large. While there is no legal impediment to proceeding without 100% provincial participation, the practicality is that the lack of overwhelming support for PRPPs may limit their effectiveness.

Your quinquennial retirement check-in: A five-year tax retrospective

No, “quinquennial” is not part of my everyday vocabulary.  It is however a handy milestone for evaluating retirement planning progress, if not on an immediate personal basis then at least in terms of changes in the tax landscape.  

By its nature, the retirement/tax system evolves incrementally, principally in step with the annual federal budget process.  To those of us involved day-to-day in the financial advisory field, at times such change may seem to flow as slow as molasses in January.  By contrast, the general population might only contemplate these matters periodically – often only when prompted by their advisors – so developments may appear more momentous once brought to their attention.   

However, over the most recent five-year stretch, it could be argued that the sum of these developments is nothing short of astounding, whether planning your own retirement or advising others.  With that in mind, consider how the following items will affect retirement planning conversations today compared to a mere quinquennium ago.  

2008 – Pension income splitting

Technically a little outside the timeframe, pension income splitting was announced in the Halloween 2006 Economic Statement and introduced in the 2007 Budget.  The first opportunity to elect to split up to 50% of such income with a spouse would have been in filing one’s 2007 tax return in/by April 2008.  

In addition to the obvious potential to push income to a lower bracket spouse, the maneuver could help preserve the pensioner’s age credit, fend off OAS clawback and assist in making fuller use of the spouse’s pension credit.

2009 – Tax-free Savings Account

Introduced in the 2008 Budget, Canadian residents over the age of 18 received their first $5,000 annual allotment of TFSA room on January 1, 2009.  

The structure allows for contribution of after-tax funds, with any subsequent growth and withdrawals being tax-free.  In addition, there is a dollar-for-dollar credit on those annual withdrawals that increases contribution room the next January 1st.  Apart from being a welcome gift for those with excess cash to invest, the TFSA offers lower bracket individuals a more viable alternative or complement to the traditional RRSP structure.

The indexing formula boosted the annual dollar limit to $5,500 beginning in 2013.

2010 – Canada Pension Plan

While it is patently obvious that this is not a new program, the 2009 triennial review proposed significant changes to the CPP.  These changes were legislatively approved in 2010.

With the elimination of the work cessation test, it became administratively simpler to commence a retirement pension, and all future pensions will be marginally improved as the low earnings drop-out increases from 7 to 8 years.  However, the decision as to when to commence that pension has become more complicated with new mandatory premium payments for working beneficiaries (voluntary after 65), an increased monthly early take-up penalty from 0.5% to 0.6%, and an increased monthly deferral premium from 0.5% to 0.7%. 

2011 – Registered Disability Savings Plan

The RDSP was actually introduced in the 2008 Budget, but took 2 or 3 years of tweaking before those in the target population could fully avail themselves of the program.

A key benefit is the access to matching Grant and free Bond support money.  The 2010 Budget made provision for carryforward of unused Grant and Bond entitlements.  Perhaps the most important modification occurred in the 2011 Budget with the relaxation of stringent rules that up to then would have forced mass repayment of Grant and Bond money at inopportune times.  

The RDSP is now coordinated in many ways with the beneficiary aspects of RRSPs, RRIFs and RESPs, making for much more flexible planning options for individuals and families with disability planning needs.

2012 – Old Age Security

The 2012 Federal Budget will probably be most remembered for raising the OAS qualification age from 65 to 67.  Those born prior to April 1958 will remain eligible at 65, with those born after January 1962 having to wait all the way to 67.  The rest of us will be somewhere in between, with the phase-in period ranging from April 2023 to January 2029.  

As well, as of July 2013 an eligible individual may defer OAS pension for up to five years, in exchange for a 0.6% increase in the pension amount per month deferred.

2013 – Pooled Registered Pension Plan

As we head into the next quinquennium, the PRPP warrants mention before signing off.  

Discussed since 2010, the program is aimed at encouraging workplace savings where no current pension arrangement is in place.  The federal tax amendments out of the 2012 Budget are now passed, but there is yet to be any concrete action from the provinces.  As the program design dovetails contribution room with RRSPs, ever more opportunities and trade-offs may lie ahead, further feeding those retirement planning conversations.