The PRPP: Retirement options beyond RRSPs
Plans meant to appeal to employees at small- and medium-sized workplaces
The world of financial planning is full of four-letter acronyms. There is the RRSP, the RRIF, the TFSA, the RPP and the LIRA, among others.
Add the PRPP to that burgeoning list.
The Pooled Registered Pension Plan was introduced by the federal government as another alternative to encourage people to save for retirement.
A professionally managed pension fund with contributions usually from both employee and employer, PRPPs are intended to fill in a gap for employees at small- and medium-sized firms who don't have access to a workplace pension plan. As of 2011, only 37 per cent of men and 40 per cent of women had a company pension, according to Statistics Canada.
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PRPPs are also aimed at the self-employed.
Who can take advantage?
Workers in federally regulated industries, such as banks, railways, and telephone and cable companies, whose employers choose to take part.
Employees or the self-employed in any of the territories.
Those who live in a province that has passed legislation allowing PRPPs for those not covered under the first two criteria.
The self-employed, along with workers in federally regulated industries whose employers choose not to take part in a PRPP, can elect to enroll in a plan.
Which provinces have them?
In May 2015, Ontario passed legislation to enable PRPPs, joining Alberta, Saskatchewan and Nova Scotia.
However, implementation of the plans is still contingent on each province working out a deal with Ottawa on federal supervision of PRPPs.
B.C. has introduced PRPP legislation but has not passed it yet, pending a deal with Ottawa.
Nova Scotia says it hopes people in the province will be able to use PRPPs starting later this year.
How do they work?
Once an employer chooses to participate in a PRPP, employees will be automatically included. However, they will be given the chance to opt out. Employers also have the option not to contribute.
Employer and employee contributions are then pooled in a pension plan, which is administered by a third party.
Contributions to a PRPP are tax deductible and count against your RRSP contribution limit. That means the maximum that individuals can contribute is the difference between their RRSP deduction limit and the employer's contributions to their PRPP.
If an employee has $5,000 of RRSP contribution room, and the employee and employer both contribute $2,500 to a PRPP, then the employee can only claim a $2,500 contribution. PRPP over-contributions will be taxed similar to over-contributions to an RRSP.
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Unlike an RRSP, you cannot contribute to your spouse's PRPP or open a spousal PRPP.
If you leave your place of employment, you can transfer from one PRPP to another, or you can leave your money in the existing plan.
A key feature of PRPPs is that they are meant to be low cost.The regulations that govern PRPPs state that costs to members must be at or below the costs incurred by the members of defined contribution pension plans, which provide investment options to groups of 500 or more.
As of the end of 2015, 13 PRPPs administered by financial institutions were registered by the Canada Revenue Agency.
It's not clear how widely such plans are used, but for the 2014 tax year financial institutions submitted seven returns to the CRA with 622 slips for contribution receipts. CRA said it is possible for an issuer to submit multiple returns, and for an individual to contribute to more than one PRPP.
Statistics for the 2015 tax year are not yet available.
The CRA also doesn't yet have statistics on the number of employers participating in PRPPs, or how many self-employed individuals are contributing to them.
Other group plan retirement options
In Quebec, the government has introduced a new private savings vehicle, the Voluntary Retirement Savings Plan. Any firm in the province without a workplace savings plans and with at least five eligible employees will soon be required to offer a VRSP. An eligible worker must be at least 18 years old and have at least one year of uninterrupted service.
By the end of this year, any firm with 20 or more eligible workers will be required to have a VRSP in place. By the end of 2017, firms with 10 to 19 eligible employees will have to have one. The exact date has not been set for firms with five to nine employees, but it will be before Jan. 1, 2018.
The PRPP and the VRSP are similar in many ways, but a key difference is that Quebec employers covered by the law must offer a VRSP.
The Saskatchewan Pension Plan
Created in 1986 and open to all Canadians between the ages of 18 and 71, the Saskatchewan Pension Plan allows contributions of up to $2,500 annually, contingent on RRSP contribution room. Transfers of up to $10,000 annually from RRSPs are also allowed.
The SPP is comparatively small as far as pension funds go. Its website identifies the SPP as the 28th largest defined contribution plan in Canada, with $411 million in assets under management at the end of 2014.
The plan's investment options are limited to a balanced fund and a short-term fund.
The SPP's administration fees are low — averaging about one per cent annually between 2005 and 2014.