Pooled Registered Pensions

The private pension plan that rewards employees for long and faithful service is a beautiful social institution. Too bad only large companies have the wherewithal to provide it. Although government plans like CPP take up some of the slack, one of the goals of pension reform is to find a way for small and medium businesses to offer plans providing a secure retirement to their employees. A new plan proposed in federal Bill C-25, which was tabled on Dec. 14, 2011, has the potential to fulfill that lofty purpose.

Ladies and gentlemen, let me introduce you to the proposed Pooled Registered Pension Plan (PRPP).

OVERVIEW OF THE PRPP

What Is the PRPP

The PRPP is a private defined contribution multi-employer retirement savings plan offered to employees of small and medium-sized businesses as well as the self-employed, funded by the contributions of participating employers and employees and administered by third party administrators.

How the PRPP Will Work

The general framework for the PRPP:

Plan administration: One of the reasons small and medium-sized businesses can’t provide their own pension plans is that they don’t have the resources to administer them. But with PRPPs, the burdens of plan administration, e.g., managing contributions, disclosing plan information to members and paying out benefits, will be carried out not by the employer but a third party administrator.

Role of employers: Employers who choose to participate in PRPP arrangements—although some jurisdictions might decide to make employer participation mandatory—will have the following responsibilities:

Selecting the plan and/or moving from one plan to another;

Informing employees of participation in the plan;
Enrolling employees in the selected plan;
Determining the appropriate employer and employee contribution amounts;
Making direct contributions and collecting and remitting employee contributions;
Remitting tax on direct contributions to the CRA; and
Notifying the administrator of new members or the termination of existing ones.

Role of employees: There will be 2 classes of members eligible to participate in PRPPs:

Employed Members, i.e., employees of employers that offer PRPPs; and
Individual Members, i.e., the self-employed and employees of employers that choose not to participate in the PRPP. In other words, employees can choose to participate in a plan even if their employers don’t offer them.

Employed Members will be like members of regular DC pensions who enroll and make contributions through their employer. Individual Members, however, will have to carry out these functions for themselves.

Portability of benefits: Member benefits will be portable:

Employed Members may, upon termination of employment, choose to remain in the plan or move the benefits they’ve accrued to another plan or retirement savings vehicle;
Individual Members may choose to stop participating in a PRPP at any time and move their benefits to another plan or retirement savings vehicle (subject to minimum investment periods established by the administrator); and
Employers may decide to stop offering a particular plan at any time and either move to a new plan (in which case the employer would be responsible for enrolling its employees) or pull the plug on PRPP arrangements entirely.

Locking-in of benefits: As with conventional pensions, PRPP benefits will be locked in, i.e., the member can’t withdraw them as cash without incurring tax penalties, subject to exceptions for financial hardship provided by the jurisdiction’s pension law.

What Happens Next

Bill C-25 is expected to pass in 2012. The federal income tax rules will also have to be changed to provide for the PRPP. But this is also expected in 2012. If and when these changes work their way through the legislative and regulatory process, PRPPs will become an option for employers subject to federal pension regulation.

But PRPPs won’t be an option for employers regulated by provincial pension law unless and until the province changes the pension law to allow for them.

ANALYSIS

The PRPP scheme has been criticized for making employer participation optional and thus putting employees’ pension coverage at the mercy of their employers. But this criticism misses the mark in 3 important ways:

Provincial authorities may yet decide to make PRPP participation mandatory in their own jurisdictions;
In reducing the financial and administrative burdens that have precluded employers from offering private pensions, the PRPP proposal will make it very attractive for employers to offer plans—after all, most employers want to provide pensions to their employees but just can’t afford to; and
Employees of companies that choose not to offer a PPRPP will have the option to enroll in a plan as an Individual Member.