The current federal legislation for PRPPs only applies to employees governed under federal jurisdiction, such as inter-provincial transportation, banking, telecommunication and airlines.
So on June 28, 2012, the Canadian government approved the Pooled Registered Pension Plan (PRPP) Act.
This Act will create a large scale, inexpensive pension plan, available to those who are self-employed, as well as employees of companies that don’t already offer one (e.g. small businesses).
Why now? Less than half of Canadians have access to a workplace pension plan. Further, nearly 50% of Canadians admit they’re living paycheque-to-paycheque. PRPPs are designed to counter this lack of savings and help more Canadians prepare for retirement.
Unfortunately, it’s still too early to tell when the Act will come into force across the nation. But the Fed has indicated it will work closely with provinces to implement PRPPs in Canada. Some, like British Columbia, Alberta, and New Brunswick, have shown interest. Others, like Ontario, have only given it a lukewarm reception.
So far, only Québec has tabled its own version: the Voluntary Retirement Saving Plan (VRSP), which was scheduled to launch January 2013. However, since Bill 80 died on the order paper, the new Quebec government will have to retable the legislation for it to receive the Royal Assent. The Parti Québécois did not take a position on the VRSP in its electoral platform.
Here’s how the Fed’s PRPP and Quebec’s provincial plan stack up.
What will be the same
- The employer may make contributions on behalf of its employees, but will not be required to do so.
- The employer shall notify each employee of its intention in writing; participants will be able to opt out within 60 days of the PRPP’s implementation. They will also have the opportunity to set their contribution levels to 0%.
- Contributions will be tax-deductible and tied to RRSP deduction limits, thus reducing RRSP contribution room.
- Participants cannot use plan proceeds as collateral for a loan. Plan proceeds will be creditor protected in cases of bankruptcy or insolvency.
- PRPP/VRSP administrators must offer investment options of varying degrees of risk. They have to offer one default option, which could be a balanced fund or a life cycle fund.
- The Superintendant of Financial Institutions will have the power, at the federal level, to issue a license to any corporations. In Quebec, the Régie des rentes du Québec will regulate the plan administrators, but only insurers, trust companies and investment fund managers will be able to offer VRSPs.
- Assets will be divided in the case of divorce or separation. In Quebec, plan proceeds will be part of the family patrimony.
- If the participant dies, his spouse (or heirs) will receive a benefit that is equal to the participant’s account balance. Participants in the VRSPs will be able to, under certain conditions, designate beneficiaries of the plan (similar to RRSPs and TFSAs in Canada).
What will be different
- The PRPP doesn’t force employers to set one up for its employees. In contrast, with the VRSP, any employer who has five employees with at least one year of continuous service will have until year-end 2013 to subscribe. In other words, all employees who have worked at the company for one year will be automatically enrolled.
- The PRPP doesn’t stipulate any mandatory contribution level. It’s up to plan administrators to set contribution levels and employees can even set them at 0%. In Quebec, the mandatory contribution level will be set at 2% in 2015, 3% in 2016 and 4% in 2017. An employee will be allowed to reduce or stop his contributions at any time.
- At the Federal level, plan proceeds will be locked-in, but tax-deferred transfers to other registered savings plan will be available. In Quebec, only the employer portion will be locked-in. Contributions from employees won’t suffer any restrictions (i.e. the employee will be able to cash out or transfer to other plan administrators).
- In Quebec, an employer that’s already offering a group plan to will not be required to establish a VRSP.
What about advisors?
The law states both PRPPs and VRSPs will be low cost. According to the Quebec Budget,the maximum management fees will be about 1%.
Will that leave a role for advisors? Doubtful, because the majority of Quebec providers have made it clear they will offer VRSPs directly to investors, bypassing advisors.
However, these plans still provide a good opportunity. Start talking about group plans with your business-owner clients. Outside of Quebec, the obligation to set up a PRPP might come sooner than they think.