In 2012, the federal government’s Pooled Registered Pension Plans Act was signed into law. The plan’s objective is to create a large-scale, inexpensive pension plan for employees of companies that don’t already offer a pension.
But the federal government has limited jurisdiction over the workforce, so it had to collaborate with the provinces.
Quebec’s version, the Voluntary Retirement Saving Plans (VRSP), came into effect July 1, 2014. Alberta and Saskatchewan have also adopted the PRPP (although, at time of writing, legislation in both provinces isn’t yet in effect). B.C. tabled legislation on February 19, and Ontario’s promised to do the same in the fall. Here’s what you need to know.
Similarities and differences
For PRPPs and the VRSP, the employer isn’t required to contribute to the plan on behalf of employees. The employer is required to notify employees in writing of its intention to set up a plan, and employees will be able to opt out within 60 days of implementation. They also have the opportunity, once the employer has established the plan, to set contribution levels to 0%.
If the participant dies, his or her spouse or heirs (if there’s no spouse) gets a benefit equal to the participant’s account balance. Under certain conditions, participants in a VRSP will be able to designate beneficiaries.
There are differences between PRPPs and VRSPs. Outside of Quebec, legislation doesn’t force employers to set up PRPPs—they have discretion. In Quebec, by contrast, any employer who has 20 or more employees on December 31, 2016; 10 or more employees on December 31, 2017; or 5 or more employees starting any time after January 1, 2018, with at least one year of continuous service, must subscribe to a VRSP, and automatically enroll all employees who are at least 18 years old and have one year of continuous service. PRPP legislation doesn’t enforce a mandatory contribution level; it’s left to plan administrators. Employees will have the option, as in Quebec, of setting their contribution rate at 0%.
In Quebec, a default employee contribution level will be set at 2% for the years 2014, 2015 and 2016, 3% in 2017 and 4% for the years starting in 2018. This is a key difference between the plans. All PRPP assets are locked in, and in case of termination of employment, are only transferable to other locked-in registered savings (such as another PRPP, LIRA, RPP, etc.). With the VRSP, employer contributions are also locked in, but employees’ aren’t. If the employee leaves the company, proceeds from plan contributions are transferable to another VRSP, but also into an RRSP.
Finally, in Quebec, employers that already offer group plans aren’t required to establish a VRSP. This is a great feature because it avoids a situation where employees contribute to a program that could lead to a Guaranteed Income Supplement (GIS) clawback.
The table below summarizes key features of the federal and provincial plans:
|* If an employer has at least twenty (20) employees on December 31, 2016, at least 10 employees on December 31, 2017, or at least five employees starting at any time after January 1, 2018, conditional on a Quebec Government proclamation.|
|PRPP/VRSP legislation has been adopted||Yes||Yes||No||Yes||Yes|
|PRPP/VRSP is in effect||Yes||Yes||No||No||No|
|Employer is required to make contribution||No||No||No||No||No|
|Employer is required to set up a PRPP/VRSP||No||Yes*||No||No||No|
|Employee automatically enrolled if PRPP/VRSP is created||Yes||Yes||Yes||Yes||Yes|
|Employee can opt out/set contribution to 0 %||Yes||Yes||Yes||Yes||Yes|
|Default contribution rate stipulated in legislation||No||Yes||No||No||No|
|Available to individuals and self-employed||Yes||Yes||Yes||Yes||Yes|
|Participant can use proceeds as loan collateral||No||No||No||No||No|
|Plan proceeds protected in case of bankruptcy or insolvency||Yes||Yes||Yes||Yes||Yes|
|Default investment is life-cycle fund or balanced funds||Yes||Yes||Yes||Yes||Yes|
|Spouse beneficiary at death||Yes||Yes||Yes||Yes||Yes|
|Mandatory low cost||Yes||Yes||Yes||Yes||Yes|
In Quebec, 10 providers have been authorized as VRSP administrators, most of them insurance companies. VRSP legislation requires plans be inexpensive. A quick review of VRSPs already offered in Quebec indicates they meet this requirement. The average management fee for the default option (generally a life-cycle investment solution) in the Quebec plans shows an average fee of 118 bps. For the optional investment vehicles available with the VRSP, the fee can be between 46 and 138 bps, depending on the investment.
Advisor compensation, according to a survey of available plans, should be around 20 bps, which seems lower than trailers offered through group RRSPs. Finally, employers have to carefully choose VRSP providers when establishing a plan. Fees for transferring from one administrator to another are high. For example, the transfer fee for a VRSP with five employees could be anywhere from $250 to $750, depending on administrator. To transfer a plan with 50 employees, the fee could be $500 to $3,750.
The most striking feature of the VRSP legislation is it provides employers an incentive to open group plans instead of VRSPs. Why? Most employers are reluctant to open an investment vehicle regulated by the government. Also, most clearly see the benefits a “full service” advisor can bring their employees.
Finally, for smaller businesses where employees don’t earn high salaries, opening a group TFSA will be more beneficial because they’ll avoid potential Guaranteed Income Supplement (GIS) clawbacks in retirement.