Addressing the Retirement System “Gap”: PRPPs Now Available in Ontario

In 2012, the federal government introduced a new type of tax-preferential workplace pension plan, the Pooled Registered Pension Plan (PRPP). Ontario is one of six Canadian provinces to have incorporated PRPP legislation into its existing provincial retirement framework, through the implementation of legislation last Fall. In this FTR Now, we explain the key features of Ontario PRPPs, how they compare to defined contribution (DC) registered pension plans (RPPs) – and why a PRPP approach may benefit your organization.

Addressing the Canadian Retirement System “Gap”

The Canadian retirement system has long been described as a three-legged stool: government programs – such as the Canada Pension Plan (CPP) and Old Age Security (OAS) – workplace plans and individual savings. With the changing nature of employment, many smaller employers and newer businesses have moved away from providing employees with workplace retirement plans. Governments across the country have been examining how to deal with this retirement system “gap.” As we previously reported, with the concurrence of the provinces, the federal government introduced changes to the CPP last year in effort to address this gap for the next generation of Canadian workers.

Reform has also been occurring in relation to workplace plans. In 2012, the federal government introduced a new type of tax-preferential workplace pension plan, the PRPP, the purpose of which is to encourage greater employee pension coverage and increase pension savings. As explained in further detail below, PRPPs are similar in design to a traditional defined contribution (DC) registered pension plan (RPP). However, a third party administrator acts as the administrator of the PRPP and the employer has no obligation to make contributions to the PRPP.

Following the introduction of the federal legislation, British Columbia, Nova Scotia, Quebec, Saskatchewan, Manitoba and Ontario have introduced formal PRPP legislation (Quebec’s version of the PRPP is the Voluntary Retirement Savings Plan Act). Ontario’s Pooled Registered Pension Plans Act, 2015 and supporting regulations came into force last Fall, and largely incorporate the federal PRPP legislation, adapted to the provincial context.

Comparison of Ontario PRPPs and DC RPPs

	PRPP Regime	DC RPP Regime
Application	A voluntary program that employers can choose to offer in the workplace.	Workplace plans sponsored and maintained by employers are voluntary.[1]
Administration	PRPPs are administered by licenced financial institutions, such as insurance companies and banks. Administrators have responsibilities similar to the responsibilities of a DC RPP administrator, including regulatory filing requirements, member notice requirements and compliance with the plan terms and with statutory minimum standards requirements. Employers have no plan administration responsibilities.	Generally, employers act as administrators of DC RPPs in the private sector context. Practically, most employers fully outsource day-to-day plan administration to a third party service provider (e.g. an insurance company).
Employer Responsibilities	Notification to employees that a PRPP will be offered. Obligation to remit employee contributions to the administrator (and employer contributions, if applicable).	Under DC RPPs, the employer has “plan sponsor”/employer responsibilities (i.e. establishing a plan and setting the terms of the plan, making contributions). In addition, the employer has “plan administrator” fiduciary duties (including regulatory filing requirements, member notice requirements, and administering the plan in accordance with the plan terms and applicable legislation).
Fees	Costs in a PRPP must be at or below those incurred by members of DC RPPs that provide investment options to groups of 500 members or more. Costs must be the same for all members of a PRPP.	Fees vary from plan to plan, in part depending upon the arrangements negotiated by the employer and service provider.
Membership	Similar to a DC RPP, an employer can limit eligibility to certain classes. For eligible classes: · full-time employees become members of the PRPP on hire, with a right to opt-out. · Part-time employees become members of the PRPP after 24 months of continuous employment, with a right to opt-out.	Employer can limit eligibility to a DC RPP to certain classes. A DC RPP can be designed to be mandatory or optional participation. Further, A DC RPP can be designed to permit opt-outs or not. For eligible classes: · full-time employees become members/have a right to become a member no later than after 24 months of continuous employment, and · part-time employees become members/have a right to become a member no later than after 24 months of continuous employment provided that hours and/or earnings criteria have been met. [2]
Employer Contributions	No mandatory employer contributions.	DC RPPs have a minimum employer contribution of 1% of earnings in order to comply with Income Tax Act requirements.
Employee Contributions	Contribution rates are set by the administrator. Employees have the right to set their contribution rate to zero.[3]	Employee contribution rates are set out in DC RPP plan terms – plans can require or permit employee contributions, or prohibit employee contributions.
Annual Contribution Limits	Based on an employee’s RRSP contribution limit for the year, subject to an annual Income Tax Act maximum. ($26,010 in 2017)	DC RPPs are limited to 18% of a member’s earnings, subject to an annual Income Tax Act maximum. ($26,230 in 2017)
Tax Treatment of Contributions	Eligible employee contributions to a PRPP are tax deductible. Eligible employer PRPP contributions are not reported as employment income and the employer gets a tax deduction for the contribution. Investment earnings generated in an employee’s “account” are not taxable. Amounts paid/withdrawn from the PRPP (or subsequent retirement vehicle) are taxed as retirement income.Contributions to a PRPP reduce an employee’s RRSP room.	Employee contributions to a DC RPP are tax deductible. Employer contributions to a DC RPP are not reported as employment income and the employer gets a tax deduction for the contribution. Investment earnings generated in an employee’s DC RPP “account” are not taxable. Amounts paid/withdrawn from a DC RPP (or subsequent retirement vehicle) are taxed as retirement income. Contributions to a DC RPP reduce an employee’s RRSP room.
Investment Options Available	No more than 6 investment options may be provided under a PRPP, including the default fund, and the same investment options must be offered to all members of the PRPP.[4]	Employers select the range of investment options offered under the DC RPP, no minimum or maximum options (except as required under some provincial pension legislation).[5]
	The default fund must be a balanced fund or a “portfolio of investments that takes into account a member’s age” (i.e. a target date fund).	Employers select the default investment option offered under the DC RPP.[6]
Locking-In	An employee’s DC balance in a PRPP is locked-in (i.e. must be used to provide income during retirement), subject to limited exceptions.	DC RPP account balances are locked-in, subject to limited exceptions.[7]
Termination of Employment	On termination of employment, an employee can transfer their PRPP DC account balance to another registered vehicle, on a tax-free basis. Transfer options are very similar to the options available under a DC RPP.	On termination of employment, an employee can transfer their DC RPP account balance to another registered vehicle, on a tax-free basis.
Retirement	Variable payments may be made directly from the PRPP to a member once the member reaches age 55. Members receiving variable payments must be given the option to transfer their account balance to another registered vehicle or to be used to purchase an annuity, at least annually.	Most DC RPPs require members to (1) transfer their DC RPP account balance to another registered vehicle, on a tax-free basis or (2) apply their DC RPP account balance to purchase an annuity.[8]
Governing Legislation and Regulatory Oversight	The Ontario PRPP legislation generally adopts the federal PRPP Act (with certain exceptions). All PRPPs are also subject to the Income Tax Act. Regulatory oversight in Ontario has been delegated to the federal Superintendent of Financial Institutions, pursuant to a multilateral agreement between certain provinces and the federal government.[9]	DC RPPs are governed by the Pension Benefits Act (PBA) (Ontario) (and/or other applicable pension benefits standards legislation) and the Income Tax Act. Regulatory oversight in Ontario is provided by the Ontario Superintendent of Financial Services.

The new federal and provincial PRPP regimes are separate from the existing RPP and group RRSP regimes. There is no statutory framework authorizing an employer to unilaterally convert an existing DC RPP or group RRSP to a PRPP.

Potential Benefits for Employers

While the PRPP is, at its core, another DC-type tax-preferential pension plan, it may be of interest to employers, particularly small and mid-size employers, for three key reasons:

Employers have no contribution obligations under PRPPs.
Investment fees in a PRPP must be low.
The PRPP legislation has been calibrated to specifically provide that employers have no administrator responsibility and, as such, no fiduciary duties and responsibilities that flow from the role of plan administrator.

If you have any questions or require further information, please contact any member of the Hicks Morley Pension, Benefits and Executive Compensation Group.

[1] Subject to collective bargaining constraints and the establishment of statutory plans in the public sector.

[2] Requirements vary by province.

[3] After participating in the PRPP for 12 months.

[4] A PRPP is also subject to investment restrictions under (1) the federal Pooled Registered Pension Plans Regulations, which are similar to investment restrictions applicable to RPPs set out in the Pension Benefits Standards Regulations (PBSR); and (2) the Income Tax Regulations (ITR).

[5] RPPs are subject to investment restrictions under the federal PBSR and ITR.

[6] The default fund for a DC RPP that is registered under the Alberta Employment Pension Plans Act or the British Columbia Pension Benefits Standards Act the must be a balanced fund or a “portfolio of investments that takes into account a member’s age.”

[7] In contrast to PRPPs and DC RPPs, account balances held in a group RRSP are not locked-in pursuant to statute.

[8] Provincial pension legislation in some jurisdictions now permits the payment of variable benefits directly from a DC RPP. The Ontario PBA has been amended to permit the payment of variable benefits from a DC RPP but regulations have not yet been introduced.

[9] See http://www.osfi-bsif.gc.ca/Eng/pp-rr/ppa-rra/prpp-rpac/Pages/PRPP-MLA.aspx.

The articles in this client update provide general information and should not be relied on as legal advice or opinion. This publication is copyrighted by Hicks Morley Hamilton Stewart Storie LLP and may not be photocopied or reproduced in any form, in whole or in part, without the express permission of Hicks Morley Hamilton Stewart Storie LLP. ©

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