Pooled Registered Pension Plans ( PRPPS )
On December 16, 2010, Canadian Finance Minister Jim Flaherty released a document entitled "Framework for Pooled Registered Pension Plans”. It proposes to permit defined contribution Pooled Registered Pension Plans (PRPPs), which includes the possibility of mandatory employer participation with an opt out clause for workers.
The main aspects of the Pooled Registered Pension Plan are as follows:
PRPPS will benefit Canadians who are without an employer-sponsored plan, including the self-employed. Pooled pension plans will provide a simple, low-cost, effective way to improve pension coverage for employees of small and medium sized business and the self-employed.
Under pooled pensions, a third party would manage the administration of the plan while employers would be responsible for determining employer and employee contribution levels, collecting and remitting contributions and keeping the administrator up to date regarding new members and employee termination.
PRPPs will appeal to small business owners who may not have the expertise or resources to set up a workplace pension. PRPPs will pool contributions from many companies and workers, providing participants with the investment advantages of conventional retirement funds.
PRPPs offer economies of scale that should lower administrative costs and management fees. The proposed disclosure and portability, through harmonized rules, increase the appeal of this retirement savings plan. Private-sector providers will offer and manage pooled pension plans on behalf of multiple employers, which will reduce costs to businesses and provide financial expertise to manage the investments and their risks.
Eligible Administrators of the PRPPs will be regulated financial institutions, including trust and insurance companies and other financial institutions with a trust subsidiary. The Investment Industry Association of Canada (IIAC) recommends that financial advisors registered with Investment Industry Regulatory Organization of Canada (IIROC) should be eligible to serve as PRPP administrators.
Canada's life and health insurance industry currently administers approximately 70% of Canadian pension plans. The Canadian Life and Health Insurance Association says half of private sector workers in Canada have no access to workplace pension plans. Approximatily sixty percent of Canadians in the private sector do not have a pension plan.
The PRPP administrator will have a fiduciary duty to the plan members. The PRPPs will have a low-cost default investment option for a broad group of workers, and a manageable number of investment options for the members to choose from.
PRPP administrators will be required to provide all members with prescribed information on a regular basis. Employers may be permitted to enroll their employees into a PRPP at any stage of their employment and there may be rights of an employee to "opt out".
PRPP framework provides that employers will have the ability to increase the worker's default contribution rate on occasion, subject to a new "opt out" right. Employer contributions to a PRPP will be locked-in, some jurisdictions may permit limited unlocking rights. Jurisdictions will make a determination as to whether to require mandatory employer participation in PRPPs.
Employers will contribute directly to a PRPP. Self-employed persons and other employees will contribute on the basis of their own available RRSP limits. The PRPP is a saving vehicle, limited by RRSP limits and regulations, it allows workers to save for retirement, but it is not a guaranteed retirement income, it is not a defined benefit plan, PRPPs are not indexed to inflation.
To view Finance Minister Flaherty's draft letter on PRPPS, click here.
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Pooled Registered Pension Plans
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