A few months ago, I talked about Ottawa’s interest in overhauling the Canada Pension Plan to accommodate a rapidly aging population, longer life spans and fewer young people to help pay for it.
The government has investigated a private sector option called Pooled Registered Pension Plans.
PRPPs have rapidly evolved from study phase to a virtual certainty, and all discussion about updating CPP seems to have disappeared from the radar. The plans are expected to be available next year.
The federal government has all the provinces onside with PRPPs and has introduced legislation to modify the Income Tax Act and Excise Tax Act to accommodate the new financial instrument.
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The move to PRPPs should provide Canadians with an increased range of retirement savings options beyond CPP and Registered Retirement Saving Plans. Regulated companies, such as insurance firms, will administer the pooled funds and be re-quired to act in a legally responsible manner on behalf of participants. It is assumed that large regulated institutions have the ability to acquire, invest and manage large money pools more efficiently and at lower costs to participants.
Participation in the program is structured in two ways:
- small businesses, including farmers, with as few as two people can set up a pension plan through a PRPP provider
- self-employed people and workers at non-participating companies will also be able to contribute as independent participants.
The new legislation will allow any province the option to make participation in a PRPP mandatory for some businesses and industries.
Much like other investment portfolios, different levels of risk and reward options will be available. Similar to an RRSP, the PRPP will have an allowable contribution room based on earned income. To prevent a large employer from accidentally placing employees in an over-contribution situation, the amount assigned to each employee will be their RRSP limit in that year.
The contribution room depends on whether the contributor is employed or self-employed.
Contributions from a self-em-ployed person are for a fixed sum per period, to be negotiated between the plan administrator and the taxpayer. The previous year’s notice of assessment will indicate available contribution room.
Contributions made by employers and individuals will be deductible for tax purposes. Alternatively, employers will be allowed to make direct contributions on behalf of an employee that can be excluded from the employee’s earned income, as happens now with contributions to any other employer-operated pension plan.
The program is also structured to allow the spouse or common-law partner of a deceased PRPP investor to take over participation in the fund or transfer the funds to their own registered account, such as an RRSP, registered retirement income fund, pooled registered pension plan or registered pension plan.
