The federal government recently published draft legislation to create pooled registered pension plans ("PRPP"). The aim of the legislation is to provide employees and self employed individuals with a low cost means of saving for their retirement. It is expected that the provinces will implement their own enabling legislation in conjunction with the federal legislation.
Fasken Martineau anticipates that the new PRPP program has the potential to be a market changer. Mutual fund complexes may be at risk of suffering reduced assets under management as funds flow toward PRPPs. Institutions who can qualify to be administrators need to be preparing to enter into this market. Portfolio managers should be exploring asset management opportunities with potential administrators.
How Will the PRPP Work?
The Superintendent of Financial Institutions ("Superintendant") will be responsible for the control and supervision of the administration of the program. Administrators will hold amounts in trust for the members of a PRPP and will be responsible for management and operational functions of each particular plan. An administrator of a PRPP must be a corporation able to assume a fiduciary duty. The Superintendent will issue licences authorizing a corporation to be an administrator of a PRPP.
Members cannot be accepted into a PRPP prior to registration of the plan with the Superintendant. Proof that the administrator has a valid license and that the PRPP is registered must be given to any potential member.
An administrator may engage any investment manager it chooses to manage the funds in the PRPP. However, the administrator must exercise the degree of care that a reasonably prudent person would exercise. The PRPP must also be provided at low cost.
A PRPP may offer various investment options. If the plan offers investment choices, the investment options must be of varying degrees of risk and expected return to allow a reasonable and prudent person to create an appropriate portfolio for retirement savings. A choice can only be changed by request of the member.
Administrators will contract with employers, who decide to participate in the program. At least 30 days before entering into a contract with an administrator, an employer must notify in writing each employee of a class that can participate in the PRPP of :
- Its intent to enter into the contract;
- Any existing business relationship with the administrator;
- The right of any employee to object to being a member on religious grounds.
Administrators are not permitted to give, offer or agree to give or offer to an employer an inducement to enter into a contract with the administrator.
Employers must offer the contract to all members of a class of employees accessing a plan. The employee must be engaged on a full time basis. Part time employees may participate after completing 24 months of continuous service. In most cases, an employee may terminate membership by providing notice to the employer within 60 days of being advised that the PRPP is being offered to the employee. Self employed individuals may terminate membership in the PRPP at any time.
Employers must keep all amounts to be remitted to the administrator separate and apart. These amounts are not part of an estate in liquidation, assignment or bankruptcy, whether or not the employer actually separated the amounts. Employers will not be liable for acts or omissions of the administrator.
Funds may not generally be withdrawn from plan prior to retirement. However, the plan may provide for withdrawal of funds in the case of a disability or where the amount of funds in the account is less than 20% of the year's maximum pensionable earnings for the years in which:
- The member dies;
- A self employed individual provides the notification of termination of membership;
- The member is no longer employed by an employer participating in the plan.
What are the Tax Implications of the PRPPs?
Proposed amendments to the Income Tax Act ("ITA") accommodate the proposed PRPPs legislation. The proposed tax rules are generally based on a mix of the rules applicable to registered retirement savings plans and the rules applicable to registered pension plans.
Contributions made by employers, employees and self employed individuals will generally be tax deductible. Member contributions will be deemed to be a premium paid by the member to an RRSP. Deductions on contributions by members will be limited to the member's annual RRSP limit. Distributions from the PRPP will be included in computing the member's income for the year.
There are no qualified investment rules. General rules apply to ensure that investments are reasonably diversified in a manner similar to those applicable to registered pension plans. Generally, a PRPP cannot hold:
- A debt of a member;
- A share of, a debt of or an interest in a corporation, trust or partnership in which a member has a significant interest or of a person or partnership that is not at arm's length with the member or the corporation, trust or partnership.
A person will generally be considered to hold a significant interest where the person (or with a non arm's length group) owns directly or indirectly more than 10% of any class of shares or 10% of the value of the interests in a partnership or trust.
Designated pooled pension plans ("DPPP") are subject to more stringent investment restrictions. DPPPs include plans that have either (i) fewer than 10 participating employers, (ii) more than 50% of the value of the property attributable to members of one participating employer, or (iii) more than 50% of the members are employed by one participating employer.
A PRPP cannot be registered for tax purposes if there is a reason to expect that it may become a revocable plan. A PRPP becomes a revocable plan if any of the following conditions apply:
- A contribution is made to the plan other than from a member of the plan, an employer or former employer in respect of a member or as a permitted transfer from other tax deferred savings plans;
- A contribution is made in respect of a member after the year in which the member turns 71;
- An employer makes a contribution in excess of the RRSP dollar limit for the year;
- A distribution is made other than a distribution permitted under the ITA or as a return of contributions to avoid the revocation of registration or to reduce tax in respect of over contributions;
- The PRPP acquires property that the administrator knew or ought to have known that it is a restricted investment;
- The administrator has not taken reasonable precautions to avoid holding shares or debts in a non arm's length group the total fair market value of which is 10% or more of the total fair market value of all property;
- The administrator borrows money or other property;
- Amounts distributed to a member is less than certain minimum amounts established by the ITA;
- The PRPP or administrator does not comply with prescribed conditions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.