By Sheryl Smolkin
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In the recent Ontario budget, the government committed to improving the retirement income system by focusing on a modest, fully-funded enhancement to the Canada Pension Plan, supplemented by the new pooled registered pension plans (PRPPs) introduced by federal legislation late last year.
But surprisingly, the Ontario Minister of Finance omitted any details about what the provincial legislation required to implement these pooled plans will look like and expressed a number of concerns with currently proposed federal model.
Related: Ottawa launches pooled pension plan
PRPPs are defined contribution pension plans administered by financial institutions that employees, self-employed people and other individuals can participate in. The goal is to keep costs low by pooling assets and limiting investment options. While we do not yet know how PRPPs will operate in Ontario, a detailed roadmap for “voluntary retirement savings plans” – Quebec’s version of PRPPs effective next year – was revealed in the province’s recently tabled 2012-13 budget.
Provinces outside Quebec could introduce significantly different rules for their PRPPs, but the success of the new retirement savings vehicle will depend at least in part, on governments taking a similar approach across the country.
For example, a Mercer Communiqué advocates for synchronization of Quebec’s voluntary
plans and PRPPs outside of Quebec so employers with employees in several jurisdictions can apply the plans in a uniform manner for all of their workforce. They also note that consistent national rules will make it easier for employees who move from one province to another.
Here are some highlights of Quebec’s voluntary plan proposals which can be expected to influence Ontario and other provinces when they are formulating their own pooled pension plan rules:
Mandatory plans: Organizations with five or more employees with one year of uninterrupted service will have to offer a voluntary plan by January 1, 2015, unless they already offer all their employees the opportunity to contribute to a retirement savings plan. Smaller employers may offer a voluntary plan, but it is not required.
Automatic enrolment with an opt-out: All employees with at least one year of uninterrupted service will be automatically enrolled but they can opt out within 60 days.
Open to individuals: Self-employed workers, business owners and individual savers will be permitted, but not required to enrol in a voluntary plan.
Voluntary employer contributions Employers contribution are voluntary, and like contributions to registered pension plans any employer contributions will be exempt from payroll taxes. Employer contributions will be locked-in until the employee reaches 55.
Employee contributions: Voluntary plan participants can set their own contribution rates and choose to stop making contributions. For participants who do not choose a contribution rate, the default employee contribution rate will be:
- 2% from January 1, 2013 to December 31, 2015.
- 3% from January 1, 2016 to December 31, 2016.
- 4% as of January 1, 2017.
Participants may also withdraw their own contributions at any time, subject to provincial and federal tax on withdrawals.
Default investment option: The voluntary plan’s default investment option for members who do not select how to invest their money will be based on a “life cycle” approach in which the risk level is adjusted based on the participant’s age. Voluntary plans will be permitted to provide at least five additional investment choices.
Administered by financial institutions: Voluntary plans must be administered by an approved financial institution or investment fund manager. The administrator will have to show the regulator that the management fees charged are comparable to those of institutional pension plans of similar size.
Vancouver pension consultant Greg Hurst suggests in a Benefits Canada article that some employers sponsoring traditional defined benefit or defined contribution pension plans or Group RRSPS may decide to convert to the new pooled pensions arrangements if plan administration is easier and less expensive.
Related: Should OMERS offer the new pooled pension plan?