Pensions options if you own or work in a small business

There is one option being pushed by the Canadian Federation of Independent Business and which appears to be supported by the Financial Post. However the plan is not as good as it first appears to be and the writing of the article uses many weasel words and phrases (I have put some of them in italics)  to say one thing and imply another.

The findings of a Canadian Federation of Independent Business retirement poll of about 8,000 of its members paint a grim view of what’s on the horizon. That’s because a majority of respondents, 58%, said they do not feel they have sufficient income to take advantage of the various savings options available. Not surprisingly, 27%, said they planned to work to age 68 or later to be able to retire comfortably.

The overwhelming majority, 77%, reported they did not have a business retirement savings plan for themselves or their employees. That’s supported by other surveys that found 60% of Canadians have no work pension plan.

After the global market meltdown of 2008 and the loss many investors took to their retirement portfolios, the federal government floated a few options: increase CPP contributions or introduce Pooled Retirement Pension Plans (PRPP). The former option would be yet another blow to small business owners, said Dan Kelly, president and chief executive of the CFIB.

“Increasing CPP contributions would have a giant negative impact on employment in Canada because an increase is a mandatory thing and you have to do it whether you can afford it or not. It could be calamitous,” Mr. Kelly said.

The CPP option did not get the two-thirds consensus on the part of the provinces but there was interest in pursuing PRPPs. Ted Menzies, Minister of State (Finance), got a clear message from business owners. “Small business owners wanted this kind of option for some time to help attract and retain talent. The reason they hadn’t already offered a pension plan was because they didn’t want the responsibility of making the investment decisions, which is the case with group RRSPs, for example.”

Another big barrier: affordability and accessibility. “You have to be big to offer a full-on pension plan. If a small business has anything for employees it is a group matched RRSP, which is what we have here at the CFIB,” Mr. Kelly said.

“But RRSPS are imperfect as a company offering because the management fees are significant, ranging in the 2.5% mark, and if an employer puts money toward an employee RRSP, the employer has to pay payroll tax on the amount of the contribution. Depending on the industry, you could potentially pay an extra 20% to 25% in tax to put money aside for your employees’ retirement. It’s little wonder very few employers have jumped into that arena.”

Mr. Kelly said PRPPs can bring the pension vehicle down to the SMB level. Management fees are expected to be half those of group RRSPs and the federal government has confirmed PRPPs will be exempt from payroll taxes.

PRPPs are administered by the private sector: financial institutions, existing pension funds, credit unions — the options still are fairly wide open. Providers must qualify, show a track record of investments and customer relations before they are approved. The employer will choose from three or four products, which are still being developed. The process is simple for the employer, Mr. Menzies said. “They choose the plan and the administrator carries the fiduciary responsibility.”

PRPPs are entirely voluntary. And businesses that offer it don’t have to contribute to it. “If an employer opts in, they must offer it to all full-time employees who will be automatically enrolled,” the minister said. “The employee has 60 days to opt out. Just write a note to the employer you choose not to take part.”

The CFIB has endorsed the federal legislation, but here’s the rub: Provincial governments now have to put their own legislation in place and they can make it different. “We hope provinces will adopt a common framework,” said Mr. Kelly, whose organization is lobbying provincial governments to adopt the federal plan as is.

PRPPs can play a substantive role in retirement planning for small business owners and their employees, Mr. Menzies said. “RRSPs are still an option, but many people have not used it and there is a lot of contribution room available largely by middle- and modest-income families. Other countries have used pooled plans that have proven to be more successful.

“Some people save in other ways and that’s fine but not for everyone. This is low cost and the mandate is to return the best amount of money to the plan member. That will be in the regulations,” he said.

Mr. Kelly also thinks it could be a significant savings tool with huge uptake among entrepreneurs. “Many will view it as a great tool for themselves, especially for the self employed who have virtually no options other than an RRSP. For SMBs, the owner would be giving themselves a pension, too. It’s right up there with the value of their own business as a retirement savings tool.

“When you ask members what they have for their own retirement, it’s typically the equity in their business. And you can’t count on the anticipated value of your business when you are ready to retire. Look at what happened in 2008.”

The above was from "The retirement tool SMBs have been waiting for"written by  Mary Teresa Bitti  on Oct 16, 2012