Saturday, January 7, 2017

Are you retiring in Canada this year, Pillar 3: Employer pension plans

Understanding your employer pension plan

The two main types of employer pension plans include: 
·         Defined benefit pension plan (DBP)
·         Defined contribution pension plan (DCP) 
The following table below compares the two. 

Defined contribution pension plan (DCP)
Defined benefit pension plan (DBP)
What is it?
·         DCPs are a form of savings for retirement where you and your employer contribute an established amount to your pension each year.
·         Your contribution is usually a percentage of your pay.
·         The value of the pension is based on the performance of the investments.
·         Amount of the pension is uncertain.
·         DBPs are an agreement where the employer promises to pay a certain amount of money each year after retirement.
·         Employees often but do not always make contributions in addition to their employer’s contribution.
·         How much you receive depends on a formula, generally based on your income and years worked.
How is it managed?
·         Generally, you have to choose how your contributions are invested.
·         Consider the level of risk and time frame when making investment choices.
·         Your contributions are pooled into a retirement fund and managed by your employer or pension plan administrator/sponsor.
·         Investment results affect the amount of the employer’s contributions.
·         You have more control.
·         You can invest in a way that suits your goals and risk tolerance. A financial professional can help you understand the risks of various investments.
·         You have the possibility of benefiting from higher returns if your investments perform well.
·         The amount of your pension is set primarily on a set formula often based on your career earnings and years of service and is therefore generally less sensitive to annual returns in the stock market. 
·         Funds are professionally managed and you are not required to make any additional investment decisions.
·         Your investment risks are pooled across time and different individuals, so that investments have time to recover from really bad years and/or benefit from years with really good returns.
·         The amount of retirement income is not guaranteed. If your investments do not perform well, you have to deal with it yourself. It could be affected by the ups and downs of the stock market.
·         Some people are not comfortable managing their own retirement fund or investments.
·         Because of the limited advice available, obtaining separate financial advice may involve additional costs.
·         You may not be able to invest exactly the way you want as the employer may offer only a limited number of investment options within the plan.
·         The risk that the fund is not managed properly or that your employer experiences financial troubles or even bankruptcy can affect the amount of your pension.
·         You are not able to directly benefit from high stock market returns. These are passed along to all members in various ways (often in terms of lower contributions or increased benefits).

Both DCPs and DBPs have advantages and disadvantages, but ultimately you won’t have a choice over which type of pension plan your employer has in place. What’s most important is that you fully understand how your pension plan works.
Your pension will likely be a cornerstone of your retirement income, so if you don’t know how your pension works, be sure to speak to your human resources staff member, union representative or pension plan manager to find out.

Group Registered Retirement Savings Plan (Group RRSP)

A Group RRSP is an employer-sponsored retirement savings plan, similar to an individual RRSP, but administered as a group by your employer. Your contributions are made through regular pay-roll deductions on a pre-tax basis.
While Group RRSPs function similar to individual RRSPs, the details of the plan often vary by the employer. For more detailed information on your Group RRSP, consult your human resources, union, or pension plan representative.

Pooled Registered Pension Plan (PRPP)

Pooled registered pension plans (PRPPs) are a new type of pension plan to help Canadians save for retirement. PRPPs are designed mainly for people who do not have access to a workplace pension, such as employees of small-sized and medium-sized businesses, and self-employed individuals.
The federal Pooled Registered Pension Plans Act (the federal PRPP Act) and the Pooled Registered Pension Plans Regulations (the Regulations) came into force on December 14, 2012. 

How do PRPPs work? 

PRPPs are defined contribution (DC) pension plans. In a DC plan, you and your employer contribute a certain amount to your pension each year. In the case of PRPPs, employer contributions are optional. DC plans do not guarantee how much you will receive when you retire. Your pension income depends on how well the investments held in your DC plan perform.
Employer participation in PRPPs is voluntary. To set up a PRPP, an employer must enter into a contract with a PRPP administrator. PRPPs are administered by licensed third parties such as banks or insurance companies, not employers.
Once an employer enters into a contract, employees are automatically be enrolled as members unless an employee chooses to opt out. Members’ contributions to the pension plan will be made through deductions from their pay.

Who can join a PRPP under the federal PRPP Act and Regulations?  

You can join a PRPP offered by your employer if: 
·         you are employed in a federally regulated business or industry (such as banks, telecommunications companies, interprovincial transportation sectors, etc.) anywhere in Canada and your employer offers PRPPs
·         you are employed in any type of work in the Yukon, the Northwest Territories or Nunavut. 
You can join a PRPP on your own if: 
·         you are employed in any type of work in the Yukon, the Northwest Territories or Nunavut and your employer does not offer PRPPs
·         you are self-employed in the Yukon, the Northwest Territories or Nunavut. 
Note: The availability of PRPPs for provincially regulated employers, employees and self-employed individuals will depend on provincial government decisions on whether to put in place similar provincial legislation. 


Quebec: Voluntary Retirement Savings Plans
In 2013 the Quebec Government introduced the Voluntary Retirement Savings Plans Act for employers with businesses in Quebec – Voluntary Retirement Savings Plans (VRSPs) are Quebec’s version of PRPPs.
VRSPs and PRPPs are similar in many ways.  However, one of the main differences is that employers with businesses in Quebec with more than five employees must offer their employees a VRSP, a Tax-Free Savings Account, or another retirement savings plan, however, employees have the right to opt-out. 
For more information on VRSPs visit the VRSP section of the Régie des rentes du Québec website and for more detailed information on eligibility see section 45 of the Voluntary Retirement Savings Plan Act. 

More key facts about PRPPs 

·         PRPPs must be low-cost. This means that the costs charged to plan members must be at or below those charged to members of defined contribution pension plans that provide investment options to groups of 500 or more members.
·         Costs include all fees, levies or other charges that reduce a member’s return on investment, other than those triggered by the actions of a member, such as requesting copies of documents.
·         Under the federal PRPP Act, the Office of the Superintendent of Financial Institutions issues licenses for administrators to offer PRPPs.

A few things to keep in mind about employer pension plans 

If you have a defined contribution pension plan, contributing at least the amount your employer will match will enable you to fully benefit from your employer’s contributions. 
Many people switch jobs and careers throughout their working lives, which means many people might have two or more smaller pensions from different employers. 
If this is the case for you, be sure to investigate what’s best for you. Are you able to transfer your old pension to your new plan? Talk to a financial professional or your human resource advisor to better understand your options.

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