If you don't already have a company pension plan, the new Pooled Registered Pension Plans (PRPP) can offer your employees the benefits of participating in a large pension plan including the defined contribution plans many large companies offer. These plans can help smaller companies compete with corporations to attract the best employees without having the cost of setting up a pension plan and administering it.
You may want to start thinking about encouraging your employees to save in one of the new PRPPs when they become available. You may also want to revamp your employee compensation package to include an employer contribution to employees' PRPPs if they choose to participate.
These plans are intended to be a broad-based, low-cost, defined pension contribution vehicle that will be available to all employees, employers and self-employed individuals, according to the federal Department of Finance. The government contends PRPPs' potentially large pooled funds will allow plan members to benefit from lower investment management costs. Of course, it remains to be seen how significant these savings will be. Another potential benefit could be access to a wider scope of investments, although this will depend on the providers of these plans.
Along with these potential cost savings, PRPPs offer the same tax benefits as Registered Retirement Savings Plans. Like RRSP contributions, PRPP contributions will be tax-deductible. Individuals' combined PRPP and RRSP contributions will be subject to the current annual RRSP limit of 18% of the previous year's earned income, up to a maximum of $22,970 for 2012. Any employer contributions are included as part of the employee's contribution room. As such, PRPPs provide the same tax-deductible contribution room for retirement savings as RRSPs, but with a different investment vehicle.
Employees will be able to transfer their savings between PRPPs, so they're not wedded to one plan.
Employers are not required to contribute to employees' PRPPs but to encourage them to save for retirement, you may choose to match their contributions either fully or partially. Your company will be able to deduct its contributions. Keep in mind your contributions will be required to vest immediately, unlike some pension plans in which employer contributions do not vest until the employee has been with the company for a set time.
The PRPP option should be easier to administer than a registered pension plan because your company will not be required to report pension adjustments for employee and employer contributions as you would for an employer-sponsored plan.
To receive a pension from a PRPP, employees will have the same options available to defined contribution pension plan members - the purchase of a life annuity, transfer to an RRSP or Registered Retirement Income Fund, or payment of benefits similar to RRIF benefits from the employee's PRPP account. Employees will pay tax on these payments, just like other pensioners.
The Department of Finance says provincial and federal officials are working together to implement PRPPs as soon as possible.
Small business employees and owners should carefully consider their retirement savings options, both for their future financial security and to take advantage of the tax savings available. You can benefit from making the best use of all the tax-assisted savings options, including RRSPs and Tax-Free Savings Accounts. PRPPs will add a new element to this mix. It will be interesting for owners and employees to see how beneficial these plans may become in the coming years.
Deborah MacPherson is a partner with KPMG Enterprise in Calgary.