Group RRSP’s and Pensions

What types of Group Investment Plans are available?

Group RRSP’s

Group RRSP's are on type of employer sponsored savings plan. Somewhat similar to regular RRSP's in regards to the tax benefits provided and the availability of personal or spousal plans there are a few important differences.

A Group RRSP is usually made up of two components: the employees contribution and the employer matching contribution (although the employer match is not required).

Employee contribution are made to the plan in pre-tax dollars with these dollars being deducted from your pay cheque before you receive it. Your employer will reduce the amount of tax withheld from your pay depending on how much you are contributing.  Part of your contribution is made up of the reduced income tax deducted from your pay.  Contact us for more details as to how that works.

Employer contributions are optional, but some sort of matching provides an additional incentive for employees to fully participate.  Typically the employer matches a portion (some or all) of what the employee contributes. 

Employer Group RRSP contributions are fully vested from day one in the employees name.  The employee can turn around and take the money out or transfer it to another plan immediately.  

Also, employer Group RRSP contributions are like additional salary so they are subject to payroll taxes.

There is a lot of flexibility in how these plans can be set up in order for the employer to realize certain goals:

  • Employees with different company tenure can be rewarded differently so that longer tenured employees can qualify for larger matching contributions.  This is a way for an employer to reward employees for their loyalty.
  • The employer can require a waiting period before the employee is eligible for matching conributions
  • It is possible to structure the plan so that the contribution matches can be increased the longer an employee is with the company, or different matching percentages could be used for different categories of employee (for example management) again rewarding tenure and loyalty.
  • There is not requirement for employer contributions to continue if a company faces a change in their business and does not have the money.

Please contact us for more information on the many options available with Group RRSP's.

Deferred Profit Sharing Plans (DPSP)

A DPSP addresses some of the drawbacks of Group RRSP's as mentioned in the prior section as follows:

  • Any amount out of profits may be contributed to a DPSP.  If profits fall, DPSP contributions can be reduced or suspended.  It is entirely up to the employer.
  • Contributions to a DPSP made by an employer are not subject to payroll taxes (EI, CPP).
  • A vesting period can be implemented so that in order for an employee to leave the company and take their accumulated DPSP value with them they would have to have been with the company for 2 years, for example.

Similar to RRSP's there is a maximum amount that can be contributed by an employer to a DPSP. This results in a reduction of the employees RRSP contribution room through a mechanism call the Pension Adjustment (PA).

Higher employee loyalty and morale from being rewarded with a share of company profits may results in greater profits in the future through higher employee productivity and hard work. DPSP's are a way for employers to reward and thank employees for their hard work that has contributed to the prosperity of the company.

DPSP's are often used for the employer contributions along with a Group RRSP for employee contributions.

Pension Plans

There are two main types of employer sponsored pension plans; these are Defined Benefit and Defined Contribution.

Defined Benefit (DB) Pension Plans

These are traditional pension plans that were more common in the past and today are offered mainly to public sector employees (Federal, Provincial, and Municipal employees, teacher, nurses and hospital workers etc).  These plan can require employee contributions (contributory) or be fully funded by the employer (non-contributory).

The income receive in retirement is based on a formula as follows:

years of service  X  best 5 years average income  X a percentage factor

As an example, an employee with 33 years of eligible service, averaging $62,000 of income in their last five years prior to retirement, with a factor of 1.6% would receive the following guaranteed lifetime pension:

33 years  X  $62,000  X  1.6% = $32,736

This income may be indexed according to the Consumer Price Index (CPI) depending on the plan.

All of the risk for these plans is borne by the employer (not the employee) or for public sector plans, the tax payer. Every 3 years these plans are actuarially evaluated to determine if there are enough funds in the plan to meet the future obligations to the retireees.  If there is not enough money to support future obligations the fund must be topped up.

The popularity of these plans among private sector employers is reduced due to recent poor returns in equity market, increasing life expectancy combined with an aging population, reduced labour market participation and other factors.

As people change jobs throughout their careers, various options exist for their accumulated pension benefits.  The money can be transferred to a locked in RSP, to another pension plan, or sometimes the money can stay in the existing plan although based on the formula no additional years of service will be earned.

If you are changing jobs and want to discuss your options please contact us for a no obligation consultation.

Defined Contribution (DC) Pension Plans

This type of pension plans is more common today as there is less of a financial committment and risk for the employer.  Usually employees and employers both contribute.  The income received in retirment will be determined amount of money accumulated over the years of contribution and ultimately the rate of return of the investment portfolio; it is not based on a formula. For this reason proper management of the money in the plan is crucial.

When an income is drawn from a DC plan there is no guarantee that it will last for life, nor is there any inflation indexing.  It is possible to outperform a DB plan with superior returns on the investment portfolio. 

Other Points about Pension Plans

  • There is no payroll tax on employer contributions
  • Employees receive a tax receipt for their contributions to claim as a deduction
  • Each plan member can only contribute a limited amount per year
  • Contributions must continue once they are started - if business is slow the employer will have to find a way to make the contributions

Please contact us for more information about how as an employer you can make use of these plans to achieve your goals, and as an employee you can maximize the benefit you can gain from them.