The fundamental difference between a Defined Benefit Pension Plan and all other Group Retirement Savings Plans is the employer assumes responsibility for the outcome of retirement savings…Retirement Income. A defined benefit (DB) plan provides a pre-defined income to retirees, normally based upon the employee’s income and years of service to the company. These pension amounts are typically payable for life and may provide an income to a surviving spouse. Each year calculations are made which projects into the future what will be the dollar income value each year that your employee will receive in retirement. The values which an employee earns while employed are “vested” in their name and continue to accrue until such time as they reach age 65. Provisions are made for early retirement i.e. 55. 

Because the cost of a DB plan is volatile and depends on future investment returns and life expectancy, there is a prominent role for actuaries to play in this area. Pension plans can represent a significantly liability to the plan sponsor (the employer), who will also need to ensure that funding is in place to provide the promised benefits. 

Governance:  Consequently, DB Pension Plans are the most highly regulated savings plans in Canada. The provincial pension commission, in your province of registration, require regular reporting, assessments of plan viability and quality of governance. Actuaries are required by law to certify the valuation of the pension plan’s liabilities. As part of this function, actuaries must develop appropriate assumptions for life expectancy, future returns on invested assets, future changes in salaries, and other factors. 

No Defined Benefit Pension Plan can be established without significant input from Pension Actuaries.  

Commitment: The obligation to provide a future income and the complexity of both setting up and managing a Defined Benefit Pension Plan invariably concludes that these are not the preferred choice for employers. Public Sector Employers and very large corporation are the most likely providers of Defined Benefit Pension Plans. 

Having said all the above, DB Pension Plans may hold tremendous appeal for executive teams of closely held corporation or multi-generational family-owned businesses. There may be significant value to be realized in creating a Defined Benefit Pension Plan. The opportunity of ensuring plan member economic well-being by ensuring company funding of these personal needs, can afford the ability to transfer significant value from the business to the individuals.  

If you are interested, this is when a conversation with a qualified professional is vital. 

May we invite you to give us your contact information so that we may continue the conversation. 

CAP guidelines were enacted by the Joint Forum of Financial Market Regulators in 2004.

If you are an employer and you have a Defined Contribution Pension Plan, Group RRSP plan, Group RESP plan or a Deferred Profit Sharing Plan (DPSP), then you have a set of responsibilities under the Capital Accumulation Plan Guidelines.

According to the 18-page document put together by the regulators, employers have a new set of responsibilities. Here is a summary of the requirements broken down into four key themes: Governance, Communication, Process and Documentation.

Governance – A strategy document.

One of the themes of the CAP guidelines is the theme of governance. Generally speaking, the plan sponsor or employer is required to outline the criteria for establishing the plan, the service provider and the investments being offered through the plan. The best thing to do is put these criteria in writing as a strategy or governance document. Here are some of the things that document might include:

What is the purpose of the plan? 

In other words, why is the plan implemented?

There could be many reasons which might include:

To help employees with retirement savings

To help employees become more fiscally responsible

To attract and retain good employees

To reward employees

If there is change to the plan or the purpose of the plan, it should be documented as well. This document should be reviewed periodically or when significant changes occur.

In some cases, Group RRSP or Pension plans have been around for so long and has survived numerous management teams. This is a good opportunity for review.

Are you going to use a service provider? If the intent is to use a service provider (broker or consultant), the document should also outline some criteria for choosing a broker or consultant and then monitor the service provided against those criteria on a regular basis. Some of the criteria for selection might include: professional training, experience, specialization, fees, quality of services, etc.

Part of choosing a service provider is knowing what roles and responsibilities they are going to take on. The Strategy Document should outline the roles and responsibilities of the Plan Sponsor (employer), Service provider (broker and/or financial institution, and the members (employee).

Communication and education

Another big component of the CAP guidelines is the requirement for communication and education. This can be a big responsibility for the employer. Here are some things to consider:

Although employees or CAP members are responsible for making investment decisions within the plan, the employer is required to provide adequate information on the plan and the investment options. The CAP sponsor should also provide the employees/members with the tools necessary to make investment decisions within the plan. More often than not the service provider provides online tools, documents and questionnaires to help employees make appropriate decisions.

According to the most recent research by Benefits Canada, a high proportion (86%) of employers feel they are providing education and information to employees for the purpose of making sound choices in the plan. Most employers and service providers provide the minimum level of information, education and tools. In other words most of the education that occurs is plan and product education where employees are given information on the plan, how it works and the investments inside the plan. It is important for the employer to explain the investment options, transfer options, fees, expenses and penalties around the plan.

Some employers are going beyond these minimum education standards by providing financial education, which really broadens the scope of information, and education. Instead of helping employees with one small aspect of their personal finances, some employers are implementing financial education programs designed to help employees with all facets of their financial lives and not just the impact of the group plan.

We encourage all employers to consider a financial education program to complement their existing educational requirements. The cost is minimal and the results can be astounding.

Process – Plan maintenance

The last major theme around the CAP guidelines is the requirement to maintain the plan. In the guidelines, there is quite a bit of information about setting periodic reviews of many aspects of the plan including a review of service providers, review of the plan, review of the investment options. This is where a broker or consultant can really help because they can take a lot of the review requirements off the plate of the employer.

Documentation

The bottom line is documentation is so important in the world of regulation. The whole point of regulation is to protect interested parties. Employers need to protect themselves through documentation as does the service provider and event the employee.

As part of a good governance structure, anything important must be documented. This includes the relationship with service providers—a contract with each of them is essential. The investment selection process and periodic reviews also need to be documented.

Executive Summary 

Employers have several options available to them when considering a retirement savings plan for their employees.  Defined Contribution Pension Plans, Group RRSPs and Deferred Profit-Sharing Plans, are the most accessible plans for most businesses.  Here is what you need to know about each plan and how they can work for your employees.  

What Is A Defined Contribution Pension Plan? 

Defined Contribution Pension Plans (DCPP) are an employer sponsored retirement savings option available to Canadian business owners and their employees. Defined Contribution Pensions Plans are made up of a combination of employee contributions, employers’ contributions, and an optional voluntary contribution component. Defined Contribution Pension Plans are regulated by provincial pension laws, which varies from province to province. 

 What Is a Group RRSP?  

A Group Registered Retirement Savings Plan (Group RRSP) is an employer sponsored retirement savings plan.  Group RRSP’s have many similarities to individual RRSPs with the only difference being that they are administered on a group basis. The plans are made up of employee and employer contributions, but unlike traditional pensions, the employer is not required to contribute any amount to the plan.  

What is a Deferred Profit-Sharing Plan? 

In conjunction with a Group RSP, employers usually “match” their employees’ contributions into their Group RSP. Deposits are tied to the employees’ contribution via a formula and deposited into a Deferred Profit-Sharing Plan (DPSP). The matching formula might be a percentage of the employees’ contribution to a maximum percentage. This matching dollar contribution encourages savings  

Similarities and Difference  

Tax Deferred Savings   

Defined Contribution Pension Plans, Group RRSPs and Deferred Profit-Sharing Plans offer tax deferred savings for employees that contribute to them.   Contributions are taken at the source before tax and contributed to the plans on the employee’s behalf.  These investment options allow employees investments to grow tax free until they retire, at which point the funds with be taxed as they are withdrawn.  

Contribution Limits  

All plans are subject to annual contribution limits.  This amount is equal to a percentage of each employee’s income from the previous year.  Both employee and employer contributions count towards this annual limit.  All plans will also cause a pension adjustment to employees.  This means their individual RRSP will be reduced based on the amount contributed to their employer sponsored plan.  This keeps an equal playing field for those who do not have work pensions.  

Age Limits  

Defined Contribution Pension Plans, Group RRSPs and Deferred Profit-Sharing Plans require that employees and employers stop contributing to the plan and start drawing on the funds by the end of the year in which they turn 72.  Technically the employees must convert the plans to a Registered Retirement Income Fund (RRIF) by the end of the year in which they turn 71 and that will pay them out a retirement income.  For Defined Contribution Pension Plans, this fund is called a Life Income Fund (LIF).   LIFs have minimum and maximum withdrawal requirements that plan holders must adhere to. Provincial legislation determines the rules and requirements for DCPP payments.  

Group RRSPs and Deferred Profit Sharing Plan holders have two options at age 71.  Plan members can a) cash out the plan and pay all tax owing or b) convert the plan to a RRIF and start taking an income.  At this point a Deferred Profit-Sharing Plan is consolidated with the Group RSP money into a single RRIF. RRIFs have minimum withdrawal requirements that plan holders must adhere to. The Income Tax Act determines the rules and requirements for payments from a RRIF.    

Pros and Cons  

Defined Contribution Pension Plans  

Pros 

• Attractive to Employees due to the employer matching component. This can greatly accelerate employee’s retirement savings 
• Funds are locked-in and therefore not accessible until the employee retires. They do not have the option to spend their retirement savings frivolously.  
• Funds grow tax free if they stay in the account 

• Employer Contributions are tax deductible  
• Typically, the investments offered in a pension plan have a much lower fee than traditional investments.    
• Simple, reduced selection of investment options available within the plan.  

 Cons  

• Defined Benefit Pension Plans can come with higher administration costs and require continuous maintenance.  
• Due to the fact funds are locked in, employees have little to no flexibility in how they use the money they accumulate.   
• Employer contributions are expected.  This can be a significant expense, depending on how many employees a business has.  
• Business circumstances may sometimes make these required payments a challenge 
• Benefits at plan end are at the mercy of market fluctuations. 

Group RRSP  

Pros 

• Employer contributions are not mandatory.  This allows for businesses to offer their employees a retirement savings option regardless of the financial abilities of the company, with the flexibility for the company to contribute at any point if it becomes feasible.  

• Funds grow tax free if they stay in the account 
• Group RRSPS have low start up and maintenance costs.  
• Generally, Group RRSP have a must larger investment shelf than pension plans.  
• No legislative regulation means flexibility for employees to dip into their savings if necessary i.e.  Home Buyers’ Program or Lifelong Learners Program.  

Cons  

• Employees have the option to withdraw from the plan at any time, which can severely impact their retirement savings. 
• Larger investment shelves mean more opportunity for employees to take unnecessary or unsuitable risk with their investments.  
• Employer Contributions are a taxable benefit to employees 
• Benefits to employee are not guaranteed and are subject to market fluctuations  

Deferred Profit Sharing Plans 

Pros 

• Employer contributions can have access restrictions that limit the ability of employees to withdraw these savings while employed. 
• Unlike a Defined Contribution Pension Plan, these savings are not locked -in. Upon leaving an employer, the employee will have these funds merged into their RSP account and combine them for ease of use and administration. 
• The employer can choose to allow access of these funds for Home Buyer Program and Lifelong Learners Program 

• The breadth of investment options equals the Group RSP options. 
• Frequently the matching percentage encourages savings, and the flexibility of access assures employees that the money is accessible. 

Cons 

• The matching contributions establishes an “obligation” on the part of employers. 
• The relative ease of employee access to this money can defeat the idea of “retirement” savings. 

• The breadth of investment options can result in ill-considered investment choices 
• Employer contributions are taxable benefits to employee…with an offsetting contribution deduction 
• Benefits to employees are not guaranteed and are subject to market fluctuations 

Regardless of the form of your Employee Retirement Savings Program, these plans should not be entered into lightly. Discussing the features, benefits, obligations, and costs with a qualified professional is essential. 

 May we invite you to give us your contact information so that we may continue the conversation?