Group RRSP’s and Pensions – Employer Sponsored

What types of Group Investment Plans are available?

 

Group RRSP’s

Group RRSP's are a type of employer sponsored savings plan.  They are very similar to regular RRSP's in most ways, but have a few important differences.

In regards to the tax benefits provided and the contribution limits, they are the same as regular RRSP's.

What is different about them is that the contributions made to a Group RRSP are made in pre-tax dollars deducted right off your paycheque.  If you are contributing to a Group RRSP through your pay, the amount of tax withheld from your paycheque by your employer is reduced based on how much you are contributing to the plan.  Basically you pay less tax on each paycheque and get a small portion of your tax refund on each pay through the lower tax being deducted.

The other portion of the Group RRSP is the portion that the employer contributes.  This is usually done on a matching basis.  For example, an employer may offer a match on RRSP contributions where you can contribute a percentage of your pay (say up to 5%) and they will match your contribution either at 100% of what you contribute or a lower percentage.

It is important to note that an employer match is not required by some investment companies to set up a Group RRSP.   The employees benefit by having the contribution made right off their paycheque in pre-tax dollars (as discussed above).  

There is some flexibility as to how these can be structured to achieve certain goals such as:

  • A waiting period can be established so that only employees that have been with a company for a certain period of time are eligible to participate.  This can be a method for an employer to reduce employee turnover and create loyalty.
  • The plan can be structured to reward employees differently based on their tenure with the company.  For example the matching contribution can be increased the longer an employee stays with a company.
  • The percentage matching contribution and maximums can vary for different categories of employees depending on the objectives of the employer.
  • If a company runs into hard times the employer match can be stopped or changed at any time.

Also there are some drawbacks from an employer's viewpoint such as:

  • Employer contributions are immediately vested and the property of the employees as soon as the contribution is made to the plan.
  • Employer contributions are subject to payroll taxes.

Group RRSP's can be individual or spousal.  Also Group Savings plans can be established for other types of plans such as TFSA's or RESP's.

Please speak to your financial advisor for more information on the many options available with Group Savings Plans.

Deferred Profit Sharing Plans (DPSP)

Another way for an employer to reward employees is to offer this type of plan.  It is flexible in terms of how much an employer has to contribute and addresses the drawbacks of Group RRSP's as mentioned above.

For example:

  • 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.

DPSP's are a way for employers to reward and thank employees for their hard work that has contributed to the profits of the company.  This may result in greater profits in the future through higher employee loyalty and morale.

There are maximum amounts that can be contributed to a DPSP by an employer, similar to RRSP's.  An employee's future RRSP room will be reduced by what is called a Pension Adjustment (PA).  Employee contributions cannot be made to DPSP's; only employers can contribute.

DPSP's are often used in tandem with a Group RRSP to address some of the drawbacks of those plans from an employers perspective.

Pension Plans

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

Defined Benefit (DB) Pension Plans

DB plans are the traditional pension plans that were very common in the past.  These plans may be contributory (employees contribute to the plan from their income) or non-contributory (these plans are fully funded by employers.

They are the most common type of plan used in the public/government sector, and are used less frequently by private employers.

With a DB plan, the benefit you will receive in retirement is determined by a formula.  This formula has 3 variables - your income prior to retirement, your years of service, and a percentage factor (usually 1.35% to 2.0%).

As an example, an employee with 30 years of eligible service, averaging $75,000 of income in their last five years prior to retirement, with a factor of 1.75% would receive the following guaranteed lifetime pension:

30 years  X  $75,000  X  1.75% = $39,375.

Depending on the plan this income may be indexed for life to the Consumer Price Index (CPI).

The important thing to note about these plans is that all of the risk for these plans is borne by the employer (not the employee).  The plans are actuarially evaluated every 3 years, and if there is not enough money in the plan to support the future anticipated benefit payments then they must be topped up with additional money.

For this reason most private sector employers do not use DB plans anymore.  Increasing life expectancies plus volatility in investment returns have reduced their popularity.

If you leave your employer prior to retirement there are a number of options available.  Sometimes you can stay in the plan, transfer the accumulated benefits to another DB plan, or transfer the money to a Locked in RSP account.  The decisions you make in regard to this are very important.  You need to speak to your financial advisor to help you evaluate all or your options.

Defined Contribution (DC) Pension Plans

DC plans are used more commonly in recent times.  With these plans the employer and employee both usually contribute to them.  The benefit that will be received is not defined by a formula in advance but is determined at retirement based on the performance of the investment that the contributions were invested in.  

The income received in retirement is not guaranteed to last for life nor are these plans actuarially evaluated every three years.  They do not provide the same type of income security that DB plans provide.  

The employer can structure these plans in many ways.  Typically the employer controls the investment that the employer's portion is deposited to, and allows the employee to determine the investment allocation for the employee's portion.

Similarly to DB plans, if you leave your employer prior to retirement to have similar options available to you.

Other Points about Pension Plans

  • Employee contributions are tax deductible for the employee
  • Employer contributions are not subject to payroll tax
  • There are limits on what can be contributed to a pension plan for each individual
  • The employer cannot start and stop contributions - they must continue
  • An employee's RRSP contribution room is reduced by the amount contributed to their pension plan through a Pension Adjustment (PA).  For high income earners the PA may be high enough to bring the RRSP contribution room to zero
  • If you leave a Pension Plan (DB or DC) prior to retirement, you may get some RRSP contribution back in future years via the Pension Adjustment Reversal (PAR)

Please consult your financial advisor for more details and 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.