Private Pension Plans
Private pension plans provide workers with retirement income to supplement the income they will receive from public pension plans. They come in a variety of forms, including personal registered retirement savings plans (RRSPs) and employer-sponsored plans.
These plans don't all offer the same advantages and are not necessarily suited to all types of work situations. Let's take a look at their individual features.
Private employer-sponsored Pension Plans
Supplemental pension plan (SPP)
SPPs are also known as "pension funds," "employer pension plans," "registered pension plans", and "private pension plans." They are contracts under which the employer, alone or in conjunction with the employee, makes contributions to provide the employee with a retirement income and other benefits (death and sometimes disability). This income and these benefits are payable under very specific circumstances. As a general rule, funds accumulated by the employee are locked-in (or "frozen") until retirement and can only be used as retirement income.
SPPs are usually established by the employer, but may also be established by a union or other competent authority. Many workers do not have SPPs, particularly the self-employed and those who work for private sector companies that do not offer this benefit.
SPPs are governed by a spectrum of laws and administered by a variety of organizations and individuals, so the specific features vary from one
SPP to another. For example, a private sector
SPP subject to provincial jurisdiction and offered to employees in more than one province will be governed by the laws of each province.
The following are the main laws that apply to SPPs:
| Income Tax Act
www.cra.gc.ca under the heading "Representatives—Registered plans administrators—Registered Pension Plans (RPPs)"
SPPs in the private sector under federal jurisdiction (included employmen private sectort): telecommunications; banking; air, maritime, and rail transport; etc.
SPPs for local or private activities in the Yukon, the Northwest Territories, and Nunavut
| Pension Benefits Standards Act, 19851
|Yukon, Northwest Territories and Nunavut - Office of the Superintendent
of Financial Institutions
www.osfi-bsif.gc.ca/Eng/Pages/default.asp under the heading "Private Pension Plans"
1 This law applies to pension plans offered by employers in the private sector whose activities fall under federal jurisdiction (banks, interprovincial transport and telecommunications companies, etc.).
SPPs in the Québec public sector, including public service employees, teachers, Sûreté du Québec staff, peace officers, municipal elected officials, judges of the Court of Québec, etc.
Act respecting the Government and Public
Employees Retirement plan
Act respecting the Pension Plan of Management Personnel
Act respecting the Teachers Pension Plan
There are 2 main categories of SPPs:
defined contribution pension plans and
defined benefit pension plans. The 2 categories can be combined in a single
Defined Contribution Pension Plans
This type of plan sets the employer's and, if applicable, the employee's contribution in advance. The amount of the pension or retirement income is not predetermined; it is calculated according to factors such as the total funds accumulated plus interest, the interest rate in effect at the time of purchase of a life annuity, or the rates for a life income fund (LIF).
Defined Benefit Pension Plans
With this type of plan, the amount of the retirement pension is determined in advance according to a specific formula. The contribution amounts are reassessed periodically (typically each year) by an actuary. As a general rule, the employee's contribution is set in advance, and the employer is responsible for the balance of the cost of the retirement pension and other benefits.
This type of plan can be divided into 2 categories: "unit benefit plans" and "flat benefit plans". For unit benefit plans, pension payments are calculated as a percentage of the employee's salary or as the average salary for the employee's recognized years of service (e.g., 2% of the employee's average salary for the 3 consecutive highest-earning years of service). For flat benefit plans, the pension is set at a fixed rate according to the number of years of service (e.g., $480 per year of service).
Excess Benefit Plan
This type of plan is also known as a "top hat plan". As its name indicates, an excess benefit plan is meant to supplement
SPP retirement income without regard to the tax limits that apply to the
SPP. It is generally suited to high-income and key employees. It can come in the form of a retirement compensation arrangement, a letter of credit other than a retirement compensation arrangement, an employer resolution, or any other promise (written or not) of retirement income by the employer.
Excess benefit plans can be funded (contributions are paid in advance and set aside), usually through a retirement compensation arrangement. They can also be non-funded, which entails a risk of non-payment if, for example, the employer faces financial difficulties or sells the company's assets.
Group Registered Retirement Savings Plan (group
RRSP is a contract usually established by the employer or union to help employees contribute to individual RRSPs. It has set conditions regarding the opening of accounts, eligible employees, contribution amounts, available investments, terms and conditions, and the withdrawal of invested funds. For example, employees may not be permitted to withdraw funds from their group RRSPs while they are still working for the employer.
From a tax perspective, employers do not contribute to group RRSPs. Only the employee may do so. However, the employer may increase the employee's salary by a percentage or set figure, then deduct the increase for payment into the employee's group
RRSP account. This usually entails an increase in the employer's salary taxes, meaning higher contributions to the Québec Pension Plan (or the Canada Pension Plan), Employment Insurance (EI), the health service fund, the Commission de la santé et de la sécurité du travail (CSST), the Workforce Skills Development and Recognition Fund (WSDRF), the Commission des normes du travail (CNT), etc., depending on the programs that apply.
Deferred Profit Sharing Plan (DPSP)
DPSPs are contracts under which employers share a portion of their profits with their employees. The employees cannot be major company shareholders. Only employers contribute to DPSPs, and the contribution is determined according to the company's profits.
Only in rare occasions does a
DPSP allow employees to withdraw funds while still working for their employers. Funds accumulated in a
DPSP may be paid out either in a lump sum or in multiple payments over a period not exceeding 10 years, used to purchase an annuity from an insurer, or transferred directly into an
Employees Profit Sharing Plan (EPSP)
EPSPs are agreements under which employers share a portion of their profits with their employees. Employees can contribute to the plan and must pay tax on contributions made on their behalf during the year, even if they do not withdraw benefits.
Retirement Compensation Arrangement
Retirement compensation arrangements are agreements under which the employer and sometimes the employee pay into a trust (or other fund) to provide the employee with an income after retirement or in the event that they lose their position or job or their job duties change radically.
Compensation payments and the income they generate are subject to a 50% refundable tax. The employer's contribution is allocated 50% to the trust and 50% to tax. The trust (or other fund) remits for tax 50% of the employee's contribution and 50% of the income generated by the contributions made under the arrangement.
The tax is refundable to the trust without interest when compensation is paid ($0.50 tax refunded for $1 benefit paid). This means that half of the promised benefits are financed by the trust (or other fund) and the other half by tax refund.
If a retirement compensation arrangement is set up for an employee whose income exceeds the
SPP contribution limit set out in the
Income Tax Act, the agreement is deemed to be a funded excess benefit plan.
Tax Treatment of Private Pension plans
Different tax rules apply to the various private pension plans
|Private, employer-sponsored pension plan
|Employee contribution tax deductible
|Ceiling on employee contribution
|Investment income tax exempt
|Ceiling on retirement income
|Retirement income payable by age 71
|Defined contribution pension plan
| Defined benefit pension plan
|Excess benefit plan
|Retirement compensation agreement
* In rare cases, the employee's contribution may be deductible.
Employers can generally deduct private pension plan contributions from their business income, except in the case of excess benefit plans that are not retirement compensation agreements. For retirement compensation agreements, this deduction applies to the total amount paid to the trust and in tax by the employer.
Income Tax Act puts a ceiling on combined annual contributions to RRSPs (group and personal), SPPs, and DPSPs. It also puts specific ceilings on
DPSP contributions. The allowable contribution in an
SPP or a
DPSP increases a worker's
pension adjustment (PA)The pension adjustment (PA) applies to SPPs. It is calculated based on the contributions made to an employer's pension plan during the year or the benefits earned. It determines how much an individual can contribute to an
RRSP after contributing to an
SPP. and lowers his or her
RRSP contribution ceiling. Contributions made to an excess benefit plan, EPSP, or retirement compensation agreement do not affect pension adjustments or maximum
All benefits from private pension plans are taxable in the year they are received. However, when benefits are transferred
directly into another plan or eligible investment vehicle, they may be taxable in the year they are withdrawn rather than the year they are transferred. Some restrictions apply. Likewise, for excess benefit plans, a lump sum payment may qualify as a retirement allowance that can be transferred to an
RRSP, providing tax savings. Again, some restrictions apply.
More Information About Your Private Pension plan
You can contact your plan's administrator, your employer, your union, or any of the government bodies listed in the table above. General information on private pension plans is also available at
www.cra.gc.ca under "Representatives—Registered plans administrators—Registered Pension Plans (RPPs)."
Worth knowing about...
- Other investment vehicles can be used to save for retirement, notably stock bonus plans and stock option plans. Specific tax rules may apply.
- SPPs cannot be financed exclusively by employee contributions. The employer must contribute. However, in some cases the employer's contribution may not be as much as to the employee's contribution.
- Simplified pension plans (SIPPs) are defined contribution SPPs established and administered by a financial institution. Employees decide where to invest the funds in their account from among the choices offered by the financial institution, in accordance with applicable legislation.
- A member-funded pension plan (MFPP) is a defined benefit plan. The employer's contribution is set in advance. The balance of the contributions needed to cover benefits is an obligation of the plan members
- An "individual pension plan" is a defined benefit pension plan generally set up for one specific person, such as a key employee or major shareholder. Like all SPPs, it is registered with the Canada Revenue Agency and subject to the
Income Tax Act. Most are also registered with
Retraite Québec and subject to the
Supplemental Pension Plans Act if they are offered by employers in Québec's private sector. There is one exception: if the plan holder is a major shareholder, the parties may decide not to register it with
Retraite Québec. Plans that are registered with
Retraite Québec are subject to all provisions of the
Supplemental Pension Plans Act. Those that are not registered with Retraite Québec are only subject to certain provisions of the
Supplemental Pension Plans Act, notably those concerning the designation of beneficiaries, prudence in selecting investments, and partition of earnings and contributions after a conjugal breakdown.
- Be careful about investing too much of your private pension plan funds in securities issued by your employer (stocks, bonds, or other). Of course, you are free to invest in your employer's business, but beware of the risk of putting all your investments in one basket and make sure you abide by the limits set out in the applicable legislation (10% in Québec). If your employer faces financial difficulties, imagine the impact it could have on your job and your retirement savings. Consider diversifying your investments.