RRSP, pension limits raised in budget
24-02-2003
Jeff Sanford

The most widely reported provision in the budget is the increase to registered pension plan (RPP) and RRSP limits.

The new limits on RRSPs are $14,500 in 2003, $15,000 for 2004 and $16,500 in 2005. Money purchase registered pension plans will see the limit increased to $15,500 in 2003, $16,500 in 2004 and $18,000.

"We're disappointed," says Ian Markham, a senior actuary with Watson Wyatt Worldwide in Toronto. "We would have to have a limit of $27,000 to have a system comparable to the U.S. or U.K."

Markham explains that a person who makes just under $104,600 (the level at which an individual moves into the top tax bracket) is still not able to put away the maximum 18% of earnings before hitting the limit. "There are a lot of people at the upper end of the tax bracket who can't get to 18%," he says.

Also in the budget, DB plans will see the maximum pension limit rise from $1722.22 to $1833 next year and then $2000 in 2005. Which is good for plan members. That number is used to calculate an employee's final pension payments. As a result, a person in a DB plan who puts off their retirement until next year will realize a 6.5% gain in retirement payouts. "Someone who waits until next year will get quite an increase," says Markham.

The flip side is that the increase will affect the funding and accounting around DB funds, as they will be drawn on more heavily because of the higher payout. This comes at a time when there is already widespread concern in the markets over underfunded pension plans.

Companies most affected would be ones with an "executive" DB plan and many high-income staff who have accumulated many years of service, which do not have a SERP to act as an offset.

"I don't think it's something to worry about as a society --the fall in the market has far more effect," says Markham. "But for one company with a large underfunded [plan], the plan may be in trouble."

Another big change in the budget is a motion to allow DC plans to pay out pension benefits similar to what a Registered Retirement Investment Fund (RRIF) does. That is, rather than simply exist as money accumulation vehicles, DC plans could also become payout vehicles.

By allowing DC plan members to keep their funds in a plan after they retire, and having the plan pay out the savings (rather than converting to a RRIF), plan members could avoid the typically high service fees that come with conversion.

But the new initiative would add extra administrative responsibilities to those sponsoring DC plans, says Markham. "It would be a hassle for plan sponsors who have to be willing to shoulder the costs. From the plan sponsor point of view, it may be a new and possibly high expense."

One last provision in the new budget is a commitment to study tax-prepaid savings plans, or TPSPs. This type of plan would see tax paid up front as money goes into the plan, but then not taken off when it comes back out. It would be the reverse of current RRSP structure, where tax payment on that money is deferred until the money comes out of the plan.

The government has said it will look at the idea, which is a technically daunting task. "It's not that simple," says Markham. "There are a lot of issues that would have to be worked out on a plan like this."