Little more than a week ahead of the upcoming Kananaskis, Alta., meeting—while the rest of Canada’s finance ministers search for that most elusive of creatures in our federation, a political consensus—Saskatchewan has unilaterally undertaken a significant evolutionary step toward meaningful and viable pension reform through changes to the Saskatchewan Pension Plan (SPP). But perhaps a political consensus on some pension reform may not be so elusive, as Federal Finance Minister Jim Flaherty has just unleashed the fruits of a working group of provincial and territorial officials, a draft Framework for Pooled Registered Pension Plans (PRPPs).
The SPP may prove to be Canada’s first PRPP. By way of background, the SPP was first established in 1986. It has permitted contributions for Canadians ages 18 to 71, to a maximum of $600 per year to be made to the plan—without reference to earnings, without requirement for an employer-employee relationship and without any residency requirements. Contribution remittance is very flexible and can be in the form of lump sums by mail, at any financial institution, via credit card or online, or by periodic contributions via pre-authorized debit from a bank account. Contributions are tax-deductible to the member or the member’s spouse under RRSP rules. Transfers from other registered plans are permitted under the SPP. Benefits are subject to lock-in rules. The plan is defined contribution, with funds invested in a balanced fund or a short-term fund option. At retirement, funds can be transferred to a life income fund with a financial institution, or the SPP also offers life annuities, backed by the Saskatchewan government.
On Tuesday, Dec. 7, 2010, the federal and Saskatchewan governments jointly announced changes to the SPP. The contribution limit for 2010 and subsequent years has been increased to $2,500, with amendments to the Income Tax Act to align tax treatment of the SPP with certain RRSP and registered pension plan rules. Along with the increased contribution limit, employment income is now required for an individual to make contributions to the SPP as the tax-free savings account now offers an alternative to members of the SPP who formerly contributed without employment income.
With the increased contribution limits, the SPP will now be more meaningful to employers across the country as an alternative to sponsoring their own pension plans, particularly for those employees whose annual contributions would be less than $2,500 and where the employer is also unlikely to have the economies of scale to provide a similar plan with lower investment and administration costs for employees. It is also particularly notable that employers that participate in the SPP will not have the fiduciary burdens associated with other employer-sponsored retirement programs.
The SPP has much in common with the proposed PRPP framework. The similarities include the following:
- administrator (board of trustees for SPP) is a fiduciary;
- investments are pooled across the plan;
- SPP would essentially meet PRPP disclosure requirements;
- SPP administrator fulfills all of the PRPP requirements for management and operational responsibilities;
- Participating employer responsibilities are the same for SPP as for are proposed for PRPPs (subject to SPP maximum contribution limits);
- SPP permits two classes of members: individuals and employees of a participating employer; and
- portability.
The SPP varies from the proposed PRPP framework as follows:
- contribution flexibility—no set schedule for employer/employee or individual contributions; and
- locking-in—SPP locks in all contributions, under the proposed PRPP framework only employer contributions would be locked in.
Both the SPP and the proposed PRPP Framework are very welcome developments towards addressing the problem of private-sector pension plan coverage. The logical next step to complete the solution is for the provinces to establish mandatory requirements for employers to offer a pension plan.