Retirement Savings Program - taking care of the future

Retirement Savings Overview

Purpose

Why provide a retirement savings program?

tax effective compensation
encourages and rewards long service
facilitate the replacement of older workers
provide clarity and security not found in informal understandings
provides retirement income for staff
disciplined savings program
encourages employees to save for their retirement
match expenses to the time those benefits were earned

Plan Design Issues

Are pensions a form of compensation or an expression of paternalism?

vesting
past service contributions
defined contribution vs. defined benefit

Should omissions of the past be corrected?

past service contributions
defined contribution vs. defined benefit

How much risk is the organization willing to accept?

defined contribution vs. defined benefit
- investment risk
- inflation risk
- cost shifting by government programs

How important is employee appreciation?

simple & easy to understand plan design
vesting schedule
defined contribution vs. defined benefit

Requirements

Plans that are organized and administered to provide a pension benefit for employees must:

be registered under a provincial or federal Pension Benefits Acts
be registered with the federal Department of National Revenue for purposes of the Income Tax Act
have benefits, terms and conditions in compliance with the act
satisfy the regulations as to solvency and investments
be funded by advance payments under an accepted actuarial method

Taxation

Revenue Canada controls the rules governing the tax treatment of retirement savings plans (RPP, DPSP, RRSP) in Canada through the Income Tax Act and Interpretation Bulletins.

employer contributions and costs are tax deductible to the employer
employee contributions are tax deductible to the employee
income and growth are tax sheltered within the plan
benefit payments and withdrawals are taxable to the recipient

Government Sponsored Plans

Due to the fiscal irresponsibility demonstrated by most governments, it is wise not to depend on social benefits. No space on this site is devoted to government sponsored OAS, CPP, QPP or GAINS programs due to the uncertainty of collecting these benefits in the future.

Legislative History (federal unless stated)

1887 - Pension Fund Societies Act allowed employees to set up pension funds
1908 - Government Annuities Act facilitated retirement savings by selling annuities until 1975
1919 - Income Tax legislation allowed employees to deduction from taxable income their pension plan contributions and later permitted employers to deduct their contributions (RPP)
1952 - Old Age Security pension without a means test (OAS)
1957 - Registered Retirement Savings Plan (RRSP)
1965 - provincial Pension Benefits Acts
1966 - Canada and Quebec Pension Plans (CPP, QPP)
1967 - Guaranteed Income Supplement (GAINS)

Popular Choices

Contributions to a Registered Pension Plan or Deferred Profit Sharing Plan are not subject to payroll taxes, while contributions to a Registered Retirement Savings Plan are.

Many organizations shy away from Registered Pension Plans because of the entitlement mentality it fosters amongst employees, high degree of financial risk it places on the organization and excessive government reporting by management.

A favourite plan design is a Deferred Profit Sharing Plan containing a profit sharing component designed by HR plus an schedule for the employer matching employee contribution to a Structured Registered Retirement Savings Plan based on profit. The matching rate would be a minimum of 50% and maximum of 100% of employee contributions. The maximum employee contribution that could be matched is 1% of earnings during the first year of participation, 2% during the second year, 3% during the third year, 4% during the fourth year and 5% of earnings after 4 years of participation.

Type of Plans

In Canada there are three types of retirement savings vehicles that offer tax relief and tax sheltering:

Registered Pension Plan (RPP)
Deferred Profit Sharing Plan (DPSP)
Registered Retirement Savings Plan (RRSP)