An employee’s guide to pooled registered pension plans

Saving for retirement can be challenging, especially if you don’t have access to a workplace pension plan. This is where pooled registered pension plans (PRPP) come into play.

PRPPs are designed to provide employees and self-employed individuals without employer-sponsored pensions a means to build their retirement nest egg. These plans work by pooling contributions from members, offering a low-cost and professionally managed way to save for your future. 

In this client education article, Benefits and Pensions Monitor digs deeper into how pooled registered pension plans work. We will discuss what distinguishes PRPPs from other retirement savings options and break down the pros and cons of these types of plans.

If your work doesn’t offer pension benefits and you’re looking for one, this guide can prove handy. Read on and find out how PRPPs can help you achieve your financial goals for retirement.

What are pooled registered pension plans?

PRPPs are designed to address a significant gap in Canada’s retirement savings system – the need for an affordable option for those without employer-sponsored pension plans.

This is important, especially with the latest government figures showing that there are around 2.7 million self-employed Canadians who lack access to work-sponsored pension arrangements. The figure, however, is just part of the almost eight million individuals – about two-thirds of the country’s workforce – employed by small and medium-sized businesses. Many of these companies don’t provide workplace pension.

PRPPs pool contributions from members, allowing them to benefit from professional investment management and lower administrative costs. These plans are aimed at providing workers, particularly those without employer-sponsored pensions, with a straightforward means to save for retirement.

One of the most effective programs that you can access to help you prepare financially for retirement is the Canada Pension Plan (CPP). Learn more about how the plan works in this guide.

How does a pooled registered pension plan work?

A PRPP pools members’ funds together for investment purposes. It functions as a form of defined contribution pension plan that are offered by licensed administrators to employees and self-employed individuals. An administrator must be licensed under the Pooled Registered Pension Plans Act (PRPP Act) to register a plan and accept members.

The PRPP Act, along with the Pooled Registered Pension Plans Regulations (PRPP Regulations), establishes the minimum standards that PRPPs and PRPP administrators must meet. Most provinces, however, implement their own legislation when it comes to pooled registered pension plans, so there may be slight differences. Québec, for example, has the voluntary retirement savings plans (VRSP), which work a lot like PRPPs.

Read next: The best Québec pension plans: what are your options?

Let’s explore the general elements and features of pooled registered pension plans:

1. PRPP contributions

PRPP contributions work almost the same way as group registered retirement savings plans (RRSP). Contributions are directly deducted from your paycheque and your employer can choose to contribute to the plan. If you’re self-employed, you can contribute on your own, just like in an individual RRSP. The funds are then invested into portfolios managed by financial institutions, helping grow your savings over time.

PRPP contributions are tax deductible, just like those for RRSPs. But unlike RRSPs, PRPPs operate under pension standard laws, such as the PRPP Act. This means that there are rules in place, including locking-in rules and where the funds can be transferred, which don’t apply to RRSPs.

2. PRPP contribution room

The contribution for your PRPP is aligned with your RRSP contribution limits. It is calculated based on your annual income and combined with your RRSP contribution room. This means that any contributions you make count against your available RRSP contribution room and vice versa. Keep in mind that contributions made by your employer also count toward your total contribution limit.

Read next: Introduction to Pension Plan Calculators

The annual limit is 18% of your previous year’s earned income, up to a maximum set by the Canada Revenue Agency (CRA). For 2024, the annual contribution limit is $31,560. You can carry over any unused contribution room from previous years. This gives you the flexibility to contribute more when you can afford it.

Be careful, however, of exceeding the annual limit. If you do, the CRA will charge you a 1% monthly penalty for overcontributions of more than $2,000. The tax penalty continues until the amount is withdrawn or your limit covers the excess contribution.

The best way to know how much you can contribute for the year is to check your latest notice of assessment from the CRA.

3. PRPP tax implications

As mentioned, contributions to a pooled registered pension plan are tax-deductible. This lowers your taxable income in the year the contributions are made. Investment income within the PRPP grows on a tax-deferred basis, enhancing the potential for long-term growth. Keep in mind, however, that withdrawals from your PRPP are considered taxable income, just like with an RRSP. This can impact your tax bracket in retirement.

4. PRPP transfers

PRPPs provide flexibility when it comes to transferring funds. If you switch jobs or decide to retire, you can transfer your PRPP balance to another PRPP, RRSP, or registered retirement income fund (RRIF) without incurring tax penalties. These transfers allow you to maintain control of your retirement funds while benefiting from the tax-deferred growth until you withdraw them.

5. PRPP withdrawals

PRPPs are meant for long-term savings, so withdrawals before retirement aren’t encouraged and come with penalties or tax consequences. But once you retire, you can start withdrawing funds as income. The money you take out will be taxed as regular income.

There are no withdrawal restrictions like with locked-in RRSPs but managing how much you withdraw can help you control your tax rate.

6. PRPP investment options

The investment options for PRPPs closely resemble those of other registered plans – but there are rules in place. The Income Tax Act restricts certain types of investments within a pooled registered pension plan to prevent tax loopholes.

For example, you can’t hold things like your mortgage, personal debts, or shares in companies where you have a big stake. These restrictions are designed to keep the plan fair and focused on genuine retirement savings.

Who is eligible for a PRPP?

Anyone with a valid Canadian social insurance number (SIN) can participate in a PRPP if they meet one of the following:

• works in a federally regulated industry for a business that chooses to participate in a PRPP
• employed or self-employed in the Northwest Territories, Nunavut, and Yukon
• lives in a province that has PRPP rules in place

Currently, these provinces have laws on pooled registered pension plans:

• British Columbia
• Manitoba
• New Brunswick
• Nova Scotia
• Ontario
• Québec (VRSP)
• Saskatchewan

You can enroll in a PRPP through either:

• your employer, if your employer chooses to participate
• a PRPP administrator such as an insurance company or a bank

Once enrolled, a PRPP account is created under your SIN. You can choose how much of your paycheque is deducted for your contributions. These contributions, along with your employer’s contributions and any lump-sum payments, are pooled together and credited to your account.

If your employer decides to offer a PRPP to a class of employees, all eligible employees in that class will be enrolled in the plan. Participation, however, isn’t mandatory. Although employees are automatically enrolled in the program, you can opt out within 60 days upon receiving a notice from your employer or the administrator.

Check out this guide to find tips and strategies on how to choose benefit plans at your company.

Who manages a PRPP?

There are five companies licensed to administer pooled registered pension plans in Canada, according to the Office of the Superintendent of Financial Institutions (OSFI). They are listed below, along with their PRPP offering and contact information.

What’s the difference between a PRPP and a group RRSP?

Pooled registered pension plans and group RRSPs are both designed to help employees save for retirement, but they have key differences in structure and management:

• Administration and regulation: PRPPs are professionally managed by licensed administrators and are governed by federal or provincial regulations. Group RRSPs are employer-sponsored and managed at the employer’s discretion, with fewer regulatory safeguards.
• Employer involvement: PRPPs require minimal employer involvement, making these plans easier to administer. Group RRSPs require active management by employers, including remitting contributions and managing plan details.
• Contribution limits: PRPPs and group RRSPs share the same contribution limits, but PRPPs can have mandatory contributions, which help keep your savings on track. Group RRSPs are usually more flexible, with voluntary contributions.
• Tax deductions: PRPP and group RRSP contributions are tax-deductible, but PRPPs often have lower administrative fees because of pooled resources. This can potentially lead to better net returns.
• Withdrawals: Group RRSPs allow more flexible withdrawals, while PRPPs discourage early withdrawals to maintain long-term savings. This makes PRPPs more effective for disciplined retirement planning.

Learn more about how group registered retirement savings plans work in this guide.

What are the pros and cons of pooled registered pension plans?

Pooled registered pension plans provide a structured and regulated approach to retirement savings for Canadians without access to traditional workplace pensions. While these plans offer several advantages, they also present certain drawbacks that you should consider.

Pros of PRPPs

• Professional management: PRPPs are straightforward, since they’re professionally managed by financial institutions. This means that you don’t have to worry about picking investments or handling the administrative side.
• Cost efficiency: As they pool funds from multiple members, PRPPs benefit from economies of scale, resulting in lower administrative fees than individual investment accounts. Lower costs can boost net returns over time.
• Ease of contributions: Contributions are automatically deducted from your paycheque, making saving for retirement consistent and hassle-free. This feature is also great for those who find it hard to remember to contribute regularly and prefer a hands-off savings approach.
• Potential employer contributions: Some employers may choose to contribute to an employee’s PRPP. This can boost your retirement savings and isn’t always available with other savings plans.
• Tax benefits: Contributions to a PRPP are tax-deductible, which means you pay less tax now. Your investments also grow tax-free until you withdraw the money in retirement.

Cons of PRPPs

• Limited control over investments: PRPPs are professionally managed, which is great for simplicity. But this also means that you don’t have much say in how your money is invested. If you’re someone who likes to pick and choose your investments, this may feel restrictive.
• Restrictions on early withdrawals: PRPPs are intended for retirement savings, that’s why early withdrawals are discouraged. Withdrawals made before retirement are subject to tax consequences and possible penalties. If you’re searching for a plan that can suit short-term financial needs, PRPPs may not be a good option.
• Exposure to market risks: As with most investments, PRPPs don’t have guaranteed returns. Their performance is tied to market conditions. This exposure can lead to unpredictable account balances, particularly during periods of market volatility.
• Shared contribution limits: Contributions to PRPPs are counted against the same limits as RRSPs. This can limit the amount you can save if you’re also contributing to other registered plans.

Pooled registered pension plans can be a good option if you’re seeking a low-cost and professionally managed retirement savings solution. But they may not be ideal if you want greater control over your investments or need to access funds before retirement. Understanding these benefits and drawbacks can help you make an informed decision about your financial future.

As with every important financial decision, it’s best to consult an experienced industry expert to ensure that your choice aligns with your financial goals.

If you’re looking for the top retirement planning specialists in the country, our group retirement directory is the place to go. The companies listed on this page employ industry experts and offer the best advice and services to help you achieve financial security in retirement. By partnering with these professionals, you can be sure that your financial future is well taken care of.

Have you participated in a pooled registered pension plan? How was the experience? Share your story in the comments.