Personal Pension Plans outperform group RRSPs, yet sponsors shrug

Most Canadian executives, business owners and plan sponsors default to group RRSPs or defined contribution plans for retirement savings. They do so because their advisors tell them to, and their advisors tell them to because, in many cases, those are the only tools they know.

As one pension lawyer explains, Personal Pension Plans (PPPs), with roots going back more than three decades, offer tax advantages that dwarf what conventional plans can deliver. But the pension industry has been walking right past the solution.

Lack of education impacts PPP adoption

"It's the lack of knowledge in the industry, generally speaking, about these solutions. People just don't know. And if you don't know something, you can't recommend it. You can't even compare it to alternatives. It doesn't even form part of the basic presentation. It's just completely forgotten as if it didn't exist," said Jean-Pierre Laporte, co-founder and CEO of INTEGRIS Pension Management. “There's no excuse for the pension industry not to be letting clients know about this. The fact that they just can't be bothered learning about it is not an excuse.”

According to Laporte, the PPP is a combination of a registered pension plan that operates with three distinct components: a defined benefit account, a defined contribution account, and an additional voluntary contribution account, all housed under a single plan. Laporte, who trademarked the PPP acronym, has spent years pushing for broader awareness of what the Income Tax Act already permits.

Laporte explains the common assumption in the industry is that PPPs are reserved for business owners and owner-operators - a perception shaped by how individual pension plans have been positioned in the market. But he emphasizes that the candidate pool extends well beyond incorporated professionals to include senior executives at large companies whose compensation creates a tax problem that group RRSPs cannot meaningfully address.

"When you are in the C-suite and you're earning a base salary plus bonus every year in excess of $300,000 to $600,000, or sometimes a lot more, a group RRSP is not going to do much for you," he said, noting the PPP rules contain mechanisms that allow pre-tax dollars - money that would otherwise be taxed on receipt, particularly large bonuses - to be redirected into the pension plan.

“Most people that sign up for these are doctors or lawyers that are incorporated, accountants, IT professionals, pharmacists, business owners, small business owners… That doesn't mean that the non-shareholder executives are excluded. They are also part of that universe," he added.

What a PPP looks like in practice

According to Laporte, the PPP resembles an individual pension plan but carries a critical difference: it can accumulate retirement savings under both defined benefit and defined contribution rules, and the plan member can switch between the two modes each year.

Meanwhile, a third component, the Additional Voluntary Contribution account, allows existing RRSPs or RRIFs to be transferred directly into the plan on a tax-free basis. Once inside, Laporte explains, those assets are reclassified as pension holdings, which unlocks a set of advantages unavailable under RRSP rules - including tax-deductible investment management fees (when the employer covers them), creditor protection, and access to the broader federal pension investment rules rather than the more restrictive RRSP qualified investment list.

He believes that expanded investment universe is not theoretical.

“I think most people who have an RRSP would love to be able to invest in the 407 because it's probably the most profitable company in Ontario with the highest profit margin. But if you can't be a shareholder, if you can't invest in it because it's not qualified, then that's a problem. But if you're a pension plan, you can," he said.

According to Laporte, the tax gap between a PPP and an RRSP isn’t marginal. He estimates the structure can deliver three to four times the tax deductions of a maxed-out RRSP. But the advantages extend beyond annual deductions, he said, noting a PPP has a built-in mechanism to recover from market losses that RRSPs can’t match. If a portfolio drops in value, the plan member can trigger an ad hoc off-cycle actuarial valuation, report the shortfall to the CRA, and have the sponsoring company make a special payment from pre-tax corporate funds to restore the plan's value.

Whereas the RRSP holder in the same position has no such option because they absorb the loss and wait for markets to rebound. Once both portfolios begin growing again, the PPP member is compounding on a fully restored base while the RRSP holder is compounding on whatever the market left behind.

The structure also supports early retirement with subsidized, unreduced pensions indexed to inflation - the same kind of arrangements available to members of large public-sector plans, he said.

To fund the early pension, the sponsoring company makes a terminal funding contribution, which can run into the millions. That payment is fully deductible for the corporation and non-taxable to the individual. Once the pension is in pay, the income can be split with a spouse, lowering the couple's combined tax burden further. But according to Laporte, none of these features have any parallel under RRSP rules.

Laporte concedes the complexity is part of the problem. The pension concepts underpinning PPPs are technical enough that even specialists in adjacent legal fields often draw a blank on core terminology. If seasoned professionals struggle with the language, expecting business owners focused on running their operations to navigate it on their own is unrealistic, he said.

Connected person definition matters for PPPs

The administrative picture for plan sponsors hinges on a single legal distinction: whether the employee joining the plan is a connected person or not. According to Laporte, connected persons are defined as those who own at least 10 per cent of any class of shares in the sponsoring company, or who are related to such a shareholder.

For family businesses where the plan members fall into that category, the regulatory burden is minimal.

"The PPP has no funding obligation. It's exempt from mandatory funding in most of Canada, from Ontario eastwards. The money is not locked in, and there's not even a registration requirement with the Provincial Pension Commission," Laporte explained.

However, the picture shifts for non-connected employees — typically hired C-suite executives who may hold a fraction of a percent of shares in a publicly listed company. Standard pension funding and provincial registration rules apply in full, adding cost and rigidity. But Laporte maintains the economics still hold up, noting the plan itself can be structured to cover its own administrative costs - like actuarial fees or investment management - out of fund assets rather than the corporate sponsor's operating budget.

Actuarial projections can show PPPs’ potential

For consultants or plan sponsors looking to explore the structure, Laporte said the starting point is an actuarial projection. He said the illustration requires only basic data and produces a report that quantifies the tax advantages net of fees, often framed as an opportunity cost calculation showing what the individual forfeits by not adopting the plan.

“Now when you're doing a financial plan, if you run a scenario where instead of using RRSPs, you’re using PPP, it shows you sort of how much more wealth you're going to end up with, how much more income, how much more money you can pass to your next generation. It models it for you,” said Laporte.

“Until this year, none of the financial planning software companies in the country worked out the math of using a PPP,” he added.