What it means
An RPP is a savings arrangement set up by an employer, sometimes with a union or an association, to provide retirement income to employees. Registration with the tax authority is what gives the plan its tax advantages.
Both the employer and the employees may contribute, and the contributions are deducted from taxable income within limits. There are two main types.
In a defined benefit (DB) plan, the pension is set by a formula that usually considers years of service and average earnings, and the employer bears the investment risk. In a defined contribution (DC) plan, the employer and employee pay fixed amounts into an individual account, and the final pension depends on what those contributions earn.
For employees, the plan usually offers a more disciplined path to retirement income than saving alone. Money is often deducted automatically, the employer may add to it, and professional managers invest the pooled funds.
In many DB plans, the pension is paid for life, which protects the member from outliving their savings. For employers, an RPP is a significant financial commitment.
A DB plan creates long-term liabilities that must be funded, and shortfalls can require extra payments into the plan. Finance teams measure these obligations with actuarial valuations and show them on the balance sheet according to accounting standards.
A key link with personal saving is the pension adjustment. Each year, the value of the benefits earned in the RPP is reported to the tax authority, and it reduces the person's room to contribute to a registered retirement savings plan (RRSP).
This prevents people from getting tax relief twice on the same retirement saving. When members leave the employer, they usually have choices about what to do with their pension entitlement.
They may leave it in the plan to be paid later or transfer its value to another registered arrangement. The rules vary by plan and by province, so it is wise to read the plan text.
In practice
Real-world examples.
Example
A manufacturing company with 300 staff offers a DC registered pension plan. Each employee contributes 5% of pay and the company matches it. The payroll team deducts the contributions before tax, and a trustee invests the money.
Example
A hospital worker joins a DB plan that pays 2% of average earnings for each year of service. After 30 years with average earnings of $70,000, she will receive 30 x 0.02 x 70,000 = $42,000 a year. She plans her retirement date around that pension.
Example
A finance director at a company with a DB plan reviews the actuary's report. The plan has assets of $90,000,000 against liabilities of $100,000,000, a shortfall of $10,000,000. The board agrees to make extra contributions over several years.
Formula
Calculation
Annual DB pension = years of service x accrual rate x average earnings
Suppose an employee has 25 years of service, the plan's accrual rate is 2% per year, and her average earnings over the best years are $80,000. Annual pension = 25 x 0.02 x 80,000 = 0.50 x 80,000 = $40,000. That is 50% of her average earnings, or about $3,333 per month, before any adjustments for early retirement or other terms.Case study
Seen in the real world.
Maplewood Foods is an illustrative, fictional company with a DB registered pension plan covering 500 employees. When interest rates fell, the actuary calculated that the plan's liabilities rose, because future pensions are valued at a lower discount rate.
The plan's liabilities increased from $120,000,000 to $135,000,000, while assets were $115,000,000, leaving a shortfall of $20,000,000. The finance director had to find extra cash and told the board that contributions would increase by $4,000,000 a year for five years.
The board considered closing the plan to new members and offering a DC plan instead. The illustrative lesson is that a DB plan transfers investment and interest rate risk to the employer, and finance must plan for it.
Watch out
Common mistakes.
- Assuming all registered pension plans promise a fixed pension, when a DC plan depends on investment returns.
- Forgetting that pension benefits reduce personal RRSP contribution room through the pension adjustment.
- Treating plan assets as the company's own money, when they are held in trust for members.
Questions
People also ask.
What is the difference between an RPP and an RRSP?
An RPP is arranged through an employer, while an RRSP is an individual account that a person sets up for themselves.
Who bears the investment risk in an RPP?
In a DB plan it is the employer, and in a DC plan it is the employee.
What happens to my RPP if I change jobs?
Usually you can leave the entitlement in the plan or transfer its value to another registered arrangement, depending on the plan rules and local law.
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