A Personal Pension Plan (‘PPP’) is a registered pension plan with an Individual Pension Plan (‘IPP’) backbone and an integrated Defined Contribution (‘DC’) account.
A traditional IPP is a defined benefit pension plan which is subject to pension legislation including triennial actuarial valuation and Corporately deductible contributions comprised of past service amounts (as/if available), current service contributions and upon retirement of the member, ‘top-up’ terminal funding. In addition, based on asset performance over time, these Plans (IPPs & PPPs) may experience an actuarial excess or shortfall which may require additional funding or a contribution holiday. The actuarial assumptions used in the calculations for these Plans are prescribed by the CRA because the Plan members are connected shareholders.
In Ontario, these Plans are overseen by the Financial Services Regulatory Authority of Ontario (FSRA) which has the right to enforce the Plan funding as calculated by the actuary. Because of this obligation (and frankly the underlying complexity of the original product), private Corporate sponsors with modest cash flows were hesitant to underwrite the funding of IPPs for their owners.
Approximately 5 years ago, CRA expanded the registration umbrella for connected shareholder Registered Pension Plans (RPPs) to include the ability to register an associated DC account. When a Plan is so registered it becomes a ‘PPP’. The single registration allows a Corporate sponsor of a plan to elect, in any year, to fund the DC rather than the DB (Defined Benefit) account for the member’s current service. When this simple election is made, the level of funding to ensure the survival of the Plan is 1% of the member’s T-4 income significantly less than DB funding would be for the same T-4 income. At a future date, the period spent in the DC account may be funded as defined benefit (DB) past service.
The existence of the DC account in the PPP creates some other, more esoteric, funding benefits which are unlikely to be required over the life of the Plan.
In a nutshell, for businesses which anticipate year-to-year cash flow volatility, the PPP provides a simple mechanism to flexibly adjust the plan funding obligation.
Let’s start a conversation to discuss if an individual pension plan is an option for you.
Written by Jim Pelot, B.Comm, CPA, CA; CFO and Co-founder of Podium Prosperity Group.
This article is provided for information purposes only. Although the content is believed to be reliable when posted, Podium Prosperity Group cannot guarantee this information is current, accurate or complete and does not assume any liability. The information is not intended to provide any insurance, financial, legal, accounting or taxation advice and should not under any circumstances be relied upon without consultation about your specific situation. The information is subject to modification and updating from time to time without notice.
November 1st, 2019