Definition of a pension plan

Pension plans are used by employees to accumulate tax-sheltered savings in order to receive income during retirement. The money is usually invested in various vehicles such as mutual funds including stocks and bonds of Canadian or foreign companies.

Several employers also contribute to their employees’ pension plan, which strongly encourages enrollment.

Several types of plans can be offered by employers. An assessment of each employer’s needs is required to determine which type of plan is the most appropriate. The plans described below are the most commonly used.

GROUP REGISTERED RETIREMENT SAVINGS PLAN (RRSP)

Employees enjoy all the benefits of an individual RRSP while taking advantage of lower administration and investment management fees through collective bargaining power. This plan is ideal for an employer who does not wish to make contributions.

DEFERRED PROFIT SHARING PLAN (DPSP)

The employer contributes a portion of its profits on behalf of employees. This plan is often combined with a group RRSP into which members’ contributions are paid. It offers appealing advantages such as beneficial tax treatment and rules fostering employee retention.

VOLUNTARY RETIREMENT SAVINGS PLAN (VRSP)

The latest evolution in retirement savings in Quebec, the VRSP is a voluntary retirement savings plan that enables workers to save for retirement in a structured framework. Created under Quebec government legislation, it is intended to democratize pension plan access for Quebec workers.

It is a simple plan with voluntary enrollment and limited investment options. However, under the Quebec legislation that came into force in 2014, employers are required to make it available to their employees if they do not already have access to another retirement savings vehicle. The deadline for complying with the legislation varies depending on the size of the company:

  • Group of 20 employees or more as of June 30, 2016: December 31, 2016.
  • Group of 10 to 19 employees as of June 30, 2017: December 31, 2017.
  • Group of 5 to 9 employees: to be determined, but not earlier than December 31, 2017.

This plan is ideal for a small business where the employer does not wish to make contributions.

DEFINED CONTRIBUTION PENSION PLAN
(TRADITIONAL OR SIMPLIFIED)

Both employee and employer contributions are paid into this plan that offers a wide variety of investment choices. It is registered with the Régie des rentes du Québec and guarantees protections provided under the Supplemental Pension Plans Act of Quebec. The simplified version of this plan (SRP) is known for being simple and easy to manage. Therefore, it is the ideal plan for employers who intend to contribute to a retirement savings plan.

INDIVIDUAL PENSION PLAN (IPP)

The IPP is a single-member defined benefit pension plan. Under certain circumstances, it may allow to contribute higher amounts than those paid into an RRSP and even provide for past service benefits. As such, it is especially well-suited for a company’s owner-manager or executive officers.

Tax-Free Savings Account (TFSA)

Even if it is not a pension plan, the group TFSA is becoming more and more popular for retirement savings purposes. The contributions to a TFSA are not tax deductible, but the income they generate and the amounts that are withdrawn are not taxable. The TFSA can be an attractive addition to a pension plan in order to facilitate additional savings for retirement or for shorter-term projects.

 

Click here to learn about the advantages of a pension plan.

Download our Group Annuities leaflet about pension plans.