Implementing a Pension Plan for your Organization

If you read our post last week, you will now be aware that Group RRSPs are an excellent way to encourage employees to save for retirement, and the program itself is quite simple for an employer to administer. But as pointed out, as an employer it is impossible to ensure that funds will ultimately be used for retirement by the employee after the money has been deposited in the RRSP. Even if rules are established to govern the availability of funds during the time your employees are actively working for you, upon termination of employment that employee has immediate access to the RRSP funds should he/she wish to withdraw them.

If you want to set up a retirement program where you can ensure the funds will be used for retirement, you need to set up a Pension Plan.

What next?

There are two types of Pension Plans available in the marketplace: Defined Benefit Pension Plans (DBPP), wherein the final pension payout is known, or Defined Contribution Pension Plans (DCPP), where the amount of the pension is determined by how much money is saved over the lifetime of the plan. Today’s commentary will only be addressing DCPPs, as these types of plans are increasingly the more commonly chosen.

A DCPP is ideal for small business operations because the cost of providing the benefit is controlled by the plan design, and thus is predictable for budgeting purposes.

To set up a plan, the employer must first decide how much (as a percentage of salary) will be contributed on behalf of each employee. The amount contributed can differ by  specific class of employees, but all employees within that class must be treated equally. Legislation dictates that the Employer must contribute to the Pension Plan for all participating employees, and depending on the province there is a minimum required contribution.

The next decision is whether employee participation should be voluntary or compulsory. How much will the employees be required to contribute if they decide to participate? A typical plan might be 5% of gross earnings, matched by the employer, for a total of 10% of monthly earnings.

The Employer must also determine and establish the required waiting period for new employees before they can join the plan.

In terms of future administration (after initial set up and ongoing collection of funds), you should note that there will be some reporting required at the end of each year. The legislation for Pension Plans is governed at a provincial level in Canada, unless your business is subject to Pension Benefits & Standards Act (PBSA) legislation, which overrides the provincial legislation. The Institution that administers the pension funds will often assist employers and plan administrators with the annual filing of paperwork.

Work with a professional Advisor

If you are thinking of implementing a Pension Plan for your employees, be sure to work with a licensed Advisor who is both knowledgeable about pension legislation and has also worked with pension plans past and present. This is an area where, as an employer, you will want to be working with someone who has the expertise and experience to assist you throughout the process.