Q: What is the difference between an Individual Pension Plan (IPP) and an INTEGRIS Personal Pension Plan (PPP)?
A: Thank you for your interest in the Personal Pension Plan. You were asking us to clarify how the INTEGRIS Personal Pension Plan differs from the Individual Pension Plan (or IPP).
We can subdivide the answer to your question across a number of dimensions:
c Tax optimization
d Fiduciary oversight
It is important to recall that the term “Personal Pension Plan” is not a defined term under the Income Tax Act (Canada), but rather is a common law trade-mark used by INTEGRIS Pension Management Corp.
to refer to our core product. From a pure legal point of view the PPP has the following characteristics:
• It is a registered pension plan (or RPP) governed by Income Tax Act (Canada) section 147.1
• It is considered a combination RPP because it offers both a Defined Benefit component (everything that a conventional IPP offers) and a money purchase or Defined Contribution account. It also contains an “Additional Voluntary Contribution” account (or AVC account).
• For registration purposes, our PPP is considered an individual pension plan by CRA.
• It is also a designated plan, and as such, must comply with the maximum funding valuation rules as prescribed under Income Tax Regulation 8515.
• Since most of our clients are ‘connected persons’, a number of additional legal rules further round out the regulatory structure surrounding the plan.
By contrast, most IPPs only offer a defined benefit provision. Some actuaries do also offer an AVC subaccount to allow for transfers-in of RRSP assets. Some IPPs are purely DC, but are very rare.
Under Canadian tax laws, individuals under the age of 40 who use a conventional IPP are penalized vis a vis those who save through an RRSP – in terms of the amount of contributions that can be invested.
We have remedied this by adding a Defined Contribution and AVC component to the basic IPP/Defined Benefit component. Because the RRSP limit in a given year is always the previous year’s money purchase limit (DC limit), we ensure that the DC contributions to the PPP always exceed both the RRSP and IPP limits – at any age.
Moreover, individuals have the right to elect to flip between the DB and DC/AVC sides of the PPP each year without filing a plan amendment. This allows the member to control how much gets contributed each year without losing any potential tax-deferral savings room. When the DB component is not in use, the DC rules are as follows: Mandatory employer contribution = 1% of T4 income. Voluntary member contributions = between 0% and 17% of T4 income. Existing RRSPs can also be rolled into the AVC account on a tax-deferred basis with a CRA Form T2033. [This creditor protects these assets, allows the IMFs to be tax-deductible to the corporation and allows these assets to be deployed in non-RRSP eligible asset classes].
By contrast, in order to reduce or eliminate current service cost contributions in a conventional IPP, one would have to either freeze accruals, or opt for T4 compensation of $0.00, thereby temporarily fixing the contribution issue but permanently removing the year of credited service. Our flexible plan architecture allows for seamless and cost-free movement between the two main ways to accrue benefits under an RPP.
Furthermore, if an individual decides to dial down contributions to the DC side of the plan [recall that our plan only requires a mere 1% of T4 income from the employer] for a number of years, it is always possible at a later date, once the company has a lot more disposable income, to do a plan amendment and convert the DC years into DB years, and thus provide the corporation with an ability to do a retroactive purchase of past service.
c Tax Optimization
Perhaps the most innovative aspect of the PPP is its ability to further increase the overall tax-deductible contributions an individual is legally allowed to make to a tax-deferred savings vehicle under the ITA. This stems from the fact that from age 18 to 40, an individual using the DC component of the PPP can contribute substantially more pre-tax income to a PPP than by using an IPP.
If an RRSP is used instead [because the savings limit between DC and RRSP plans is quite minor], the individual in question who waits until age 40 to set up an IPP then foregoes these additional tax deductions:
• RRSP double dip contribution (RRSPs are based on previous year earned income) + PPP DC amounts.
• Tax deductibility of all of the investment management fees of the assets.
• Input tax credits on HST, or with trust plans, access to the 33% HST Pension Entity Rebate Program
• Tax deductibility of any interest paid to a corporate lender for PPP contributions
Also, should an IPP end up being ‘overfunded’ and considered by the CRA to be in “excess surplus”, with the addition of another year of credited service, a Pension Adjustment would be created, and this would reduce the member’s personal RRSP contribution room to a mere $600 (the PA Offset amount).
By contrast, in such a situation, the PPP allows the member to switch to the DC and AVC components of the plan. Because another year of credited service is not added to the Defined Benefit component of the plan, there is no pension adjustment. This allows the PPP member to contribute up to 17% of T4 income (capped by the money purchase limit) to the Additional Voluntary Contribution component of the plan. This generates a personal tax deduction, reported in Box 20 of the T4 slip, and deductible against the high marginal tax brackets facing the member.
Recent actuarial modelling undertaken shows that for a 30 year old individual earning 6% (whether an IPP or PPP is set up at that age) and wishing to retire at 65, the cumulative additional assets of the PPP will exceed the IPP by approximately $790,000. This assumes the exact same level of market risk being borne by the member. It makes the PPP the most tax-effective retirement savings vehicle permitted by the rules under the Income Tax Actand its regulations in Canada.
d Fiduciary Oversight
All PPPs are currently administered by INTEGRIS, who acts as the pension committee of the PPP, and as such acquires a fiduciary duty of care in connection to its plan members. This fiduciary duty of care is anchored in the provincial pension legislation and the law of agency. While INTEGRIS could also act as a fiduciary of an IPP, to date few remain in IPPs in view of the additional value provided by the PPP architecture.
In practical terms, the fiduciary obligations undertaken by INTEGRIS translates into immediate value for PPP clients in the following manner:
• INTEGRIS negotiates economies of scale to reduce actuarial administration costs through group purchasing of services.
• INTEGRIS seeks out specialized partners to offer special ‘pensions-only’ value like access to private equity investments that are not RRSP-eligible or access to the HST Pension Entity Rebate.
• INTEGRIS supervises the agents of the PPP hired to carry out the actuarial and administrative work related to the plan. This gives immediate power and influence to the clients that they would otherwise not be able to wield when faced with large financial institutions.
By contrast, IPP suppliers merely act as service providers and refuse to share the fiduciary burden of plan administration with the corporate clients. Since IPPs are highly individualized, it is often very difficult to achieve economies of scale.
I hope the foregoing provides a useful summary of the key differences between IPPs and PPPs.