The Resurgence of Individual Pension Plans (IPPs)
By Stephen Cheng
Westcoast Actuaries Inc.
February 2004
With pension/RRSP tax reform introduced in the early 90's, shareholders of incorporated companies with T4 type employment earnings are allowed to have their own pension plans for post-1990 service. Investment professional and financial planners were expecting significant demand for IPPs. That never materialized. There seem to be a lot of renewed interest currently in IPPs. Why are IPPs having a second coming?
The Past:
Many factors impeded the growth in IPPs in the past, such as:
- Shareholders can only have pension benefits from 1991 onward so opportunities for past service contributions were limited;
- Very high actuarial and administration fees for implementation and on-going maintenance of IPPs.
- Federal budget cut backs in the mid-90s lead to many IPPs being in an excess surplus position - the undesirable combination of not being able to contribute to an IPP while not having any RRSP room.
The Present and The Future:
The world has changed and the conditions are now much more favourable to IPPs. The contributing factors to growth in IPPs are:
- The age factor - We have an aging population with many baby boomers reaching retirement age. Hence more people will benefit from IPPs.
- The down investment market in the last few years prompted more people to pay attention to IPPs. In an IPP, the assets are expected to grow at 7.5% per annum. The plan sponsor (company) can contribute more to the pension plan if the triennial actuarial review identifies investment rates of return of less than 7.5% per year since the previous actuarial review.
- The February 2003 federal budget increased the retirement savings limit that benefited IPPs more than RRSPs.
- More significant past service funding - For a new IPP implemented in 2004, a shareholder can potentially have contributions made with respect to 13 years (1991 to 2003) of past service. For an IPP that was implemented in the early 90's, for example in 1993, the years of past service funding would have been restricted to 2 years (1991 and 1992). In the future, more and more years of past service funding would be available as the current system matures.
- Lower fees - actuarial and administration services from some actuarial firms are now available at much more reasonable levels.
How Much Better (Than RRSP)?
Given the right age profile, an IPP can provide substantially higher contribution amounts than RRSP. The estimated current year contribution amounts for some sample ages assuming maximum employment earnings for pension purposes (~$100,000) are:
| Age | Amount |
| 45 | $19,000 |
| 50 | $21,000 |
| 55 | $23,000 |
| 60 | $25,000 |
For people at maximum employment earnings and eligible past service from 1991 onward, they may have substantial past service opportunities. The lump sum past service contribution by the Company can be as high as $100,000 for a 55-year old or $135,000 for a 60-year old. Please note that an individual will need to have RRSP funds transferred into the IPP in order to be eligible for past service contributions.