Financial Planning -> Pensions -> Registered Pension Plans (RPPs) -> Defined Contribution Pension Plans - What are they?
Registered pension plans (RPPs), which are regulated by either federal or provincial legislation, are either Defined Benefit Pension Plans or Defined Contribution Pension Plans.
With a defined contribution plan, also known as a Money Purchase RPP, the employees do not know in advance what their pension will be when they retire, but they do have some control over how their pension funds are invested. The company makes contributions to the plan usually based on a percentage of the employee's wages. Often the employee can also contribute, which may result in a higher contribution by the employer. The plan funds are invested in individual accounts for each employee. The employee usually has a choice of types of securities in which to invest their funds.
With defined contribution pension plans the risk to the employee is that the investments may perform poorly. However, the upside is that if the investments perform well, all profit increases go to the employee. If the company becomes insolvent the employee will not lose any of the pension, because the funds are in the employee's name.
If an employee leaves their job prior to retirement, they will be able to transfer the assets in their pension plan to a locked-in RRSP, also known as a Locked-in Retirement Account (LIRA). This differs from a Group RRSP, where any assets transferred to an RRSP would not be locked in.
Revised: October 26, 2023
Copyright © 2002 Boat Harbour Investments Ltd. All Rights Reserved. See Reproduction of information from TaxTips.ca