Office of the Superintendent of Financial Institutions
Private pension plans provide an important source of retirement income for members and their families. Employers generally set up pension plans voluntarily; however, once a pension plan is established, it must be funded and administered in compliance with applicable tax and pension laws.
Registered private pension plans are classified either as defined contribution plans or defined benefit plans. It is important that you determine which type of plan you have, since this affects the kind of pension benefits you will receive.
In a defined contribution plan, the employer contributions and employee contributions (if any) are defined and the amount of pension income that the member receives upon retirement is determined largely by the amount of contributions and investment income accumulated prior to a member's retirement. These contributions are often a fixed percentage of an employee's annual earnings and are deposited monthly in an individual account in the member's name. Investment earnings are credited to this account. Defined contribution plans are sometimes referred to as money purchase plans.
A defined benefit plan provides members with a defined pension income when they retire. This benefit usually depends on factors such as years of membership in the pension plan and the member's salary and not on the investment returns of the plan fund. Different types of formulas can be used to calculate a member's benefit.
In a pooled registered pension plan (PRPP), employer contributions (if any) and member contributions are defined. PRPPs are provided by licensed administrators to employees of multiple employers and to self-employed persons. Contributions are often a fixed percentage of the member's annual earnings and are deposited monthly in an individual account in the member's name. Investment earnings are credited to this account.
For information about costs and fees of PRPPs, please see the Pooled Registered Pension Plan cost comparison table on the Financial Consumer Agency of Canada's website.