By Chris Warner

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Not all pensions are created equally, so choose wisely Back to video

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Pensions of all types appear to be the same to many people: save money during your working years and get a stream of predictable income in retirement.

But choosing whether to enrol in something such as a multi-employer pension plan (MEPP) or an individual pension plan (IPP) can be difficult to fully assess because the differences are nuanced. You may as well ask someone from abroad to point out the differences between a Newfoundlander and an Ontarian. Said person might only reply, “They’re both Canadian?”

In reality, we are aware that even with the shared nationality, there are typically significant differences between individuals. This holds true for pensions as well, which is a topic that has gained considerable attention this year and has personally impacted my household.

After 13 years of education and specialization, my partner, a specialist physician, is reaching a stage in her career where she must decide the most suitable approach for saving for retirement. Consequently, we have been comparing the options of MEPP and IPP for incorporated professionals and business owners.

Upon conducting a thorough comparison, my perspective as a financial professional leans towards the benefits of an IPP. It provides greater flexibility and long-term potential for retirement and intergenerational planning. The higher an individual’s earnings, the more advantageous an IPP appears.

On the other hand, an MEPP may be a suitable choice for investors who possess limited knowledge or interest in this field, or those who prefer not to take on the responsibility of managing their own finances. Essentially, it is an option for individuals who lack the in-depth knowledge required to formulate a retirement savings strategy because an MEPP reduces much of the complexity.

To help aid other incorporated individuals and business owners in this selection process, here are some key differences to consider.

MEPP vs. IPP

An MEPP is a group-administered pension plan that pools together multiple employers (for example, medical corporations). Its goal is to use economies of scale for its members to access alternative investments and reduce administrative costs. It also typically provides longevity protection for those in the pool who live longer; they can benefit from the unpaid income that is saved from those in the pool who die earlier.

An IPP is an employer-administered registered retirement plan intended for one person, usually an incorporated business owner or professional who is both employer and employee. An IPP allows personalized control over its investments, funding flexibility and estate-planning benefits. The goal is to provide a customizable pension retirement savings vehicle that is self-determined, rather than reliant on the group performance of a pool.

Mortality risks

In an MEPP with a substantial member pool, there is typically protection in place to ensure that individuals who live longer do not exhaust their retirement income. On the other hand, those who pass away early in retirement may receive a lower cumulative retirement income, limited to either the minimum guarantee or a reduced spousal survivor benefit. It’s important to note that an MEPP is generally unable to distribute funds to heirs as a registered retirement savings plan (RRSP) or IPP can.

An IPP does not have a pool to draw from so managing longevity risk is entirely internal. This is monitored and adjusted by actuarial reviews a minimum of every three years. If funding or growth is found to be insufficient, then the employer may be required or may elect to top-up the IPP (called “deficit funding”).

Performance risks

Pensions have capped benefits on retirement income, but investment performance impacts each account in different ways.

In the case of better-than-expected performance, an MEPP likely only generates its projected retirement income; the remaining surplus is kept within the pool, helping keep costs low or protecting against future underperformance.

By contrast, an IPP that outperforms expectations could reduce its funding requirements in future years.

In the case of underperformance, the MEPP does a benefit adjustment, wherein the projected retirement income is decreased. There is no ability for plan members to provide deficit funding; they would need to make up any retirement shortfall through their own savings while in retirement.

For an IPP, underperformance below the prescribed rate of growth could trigger deficit funding. This is often used strategically as investors may choose to tax-shelter most or all their fixed-income investments in an IPP to trigger more top-up contributions — ultimately gaining more retirement contribution room. This also leaves their more tax-efficient investments in their corporation.

Contributions

Both MEPP and IPP contributions are tax deductible.

MEPPs are fairly straightforward. The member makes annual plan contributions via their employer (the individual’s own corporation or a sponsor corporation they are performing work for) typically contributes 18 per cent of eligible earned income to the plan, up to a capped maximum. There may also be the option to purchase past service amounts for years prior to joining the MEPP, provided RRSP contributions haven’t been fully utilized.

IPPs follow an actuarial contribution formula based on things such as age, eligible earnings and previous contributions. They typically have higher lifetime contributions than both RRSPs and MEPPs.

IPPs have some additional benefits such as pension transfer and terminal funding. A pension transfer allows for an existing RRSP to be partially or fully rolled into a new IPP. Terminal funding is calculated when an employee is about to retire, and it allows for additional funding into the IPP at retirement.

Costs and control

The actuarial fees of an MEPP are absorbed by its pool, which can be challenging to break down on a per-member basis as they can fluctuate based on factors such as membership.

Actuary fees are dependent on several factors. Based on my experience with third-party actuaries, the actuary fees of an IPP work out to around $500 per year, which are deductible expenses for the corporation.

An MEPP is stewarded by the plan sponsor. An in-house or hired professional provides guidance on the investment selection and asset mix in perpetuity. Subject to pension legislation, they can also choose to cease the plan and unwind the pools back to members.

The employer, who is usually an incorporated business owner or professional, administers the IPP and has full control over investment selection, asset mix and tactical positioning. Usually, they consult with professionals to help guide this process. Once an IPP is undertaken, the individual must continue it to retirement, though exceptions exist.

Estate planning

MEPPs normally have a minimum guarantee period for income (for example, 10 years) in case the member dies earlier than expected and is without a spouse. These payments would be made to the beneficiaries of the deceased’s estate. Note that the payments can still be significantly less than the total contributed to the plan.

In the case of a survivor spouse, both MEPPs and IPPs typically have the option to pay a reduced amount of retirement income to them.

For MEPPs, when both the spouse and the member have died, assuming the guarantee period has already been met, there is no further income.

Conversely, an IPP does not need a minimum guarantee period. Instead, whatever remains in the IPP at last death is paid directly to the named beneficiaries such as adult children of the IPP.

Each beneficiary of IPP income pays tax on the income at their marginal rate. This can be quite advantageous compared to an RRSP, which is taxed in the hands of the deceased, usually at the highest marginal rate. If an IPP has several beneficiaries, then it has a much higher chance of averaging into a lower tax rate cumulatively.

The decision to enrol in either an MEPP or an IPP involves careful consideration of the nuanced differences between the two options, which could ultimately mean seeking professional advice and conducting a thorough evaluation of an individual’s circumstances.

Pensions may seem similar at first glance, but there are significant variations that can impact retirement income, estate planning, control and costs. By carefully considering the unique features and benefits of MEPPs and IPPs, individuals can pave the way towards a more secure and prosperous retirement.

Chris Warner, FCSI CFP CIM PFP, is a wealth adviser at Nicola Wealth.