Westcoast-Actuaries Inc. - IPP Investments

Individual Pension Plan (IPP)
Investments

Funding Media
Investments
Investment Rules

The most common funding media for funding an IPP under CRA rules are:

[Alternative A] - A contract with an insurance company - Most insurance companies have their standard products for IPPs. Available investments would be restricted to the types of funds managed by the insurance company and certain third-party investment managing firms the insurance company is affiliated with.
[Alternative B] - A pension trust with a corporate trustee (i.e. a trust company). Keep in mind that certain trust companies may have a significant amount of minimum trust and custodial charges as they specialize in very large pension funds. Some trust companies have special trust and custodial products for IPPs ranging from $300 to $2,000 per year depending on types of investment held in the account. Usually the lower fee arrangement applies to IPP accounts that only invest in mutual funds that are settled electronically through FundSERV Inc.
[Alternative C] - A pension trustee with three individuals acting as trustees. A common arrangement would be the IPP member, the spouse and one third-party acting together as trustees. The requirements for setting up the trust are:
1. All trustees must be Canadian residents; and
2. One trustee must be independent (i.e. not a shareholder, partner, employee) of the company that sponsors the pension plan.

Alternatives A & B may have a lower "Management Expense Ratio" (MER) for the funds offered by the insurance or trust companies because they are institutional investors and as such they already have infrastructure set up to process the necessary administration and reporting requirements of the pension fund assets. As institutional investors they "pool" the investment funds from all of their clients' accounts in order to send large sums (in to the millions) to various investment managers who provide "investment only" services. As a result, these investment managers charge "institutional" rates for their services; these fees are generally much lower than those they charge their retail clients.

Insurance companies usually have their custodial and administration charges embedded in the total MER along with investment management fees. The fees charged by trust companies for custodial and trustee costs are usually quoted separately as a flat dollar amount.

Under Alternative C, the individuals acting as trustees may not have adequate knowledge or understanding regarding pension fund investments and custodial arrangements to act as pension plan trustees. Because of this, they may have a certain liability exposure in acting as a trustee. If an IPP sponsor has difficulty finding individuals to act as trustees, the sponsor will have to rely on the pension professionals at the insurance companies and trust companies for custodial services.

Investments

An IPP can have investment flexibility similar to a self-directed RRSP subject to certain restrictions, including quality and diversification standards. The IPP funds can be invested in stocks, bonds, mutual funds, pooled funds, GICs, term deposits, etc.

Investment Rules

The investment rules for a registered pension plan are outlined in Income Tax Regulation 8502(h) as follows:
the property held in connection with the plan does not include:
(i) a prohibited investment under subsection 8514(1),
(ii) at any time that the plan is subject to the Pension Benefits Standards Act, 1985 (Canada) or a similar law of a province, an investment that is not permitted at that time under laws as apply to the plan, or
(iii) at any time other than a time referred to in subparagraph (ii), an investment that would not be permitted were the plan subject to the Pension Benefits Standards Act, 1985 (Canada).

The permitted investments under Pension Benefits Standards Act, 1985 (Canada) are outlined in Schedule III of the Pension Benefits Standards Regulations, 1985.

For provinces where provincial registration of IPP is required, there may be additional requirements imposed by the provincial pension legislation.

The 30% foreign content limit has been eliminated as a result of the February 2005 federal budget.

The key requirements, in brief, are:

should follow prudent-man standards with respect to quality and diversification in investment of trust funds;

investments should not be in securities of the pension plan sponsor (participating employer) or related corporations unless the company is publicly traded;

if the investment is in individual securities (e.g. stocks or bonds), each security can not be more than 10% of the fund on a book value basis at the time the investment is acquired (note - mutual funds or pooled funds are not subject to this restriction as they are already diversified).

	Individual Pension Plan (IPP) Investments Funding Media Investments Investment Rules *Funding Media* The most common funding media for funding an IPP under CRA rules are: [Alternative A] - A contract with an insurance company - Most insurance companies have their standard products for IPPs. Available investments would be restricted to the types of funds managed by the insurance company and certain third-party investment managing firms the insurance company is affiliated with. [Alternative B] - A pension trust with a corporate trustee (i.e. a trust company). Keep in mind that certain trust companies may have a significant amount of minimum trust and custodial charges as they specialize in very large pension funds. Some trust companies have special trust and custodial products for IPPs ranging from $300 to $2,000 per year depending on types of investment held in the account. Usually the lower fee arrangement applies to IPP accounts that only invest in mutual funds that are settled electronically through FundSERV Inc. [Alternative C] - A pension trustee with three individuals acting as trustees. A common arrangement would be the IPP member, the spouse and one third-party acting together as trustees. The requirements for setting up the trust are: 1. All trustees must be Canadian residents; and 2. One trustee must be independent (i.e. not a shareholder, partner, employee) of the company that sponsors the pension plan. Alternatives A & B may have a lower "Management Expense Ratio" (MER) for the funds offered by the insurance or trust companies because they are institutional investors and as such they already have infrastructure set up to process the necessary administration and reporting requirements of the pension fund assets. As institutional investors they "pool" the investment funds from all of their clients' accounts in order to send large sums (in to the millions) to various investment managers who provide "investment only" services. As a result, these investment managers charge "institutional" rates for their services; these fees are generally much lower than those they charge their retail clients. Insurance companies usually have their custodial and administration charges embedded in the total MER along with investment management fees. The fees charged by trust companies for custodial and trustee costs are usually quoted separately as a flat dollar amount. Under Alternative C, the individuals acting as trustees may not have adequate knowledge or understanding regarding pension fund investments and custodial arrangements to act as pension plan trustees. Because of this, they may have a certain liability exposure in acting as a trustee. If an IPP sponsor has difficulty finding individuals to act as trustees, the sponsor will have to rely on the pension professionals at the insurance companies and trust companies for custodial services. *Investments* An IPP can have investment flexibility similar to a self-directed RRSP subject to certain restrictions, including quality and diversification standards. The IPP funds can be invested in stocks, bonds, mutual funds, pooled funds, GICs, term deposits, etc. *Investment Rules* The investment rules for a registered pension plan are outlined in Income Tax Regulation 8502(h) as follows: the property held in connection with the plan does not include: (i) a prohibited investment under subsection 8514(1), (ii) at any time that the plan is subject to the Pension Benefits Standards Act, 1985 (Canada) or a similar law of a province, an investment that is not permitted at that time under laws as apply to the plan, or (iii) at any time other than a time referred to in subparagraph (ii), an investment that would not be permitted were the plan subject to the Pension Benefits Standards Act, 1985 (Canada). The permitted investments under Pension Benefits Standards Act, 1985 (Canada) are outlined in Schedule III of the Pension Benefits Standards Regulations, 1985. For provinces where provincial registration of IPP is required, there may be additional requirements imposed by the provincial pension legislation. The 30% foreign content limit has been eliminated as a result of the February 2005 federal budget. The key requirements, in brief, are: should follow prudent-man standards with respect to quality and diversification in investment of trust funds; investments should not be in securities of the pension plan sponsor (participating employer) or related corporations unless the company is publicly traded; if the investment is in individual securities (e.g. stocks or bonds), each security can not be more than 10% of the fund on a book value basis at the time the investment is acquired (note - mutual funds or pooled funds are not subject to this restriction as they are already diversified).
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