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How Pooled Registered Pension Plans work

Pensions have been receiving a great deal of interest from Canadians and their political representatives. That's due in no small part to the growing number of workers who don't have one -- a pension, not a politician -- outside of the government-sponsored retirement program and Old Age Security benefits. 

Despite calls on the federal government to strengthen the existing Canada Pension Plan, or CPP, the Minister of State for Finance, Ted Menzies, announced in October that the feds were introducing legislation to create a Pooled Registered Pension Plan (PRPP) program.

"PRPPs are a new kind of defined contribution pension plan that will be available to employers, employees and the self-employed," Menzies said in a speech unveiling the government's approach to improving Canadians' pension status.

Declining security
The number of Canadians with employer-sponsored pensions has declined from 41 per cent in 1991 to only 34 per cent in 2007, according to the federal Department of Finance.

Menzies called the initiative one that "will really benefit many Canadians that don't have the same security of work pension as others."

That remains to be seen as critics have denounced the plan because it's completely voluntary, and should an individual choose to participate in a PRPP, there is no requirement that employers make any contributions.

Then there's the issue of whether Canadians who are already finding it tough to save will feel they have the discretionary income to put into a pooled private pension.

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Low rates of saving
"Participation in RRSPs and Tax Free Savings Accounts is quite low," says Lynn Biscott, a Toronto financial planner. She notes that with people losing their jobs or experiencing reduced hours of work, "it remains to be seen how many Canadians will contribute" to the new program.

The picture darkens with declining rates of savings in Canada reported as dropping from a high of 45 per cent in 1997 to recent reports that in 2008 only 24 per cent of taxpayers age 25-64 made an RRSP contribution (as reported by CIBC World Markets Inc.).

Even when they have them, Biscott says many Canadians use RRSP funds as "glorified savings accounts, dipping into them for non-retirement reasons."

Under the PRPP program, funds are locked in. Employees (including the self-employed) can't take money out until retirement, although details are not yet finalized. This is the main distinction between PRPPs and existing group RRSPs, which some observers expect could be replaced by the new plan.

Employers would, in fact, be beneficiaries in such a switch, since they cannot deduct money they contribute to employee pooled RRSPs, but they would be able to do so under the pooled pension scheme.

Beware of fees and limitations
PRPP plans would be administrated by federally-regulated institutions, such as banks and insurance companies. There will be management and administrative fees charged to contributions, which some see as a revenue boon for those institutions.

Biscott advises that before signing on for a PRPP, employees should understand any lock-in regulations and how much it will cost in administrative fees.

Thus far, the legislation covers only federally-regulated workplaces (such as banks, telecommunications and interprovincial transport) and sets a framework within which each province will need to pass its own regulations.

According to Biscott, Quebec has indicated it may include mandatory registration by employers in its legislation although this would not require them to make any financial contributions.

Minister Menzies has stated that CPP improvements have yet to be introduced because there is no provincial consensus on them. This is something that advocates for pension reform, such as the Canadian Association of Retired Persons (CARP), are urging the federal government to undertake as soon as possible.

"We should not be satisfied with the least of the options," CARP vice president Susan Eng stated in her association's response to the PRPP announcement.

Improvements needed
In the meantime, CARP has made several proposals to improve the PRPP framework, including:

  • Fee caps to prevent high fees from eroding savings
  • Risk management to limit certain assets and protect savings
  • Oversight of executive compensation tied to fund performance
  • Auto-enrollment to improve uptake
  • Consideration of target benefits rather than defined contributions

In addition to low rates of participation for voluntary retirement and savings programs in Canada, pension expert Monica Townson notes in her recent study for the Canadian Centre for Policy Alternatives that average RRSP value of those about to retire (aged 55 to 64) is only $55,000.

"Canada does not need yet another voluntary tax-assisted retirement savings program," said Townson in her report. "It needs public pensions that provide all Canadians with a basic guarantee of adequate income that will protect their standard of living in retirement. Expanding the Canada Pension Plan would meet that objective."

Diana McLaren is a writer in Toronto.

 
-- Posted: Jan. 6, 2012
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