With the usual photo-op fanfare, the federal government introduced yet another retirement-savings option for Canadians this past November. The new creation -- pooled registered pension plans (PRPPs) -- is intended to make saving for retirement easier and cheaper for the millions of working Canadians, both employees and the self-employed, who do not have a workplace pension plan.
Final operational details await passage of enabling regulations. However, based on the information released to date, PRPPs are unlikely to be widely accepted. Most significantly, the PRPP program is intended to be a voluntary retirement-savings option. Employers decide if they want to set up a PRPP and whether or not to contribute to individual employee plans. Workplaces can stop offering a PRPP at any time.
PRPP enrolment in a workplace is likely to be automatic. But employees will be able to opt out, so participation will be lower than the government would like. Contribution rates are likely to be similar to another government-driven voluntary retirement-savings option, the registered retirement savings plan. In 2010, only 26% of eligible tax-filers contributed to an RRSP.
Federal legislation will set out the regulatory framework and the tax rules for PRPPs, as well as the PRPP regulations for federally regulated employers. Each province must enact legislation to implement the framework and cover provincially regulated employers.
One concern is that there will be no national standard. Each province will be able to override any federal PRPP feature. PRPPs are likely to be just different enough across the country to confuse the public and discourage participation. For example, Quebec plans to have a distinct name for its PRPPs; they'll be known as voluntary retirement savings plans (VRSPs). The province has also proposed that every employer (with some exceptions) be required to offer a savings plan.
Rates of return on PRPPs will depend on the investing options offered by a particular plan and the skill of the plan's administrator. Plan members who are dissatisfied will be able to transfer their account to another PRPP. However, those exiting a workplace PRPP would no longer benefit from any contributions made by their employer.
PRPP contributions are tax deductible, but there's a significant drawback. These contributions count against a plan member's available RRSP contribution limit. Furthermore, if an employer contributes to an employee's PRPP, the employee's RRSP contribution room will be reduced by the amount contributed.
PRPPs will follow pension-plan rules, so savings will be transferrable to another plan if an employee changes jobs. But except in cases of disability or death, the money will be locked in until retirement. In contrast to RRSPs, the funds cannot be withdrawn (and the tax paid) if the plan holder needs the money.
As well, the federal government's home buyer's plan and lifelong learning plan, which allow Canadians to borrow from their RRSP to buy a home or fund education expenses respectively, are not available for PRPPs.
The low management costs that pooled funds can offer are one of the main alleged benefits of PRPPs. However, it remains to be seen if these fees will be as low as has been suggested, given that the same financial-services companies that charge Canadians some of the world's highest mutual-fund fees will be administering the plans.
Individuals with the discipline to voluntarily save for retirement may be better served by directing their money to an RRSP instead of a PRPP. With RRSPs, you have a much broader choice of investing options and more flexibility. The experience of retirees with locked-in retirement accounts who cannot access their savings when needed casts doubt about the wisdom of directing retirement savings to a PRPP.
As for those who are the identified target of PRPPs -- Canadians who are not saving enough money for retirement -- a voluntary contribution program is unlikely to change their behaviour. More financial-literacy education might help.
Even so, in my opinion, only a mandatory retirement savings plan or a program that offers an incentive to save will increase participation significantly. Canada already has excellent retirement savings programs with these features. With some fine-tuning, these programs could deliver the retirement-savings rates the government is seeking.
Contributions to our mandatory Canada Pension Plan could be increased to provide larger pensions for retirees. Group RRSPs provide payroll deduction, professional administration, the lower fees of pooled funds and the ability for employers to contribute to employee plans. To increase participation in group RRSPs, employers could be given tax deductions if they match employee group RRSP contributions.
Ottawa should push the stop button on PRPPs. This country does not need another voluntary retirement savings program and associated bureaucracy. Existing programs can be modified to create a less confusing and cheaper way to improve the retirement-savings habits of Canadians.