by Mike Holman
Pooled Registered Pension Plans (PRPP) were first announced by the Conservatives during the last election campaign. As is my custom, I ignored it since most campaign promises never see the light of day after the election.
Now that the Conservatives have a majority government and recently issued more information on PRPPs, I thought it would be worth a quick look to see how the plan works and who can benefit from a PRPP.
What exactly is a Pooled Registered Pension Plan (PRPP)?
A PRPP is a defined contribution pension system offered by third party financial institutions such as banks and insurance companies. The plan administration and fiduciary duty will be the responsibility of the financial institutions. This should make it fairly easy for small to medium sized companies or self-employed workers to set up a PRPP.
The actual investment instruments have not been clarified, but the government has mentioned large “pooled” investment funds with low costs.
Group RRSPs are an option for companies who want to offer a workplace savings plan, but they are a fair bit of work to administer and the employer has the fiduciary duty as well. Group RRSPs are not as practical for smaller companies or the self-employed.
What is the reason behind PRPPs?
The government is proposing PRPPs as a way to “improve the range of retirement savings options for Canadians. Unfortunately, improving the range of options doesn’t necessarily translate into any extra retirement savings.
The goal is to provides access to 3.5 million Canadians who don’t have access any kind of registered pension plan through their workplace (such as a defined benefit pension plan or a group RRSP).
Those people currently have access to RRSPs and TFSAs, but a lot of them are not properly utilizing either account type. Lack of saving discipline and investment knowledge is likely the main reason. It takes a bit of work to get an investment account at a bank or through a financial advisor and some people can’t be bothered.
Since the plans aren’t going to have mandatory contributions, they will basically just level the playing field for employees of smaller companies, so they have easier access to what is essentially a group administered RRSP.
There are some big benefits of a workplace savings plan. Contributions made from payroll deductions are very convenient. The ability to make a contribution from your pay cheque into a registered account without having to pay any withholding tax is also a great feature.
Who will benefit from PRPPs?
Employees who work for a company that does not currently offer any kind of workplace pension saving program will benefit from having access to a PRPP. Even if the employer doesn’t offer a PRPP, employees or self-employed workers can still join one on their own.
Employers that are too small for group RRSPs should be able to offer a PRPP, which might serve as a good recruiting and retention tool.
Employers that currently offer group RRSPs might be interested in switching to a PRPP in order to reduce administration costs and remove their fiduciary duty.
Who won’t benefit from PRPPs?
Employees that have a defined benefit pension plan or an employer-sponsored defined contribution pension plan (such as a group RRSP) won’t have access to a PRPP, which makes sense since
they don’t need one.
Anyone who is not currently employed will not benefit from PRPPs.
What kind of investments will be offered through PRPPs?
This part of the new pension plan type is not clear. The government has referred to an “investment pool”. I’m not sure what that refers to. Will there be specific funds run by a private company that any worker can invest in? Will there just be a few big funds that everyone will invest in? Ie Will employees of XYZ Autobody shop will be investing in the same Canadian equity fund that the employees of the local pizza place are investing in? Or can the plan administrator offer any funds/ETFs publicly available?
Hopefully more details will be forthcoming on this issue.
On the PRPP government framework page, it says “lower costs that result from large pooled funds.”
That statements seem pretty naive to me. How exactly will the fees be kept low? Will this be mandated by the government? Economy of scale means nothing – just look at Canada’s largest mutual fund – the $14 billion Investor’s Group Dividend fund for an example of how economy of scale saves money for investors. The MER on that fund is a whopping 2.68% in spite of the massive size of the fund. In this case, all the economy of scale savings are going straight to the Investor’s Group shareholders – not the mutual fund investors.
Will money in a PRPP be locked-in?
According to the PRPP framework, employer contributions will be locked-in – similar to money in a LIRA account. This is really dumb and will add a lot of hassle to the plans. It should be up to the employer to decide on a vesting period for any employer contributions, after which the employee can do whatever they want with the employer contribution money.
Will the PRPP be mandatory for employees?
No, it will be up to the employee to make use of the PRPP. It’s possible that employers might have to auto-enrol every employee, but they can’t force the employee to contribute.
Will the PRPP be mandatory for employers?
It’s up to each province to decide if offering an PRPP will be mandatory for employers.
Will PRPP contributions affect RRSP contribution room?
Contributions to an PRPP are treated like RRSP contributions as far as taxes go. Any employer contributions are also considered contributions. IE If you have $8,000 of RRSP contribution room available for a particular year and your employer contributes $2,000 to an PRPP and you contribute $3,000 to the PRPP – that means you have used up $5,000 of RRSP contribution room.
These plans will close a gap in workplace pension saving coverage by offering a defined contribution pension plan to workers who don’t currently have access to one. The term “coverage” only refers to giving access to these workplace plans. It doesn’t mean that any employees will use them.
I’m skeptical that PRPPs will make much of a difference, but if this plan is offered with financial advice and the costs are low, it might help some people get started with their retirement savings.
This won’t do anything for the large segment of the population that can’t or won’t save money for their retirement. You can lead a horse to water….