Bill C-25, which establishes a federal framework for the new Pooled Registered Pension Plan (PRPP), was passed into law last week. The debate over this new addition to Canada’s retirement system now shifts to the provinces, each of which will decide if they want to follow Quebec’s lead in adopting the new plans.
That debate has been heated at times. While financial services industry organizations like the Canadian Life and Health Insurance Association and providers like Sun Life Financial have been vocal in their support of PRPPs, critics have argued there are better ways to expand Canada’s retirement savings system.
I’m going to explain in simple terms how PRPPs work, and then argue that the debate about the merits of these new plans is based on a false choice. I think they make the system better, even if they fall short of providing Canadians the standard of living some would like guaranteed in retirement.
First, here’s how they work:
- The idea behind PRPPs is that too few Canadians have a workplace pension plan. Just about six million Canadians have a plan at work, according to Statistics Canada. That’s fewer than 40% of working Canadians. But that number is misleading because so many public sector workers have plans. Less than a quarter of private sector employees work for an organization that sponsors a plan. Why so few? Depending on the type of plan an employer chooses to sponsor, they can be costly and complicated to run. PRPPs are less of a burden for employers.
- PRPPs will not be tied to a single employer. Your membership in a PRPP stays with you if you change jobs. If you move to an employer that participates in a PRPP, you can continue to make contributions to your plan. The question of whether employers are required to set up a PRPP will be up to the provinces. Quebec requires employers with five employees or more to have a plan.
- The plans are provided by financial institutions. Employers that participate in a PRPP hire a financial institution such as a bank or insurance company. The institution sponsors and administers the plan, and is required to put the plan members’ interests first. (Technically, any corporation with regulatory approval can provide this service.)
- These are defined contribution plans. Unlike a defined benefit plan where retirement income is determined by factors such as your years of service and salary earned, defined contribution plans do not promise a certain level of retirement income. Your savings are invested in various funds, and you have a personal account that includes what you save and the return you earn on your investment of those savings.
- Workplace plans are designed to make it easier for you to save. One of the reasons workplace plans are so valuable is that your contributions are deducted directly from your paycheque. It happens automatically, so you don’t have to make a conscious decision every couple of weeks to save for retirement.
- PRPPs are registered, like a registered retirement savings plan. That means your savings will earn you a tax deferral. Your savings will go into the plan on a pre-tax basis. But there will be tax considerations when you begin to withdraw your funds.
- Financial institutions will provide investment options with fees that are lower than retail. This is possible because member assets will be pooled, providing economies of scale. Expect market forces to contribute to this, too, as providers compete for employers’ business.
- PRPP contributions will not be mandatory. Employees may be automatically enrolled in a PRPP, and they may even see a certain level of savings set as a default option in their plan. But they are not required to make contributions. (Employers are not required to make contributions either.)
- Quebec will be the first province to launch these new plans. They’re called the Voluntary Retirement Savings Plan there. They launch Jan. 1, 2013.
Finally, a quick word on the debate surrounding PRPPs. For the most part, it’s been robust and productive. Those of us following its development have heard a range of good ideas about how to expand Canada’s retirement savings system. One aspect of that debate troubles me, though.
Some argue that the PRPP is a bad idea because what our system really needs is an expansion of the Canada Pension Plan (CPP). This would have the benefit of adding to the guaranteed level of retirement income promised to all Canadians under the current government-provided system. We’d have to fund that increase some way, but that’s a reasonable question for policymakers to consider.
What strikes me as unreasonable, though is simply dismissing PRPPs because they’re something other than an expanded CPP. It seems clear to me that PRPPs will make the Canadian retirement savings system stronger. Last week’s announcement from Ottawa is good news for Canadians. It may not solve all our retirement system problems, but it’s certainly a progressive step.
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