It’s coming up to a year since the federal government rolled out Pooled Registered Pension Plans (PRPPs). The proposal has come under close scrutiny as the industry debates its benefits and drawbacks.
The plans are designed to bridge the retirement savings shortfall, not replace pensions. And those unable to grasp this distinction are bound to be disappointed, especially if they compare PRPPs to RRSPs and Defined-Benefit pensions.
A C. D. Howe report, for instance, argues the new option represents “only a mild improvement” over existing plans. Joining the long list of PRPP critics, the institute’s 24-page report makes no effort to mask its skepticism other than a passing acknowledgement of PRPPs’ potential for becoming a good pension savings vehicle for Canadians.
The tax rules are the report’s main point of contention.
It argues lower- and middle-income workers shouldn’t save for retirement in tax-deferred accounts because “they will pay taxes and government benefit clawbacks on withdrawals in retirement at rates that are significantly higher than the refundable rates that apply to contributions.”
This runs counter to conventional wisdom that “retirees pay lower taxes on their pension income than they paid on earnings while working.”
The authors, James Pierlot and Alexandre Laurin, also propose amending tax rules to allow tax-prepaid saving within the PRPP, as is allowed in TFSAs.
Nonetheless, the institute has does little to change the point of view of staunch PRPP supporters.
Tom Reid, senior vice-president, group retirement services at Sun Life Financial, says PRPPs are a great leap forward.
“The C. D. Howe Institute makes an important contribution to the debate by talking about low-income workers,” he says. “Where we disagree is where the report says tax rules for PRPPs have to be correct before anything else can be [considered]. The paper doesn’t address a number of other issues important to the delivery of PRPPs.”
For instance, despite assuming the tax rules for PRPPs are virtually the same as RRSPs or DC pension plans, the features of the PRPP package make it superior, says Reid.
“PRPPs are going to be low-cost vehicles, and that’s why the government’s trying to create scale; [also,] making it mandatory for employers [to offer them] will dramatically broaden the coverage of retirement savings plans for working Canadians.”
If employees can automatically contribute, and those contributions are indexed to any raises, the plan will work even better.
C. D. Howe focused on potentially negative tax elements that aren’t just attributable to PRPPs, but also to the retirement savings products to which they are often compared, he adds.
Another benefit he points out: “Employers no longer have to act as a sponsor. In the case of PRPPs, the financial services administrator will act as a sponsor [and] the employer is effectively absolved of any responsibility in a fiduciary capacity.”
This makes PRPPs far more compelling than any tax issues raised by the report, says Reid. He says the problem of higher effective income tax rates in retirement can be neutralized by the plan’s opt-out feature and the benefit of employer matching contributions.
“There’s always the ability for people of lower-income to opt out; [PRPPs] are not going to be mandatory at the employee level,” he says. “[The provision for employer match] is quite worthwhile and the benefit may outstrip the negative tax consequences at the time of retirement.”
That’s not to say the plan is perfect in its current form. Reid agrees with C.D. Howe that the government hasn’t touched the issue of how accumulated savings will be converted into retirement income.
But, “The government is just a facilitator,” he counters. “It’s incumbent on the industry to take ownership of that issue and solve it. It probably involves a more clever deployment of life and term-certain annuities.”
Read: Are you ready for PRPPs?