PRPPs: New vehicle, same old problems

The newly re-introduced Pooled Retirement Pension Plan (PRPP) may be touted as the cure-all for Canada’s flailing retirement savings system, but a rather unimpressed advice industry regards it as just another tool.

Tina Tehranchian, financial advisor, Assante Capital Management, says she’s not sure if the PRPPs are addressing issues that are causing lack of participation in retirement savings plans.

“It’s great as another option, I’m all for consumers having all sorts of options available to them, but let’s be serious about it, companies have had the option of offering group RRSPs and others plans where both employers and employees could contribute—similar to a defined benefit pension plan (DB)—but the participation rates have not increased dramatically.”

Larger companies are increasingly pulling out of DB and opting for defined contribution (DC) pension plans and group RRSPs. Those companies don’t face the same cost problems as smaller companies.

“As an additional option that’s available to employers, it’s good, but as a solution to the deficit in savings by the lower-income Canadians, I’m not convinced that PRPPs are going to do the job,” said Tehranchian.

Far from being thrilled by the new PRPP model, some critics say it does nothing to address Canadians’ need for greater retirement security and that the government should instead have expanded the CPP.

This is an ideological move that flies in the face of common sense and good research, said Ken Georgett, president of the Canadian Labour Congress.

“It’s really nothing more than a piecemeal approach that rewards banks, insurance companies and mutual fund companies instead of offering real retirement security options for everyone,” said Georgett. “Every credible piece of information that we have seen indicates that the PRPPs would be far inferior to an expanded Canada Pension Plan in providing retirement security for Canadians.”

However, government argues that expanding the CPP is effectively the same as increasing the payroll tax on employers, thereby creating a disincentive to hire.

PRPPs are a savings plan intended for employees of small- and medium-sized employers who do not currently offer their employees a registered pension plan. It is, however, unclear how the rules will apply to them.

David Vincent, senior partner at Toronto law firm Norton Rose, tried to unravel some of the uncertainty shrouding the programme.

“My guess is there will be an opt-out provision; I find it hard to believe that a provincial government in Canada will force the employers to offer a retirement savings programme without allowing an opt-out; that’d be too draconian,” said Vincent’s, whose corporate and commercial practice emphasizes all aspects of pension and benefits matters.

The programme’s success will also depend a great deal on its ability to keep costs low allowing for higher returns. One of the ways to do so is to take advantage of economies of scale and create PRPPs that are available nationally.

“The biggest challenge we will face is to harmonize all the rules and laws that apply,” says Leblanc. “Each province will have to look at their labour laws to make sure they can align eligibility rules and pension rules.”

The differences between provincial benefits legislation are increasingly significant, said Vincent. “Particularly for employers, who have employees in more than one province, it makes it much harder; they now need to comply with different laws and different provinces.”

Vincent admits that it may not be that big a deal for small- and medium-sized employers who typically don’t employ people across provincial jurisdictions, but “the lack of harmonization across provinces in pension legislation is troubling and not helpful for businesses much in the same way as the securities legislation.”