OTTAWA – The Conservative government is poised to take the next step towards rolling out a new private-sector retirement savings tool.
The government has introduced a bill that paves the way for the creation of Pooled Registered Pension Plans.
The plans are part of the government’s response to a growing concern over whether Canadians are saving enough for retirement, especially in the aftermath of a global recession that hammered retirement investments.
An estimated 60 per cent of workers in the private sector do not have a company pension plan and one-third of Canadian adults have no retirement savings at all, according to statistics from the Canadian Labour Congress.
The government says PRPPs will help close the growing retirement savings gap in Canada. Critics say solving the problem of retirement savings will take strengthening the CPP program.
Global News examines what PRPPs are and what they mean to Canadians.
What are they: PRPPs are a defined contribution pension plan for private-sector employers and employees. The funds would allow private sector workers to pool their pensions with other people to increase their investment power and share management costs. The funds would be managed by regulated financial institutions.
How are they different from RRSPs: The pooled nature of the plans mean that Canadians will now have the opportunity to be a part of a large-scale, lower-cost retirement investment vehicle.
What are the benefits: The major benefit of the pooled plans is power in numbers, meaning the size of the investments will be increased and the costs for administering the fund will be shared.
Marion Wrobel of the Canadian Bankers Association said an added benefit of the PRPPs is that they give employers a chance to offer added benefits with very low additional costs.
What are the costs: The PRPPs are meant to be a low-cost investment vehicle, but that doesn’t mean they are cheap or risk-free.
NDP pensions critic Wayne Marston cautions Canadians that the value of PRPPs would be subject to the whims of the stock market and the good management by financial institutions: “It’s allowing people to pool with other people to invest together, but it has no added protection against the market. It’s going to be delivered by roughly the same people who are delivering RRSPs right now, and guess what, there is no cap on the (administration) fees.”
Wrobel said participants have to be willing to stomach some investment risk, but should trust in the ability of financial institutions to manage that risk: “This is something they are good at and in that respect they will be taking on the risks and those are the institutions well-placed to take on those risks.”
Are they voluntary: Yes, workers can opt-out of programs offered by their employers. Also, firms are not required to contribute.
Will they work: It’s hard to know how many more dollars Canadians will sock away in PRPPs, but Wrobel said the new tool sets the right incentives.
“The design of the PRPP is such that it will make it more appealing for small business to offer PRPPs to their employees because it would reduce the administration costs and administrative burden that (small and medium-sized businesses) currently face under the pension plans available for them.”
Marston says the funds will help some Canadians save for retirement, but many others will be left behind. Only Canadians with disposable income, not those struggling just above the poverty line, will be able to afford increased investment, he said.
What are the alternative ways to overhaul the system: Along with PRPPs, expanding the Canada Pension Plan has been raised as a potential solution. Politically, PPRPs are more expedient, but critics urge the government not to stop there.
Marston advocates increasing the CPP contributions of both employers and employees by 2.5 per cent over seven years – an increase that will result in a doubling of the CPP benefit after 35 years.
That type of change, he says, will benefit all Canadians whether they take additional savings measures or not.
For Wrobel, CPP reform lacks the flexibility of PRPPs: “You may be requiring some people to contribute more at a time when they don’t want to and when they have other priorities,” he says.
The government has not taken future CPP enhancements off the table.
When will they be available: The federal government is scheduled to introduce the legislation needed to get the ball rolling this week, but each province will also have to introduce and pass their own bills on the plan. It is expected that Canadians could have access to PRPPs by the end of 2012.
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