Pensions & Peace of Mind: To Pool Or Not to Pool?
Pooled Registered Pension Plans (PRPPs) are Canada’s latest pension-planning tool.
To pool or not to pool? That is the question – at least among Canada’s retirement experts. Pooled Registered Pension Plans (PRPPs) were proposed last November by the federal government and are intended to provide workers within small and medium-sized businesses — as well as the self-employed — with a simple low-cost, way to save for retirement. But are they right for you?
Your retirement income will be made up of several pieces. For most Canadians, the major income sources will be the Canada Pension Plan and Old Age Security, company pensions and Registered Retirement Savings Plans, non-registered savings and amounts in a Tax Free Saving Account and maybe an inheritance or the proceeds from the sale of a home.
But government research says that almost two-thirds of Canadians are expected to have insufficient retirement savings. (Around 60 per cent of Canadians have no workplace pension plan.) And while Registered Retirement Savings Plans (RRSPs) started out in 1959 with a focus on retirement, they are increasingly used for other purposes – buying a first home or going back to school, hanging a big flat-screen TV on the wall, or simply as temporary savings to help escape winter's chill. And many Canadians don't use the savings capacity that RRSPs provide, perhaps thinking they can save later. But that leads to choosing potentially risky “catch-up” investment strategies.
Traditional pension plans – whether they provide a “defined benefit” that pays you a known percentage of your salary after you retire or use “defined contributions” to build an investment nest-egg — impose significant management and reporting duties on employers. And while large employers can hire staff or consultants to do that, smaller employers need a simple “off the shelf” approach. Increasingly, employers have used “group RRSPs” to fill that role. But because workers can withdraw RRSP funds for any reason, group RRSPs may not meet employers’ or workers’ retirement funding objectives.
PRPPs attempt to bridge this gap between traditional pensions and RRSPs by providing pensions that focus on retirement income, without the administrative complexity of traditional pension plans or the higher cost of “retail” RRSPs. (High management expenses, lower returns), PRPPs represent a “wholesale” model with much lower costs that are normally only available through pension plans for large companies.
PRPPs will be administered by licensed providers – probably banks and life insurance companies – since they already provide similar services to group RRSPs and pension plans. Other providers, like large pension plans for teachers and government employees, might also be permitted to run PRPPs.
Employers will automatically enroll workers, but workers will have the right to opt out at any time. Rules that are still being developed by Finance Canada may allow workers to be automatically re-enrolled at a later date, again with an opt-out right. The idea is that even if they aren't prepared to contribute today, workers should be given the opportunity to review that decision periodically, rather than opt out now, only to find that they “never got around to saving” when they reach retirement age.
Plans will offer a limited number of investment options, so that consumers aren’t overwhelmed by too much choice — what international research has called “paralysis by analysis.” Investment options will have to be designed to allow the creation of a “prudent portfolio.”
One likely approach to investments is the use of “lifecycle” funds as a default investment option. These arrangements gradually adjust the mix of investments to become more cautious as we age. The rationale is that bonds are more likely to produce secure and stable retirement income, so the investments held in your plan should better match your income needs as you approach and move into your retirement years. For instance, if you're 25 when you enter a lifecycle fund, the investments might be 75 per cent in stocks, and only 25 per cent in bonds. By age 65, the mix might have shifted to 35 per cent stocks, and 65 per cent bonds. If the rules allow you to draw your retirement income from the PRPP, the investment mix might be 20 per cent stocks and 80 per cent bonds by the time you're age 80.
In Quebec, Sun Life Financial, one of Canada’s largest insurers, has already mapped out the structure of its Voluntary Retirement Savings Plan (VRSP, the Quebec version of the PRPP) product. Sylvain Bouffard, director of public affairs for Quebec at Sun Life, said the VRSP product would give two-million Quebecers access to a retirement savings plan. “The VRSP will give us a chance to reach them,” Bouffard said, adding Sun would “offer lifecycle funds as a default investment option.”
In addition to automatic enrolment and default investment options, PRPPs will probably be designed to permit your contribution rate to increase automatically over time. The logic is that starting to save gradually allows you to adapt more easily to any change in your take-home pay, and to develop smart savings habits. And as with simply participating in the plan, you'll be able to opt out of automatic increases in your contribution rate or select a higher or lower contribution rate, as well as choose different investment options.
Not everyone is convinced that PRPPs are a good idea. Some prefer RRSPs and the ability to withdraw funds for purposes other than retirement. Others suggest that defined benefit plans are better, but if employers won't offer them, that seems to be a moot argument. Similarly, some have argued that expanding the Canada Pension Plan would provide the best option.
While Canada's Finance Ministers unanimously agreed, in December 2010, to move forward with PRPPs, so far only the federal government and Quebec have taken action. Of course, the creation of the Pooled Retirement Pension Plan is also contingent on the support of the provinces. The federal Bill C-25 creates a PRPP framework, but it will only apply directly in workplaces that are subject to regulation by the federal government: banking, airlines, railways, shipping and communications. Most of these industries already have pensions. For other types of businesses, the provinces will need to enact legislation and set up their own licensing and regulatory regimes for the PRPP framework to fully come into effect. That may be where the headaches come into it.
Bill C-25 has stuck in the craw of several provinces, including Ontario. The Ontario Government made its displeasure clear during its 2012 budget slamming PRPPs as an inadequate solution to Canada’s pension savings crunch. Ontario stated the presence of PRPPs would fail to boost the total number of Canadians with a registered pension plan (RPP) – it would just add another product into the mix. (A mere 38 per cent of all employees had an RPP in 2008 – the majority of them (84 per cent) in the public sector. Just 25 per cent of private sector employees had an RPP that year.) Ontario favours enhancements to the existing Canada Pension Plan, and seems to want CPP expansion at the same time as any adoption of PRPP. Ontario has also expressed concern that the employees' contributions might not be accessible in cases of financial hardship.
While federal, provincial and territorial governments have committed to considering modest and gradual changes to the CPP, what those terms mean is unclear. And importantly, changes to the CPP require the consent of 2/3 of the provinces with 2/3 of the population. (Those fractions include Quebec, even though it runs its own, broadly parallel, pension plan, the QPP.) So it isn’t clear that agreement to amend the CPP is likely in the near term.
Quebec has had a warmer response to the federal legislation – which is seen as a solution to Quebec’s low retirement savings rate. The provincial government estimates 30 per cent of workers, mostly in the $20,000 to $60,000 earning bracket, have no retirement savings at all. Starting in 2013, Quebec will implement its VRSP. All employers in the province with five or more employees with no existing pension plan or group RRSP will be obliged to enroll staff in a pooled plan. Companies with fewer than five employees, the self-employed and individuals would also have the choice to participate. Participating employers wouldn’t be required to contribute. And under the Quebec model, employees would be able to withdraw their own contributions under certain conditions.
While the provinces’ reaction has been mixed, the reaction from Canada’s small and medium businesses is mostly positive. A poll conducted by Leger Marketing in January 2012 on behalf of the Canadian Life and Health Insurance Association (CLHIA) shows 68 per cent of small and medium enterprise owners (SMEs) are interested in providing PRPPs. Over 800 companies were surveyed in the poll. Two-thirds of employers interviewed also believed employees would embrace the opportunity to contribute to a PRPP. The CLHIA represents the vast majority of Canada’s life and health insurance industry; its members manage more than two-thirds of Canada’s private sector pension plans. Frank Swedlove, president of the CLHIA, said the poll shows that “these savvy employers know a good thing when they see it.”
“Small and medium-sized business executives are ready to embrace PRPPs as they look for new ways to keep employees and attract new people,” says Swedlove. “We are on the cusp of making a fundamental shift in the pension landscape.”
Another sign of employer support of PRPPs is the 73 per cent of SME executives who indicated they would not only provide PRPPs to employees but would “look at ways their business could contribute to the plan over and above what the employee puts into it.” Under the current legislation, it is not mandatory for employers to contribute to the PRPP.
Although it is unclear whether all Canadian provinces will adopt legislation to implement PRPPs, one thing is certain. Despite its pros and cons, the mere concept of Pooled Registered Pension Plans certainly has Canada’s pension world talking.
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