Only about one-fifth of private-sector companies in Canada offer pension plans for their employees, a reality that may not hit many of your clients until retirement looms.
To address this lack, and to help shore up Canada’s public pension system as well as private savings regimes such as RRSPs, the federal government has proposed a new pension vehicle — the pooled registered pension plan — for people without company pension plans. Even clients closer to retirement may be able to take advantage of these plans, or use them to supplement existing savings.
The PRPP was proposed late last year and included in the federal budget of March 2011. The PRPP remains a high priority in the feds’ plan to update the pension system; it’s anticipated that PRPP legislation will be introduced by the end of the year. Although full details of the proposal are still to come, the general outline of how PRPPs would work suggest good reasons for encouraging your clients to participate.
PRPPs are aimed at providing an easy, low-cost way to help Canadians without company plans, including the self-employed, to save for retirement. PRPPs are designed to be flexible, with employers able to terminate or change plans and participants able to move assets to other PRPPs or retirement-savings vehicles in certain circumstances. PRPPs would be based on the defined-contribution pension model, with the investing risks remaining with the planholder, not the sponsoring employer. Whether or not PRPPs will be mandatory will be a provincial decision.
An attractive proposed feature of PRPPs is the contributions to the plan by your clients’ employer. If a client’s employer chooses to contribute, you probably will want your clients to take advantage of this “free” money for retirement.
Another plus is the assistance for clients who have trouble putting money aside for retirement. If your clients’ PRPP contributions are set up as payroll deductions, the money is more likely to be saved, as it will not be accessible from their earnings.
In addition, if your clients’ PRPPs include automatic escalation of their contributions as their salary increases — a feature that an employee can opt out of — the resulting savings will be even greater.
Research shows that people frequently do not choose the option of opting out of an arrangement because they have to go through the trouble of doing so. For this reason, many financial services industry advocates have pressed strongly for the automatic enrolment of employees in PRPPs.
However, a PRPP may not be the best choice for your clients. If a client’s employer offers a PRPP with automatic enrolment and/or automatic contribution escalation, you will want to discuss these features to ensure that the plan is consistent with the client’s overall financial plan.
Another plus to PRPPs is the potential for low management fees. Susan Eng, vice president, advocacy, with the Toronto-based Canadian Association of Retired Persons, thinks there should be a cap on fees to manage the assets within a PRPP. She refers to the recent experience in Australia, where high fees for a similar type of retirement-savings vehicle generally has reduced returns to negligible levels.
If the management cost is attractive, you will want to discuss two other things with your clients. The first is whether they are satisfied with their PRPP assets being locked in; unlike RRSP assets, PRPP contributions won’t be able to be withdrawn before retirement.
The second is the possible investment options to be offered by a PRPP. The feds have proposed that there will be a “suitable low-cost default option” for the investments, which can have “some risk exposure,” as well as a “manageable number of other [investment] options.”
You will have to figure out whether one of the options will work with the rest of a client’s investments to achieve the return and risk exposure that your client desires.
The issue of harmonization of the rules for these plans is still being negotiated, although both federal and the provincial governments have indicated they favour harmonization. Lack of harmonization could create two issues for your clients: the administrative costs would probably be higher, with providers such as banks including the costs of transferring plans between provinces into a PRPP’s fees; and increased paperwork could discourage participation by both employers and employees.
The possibility of PRPPs being mandatory is being opposed by the Canadian Federation of Independent Business. Corinne Pohlmann, vice president of national affairs with the CFIB in Toronto, points out that some businesses, such as restaurants, have such high staff turnover that mandatory PRPPs would be a very heavy paperwork burden. New companies may also find mandatory plans to be a burden. IE