AS THE FEDERAL GOVERNMENT’S new pooled registered pension plan (PRPP) program edges closer to implementation, debate has emerged around whether the proposed structure is any more advantageous to Canadians than the savings vehicles already available.
The program was announced in late 2010 as part of a solution to the gap in pension coverage for workers across the country, and the new format recently has made strides toward becoming a reality. The federal legislation that puts in place the framework to implement PRPPs received royal assent in June, and the first set of proposed regulations governing the plans were released in August.
PRPPs aim to beef up pension coverage among employees at small and mid-sized companies by making it easier and more affordable for such businesses to offer pensions to employees.
However, a report recently released by the C. D. Howe Institute suggests that: PRPPs represent only a “mild improvement” over existing retirement savings options; and, under the currently proposed rules, PRPPs aren’t likely to improve Canada’s retirement savings system. The report points out that the proposed tax rules for PRPPs are essentially identical to those for RRSPs, with income tax not payable on contributions and investment gains deferred until pension benefits are paid out.
The report’s co-authors, James Pierlot and Alexandre Laurin, argue that this type of tax-deferred structure is not beneficial for many Canadians _ particularly lower- and middle-income individuals. In fact, the report suggests that many such workers would actually be worse off in retirement by investing in a tax-deferred vehicle because they’ll pay taxes and face clawbacks on government-issued benefits at rates significantly higher than the refundable rates that had applied to their PRPP contributions.
“The combination of income taxes and the clawback of income-tested benefits means that [PRPP participants] could face tax rates of as much as 50% to 80% of income they receive from a PRPP,” says Pierlot, a principal and lawyer with Pierlot Pension Law in Toronto and a member of the C. D. Howe Institute’s pension policy council. “Saving in a PRPP, for many workers in these income ranges, will actually increase their lifetime tax rates and lower their living standards.”
The potential negative impact of PRPPs on low- and middle-income Canadians is particularly troubling, Pierlot adds, because this is a key demographic targeted by this type of plan: “If the federal government is successful in getting lower- and middle-income workers into these plans, they will effectively pay more taxes… kind of like a regressive tax increase.”
The Toronto-based Investment Industry Association of Canada (IIAC) agrees that the PRPP may not help boost retirement savings among Canadians. The association acknowledges that PRPPs do offer some advantages over RRSPs, defined-contribution (DC) pension plans and other existing programs. For instance, management fees are likely to be considerably lower than those on most mutual funds, and employers will face far less administrative work compared with DC plans and group RRSPs.
Given these slight advantages to PRPPs, their introduction may simply result in a transfer of retirement savings from existing structures to the new one, says Andrea Taylor, director with the IIAC: “What this could potentially result in is a shift in savings to PRPPs from RRSPs rather than an overall increase in retirement savings, which was really supposed to be the goal of the PRPP program. We’re hopeful that PRPPs can fill the retirement savings gap, but we do have some concerns about the structure of PRPPs.”
The gap in retirement savings is sizable. Recent statistics released by the Office of the Chief Actuary at the federal Office of the Superintendent of Financial Institutions show that only 39% of Canadian workers are covered by a registered pension plan. Of most concern is the private sector, in which just 24% of workers have pensions. In contrast, according to Statistics Canada, 88% of public-sector workers will receive workplace pensions.
“There is a need,” Taylor says, “for small businesses and self-employed individuals to have retirement options available to them.”
Other players in the financial services industry are more optimistic that PRPPs will help close the gap. For instance, Toronto-based Canadian Life and Health Insurance Association Inc. (CLHIA) commends Ottawa for addressing the retirement savings gap with a vehicle that can be administered through the workplace.
“The easiest place to save for retirement is at the workplace, where you have payroll deductions and you don’t have to make some tough choices between saving for retirement and other demands on your money,” says Frank Swedlove, CLHIA’s president. “With PRPPs that target people at the workplace, that gap in savings for retirement is going to help get filled.”
Montreal-based Standard Life Assurance Co. of Canada also is optimistic about the PRPP. Says Louis-George Mongeau, senior consultant, legislation and plan governance, in the product development and management division of Standard Life: “Definitely, the PRPP has the potential to increase savings in Canada.”
In particular, he lauds the auto-enrolment feature, which automatically enrols employees in their company’s PRPP unless they opt out. This is likely to result in a higher level of participation in PRPPs compared with other retirement savings options available to Canadians, Mongeau says: “That will help employees _ at least, at the beginning _ to start saving for retirement. I think that is one of the major highlights of the PRPP; it’s very positive.”
Pierlot also acknowledges the advantages of PRPPs. He estimates that management fees for PRPPs could amount to a full percentage point less than those on most mutual funds because the assets will be managed on an institutional basis: “It’s a significant potential difference there.”
PRPPs also boast advantages for employers. For instance, unlike with group RRSPs, employer contributions to PRPPs won’t be subject to payroll taxes such as employment insurance premiums and Canada Pension Plan reductions. There’s also less of an administrative burden for employers vs DC plans and group RRSPs. And, under the PRPP model, the fiduciary duty is transferred to a third-party administrator, taking legal liability off the employer’s shoulders.
“If the PRPP is introduced,” Pierlot says, “you’ll probably see some shift from employers sponsoring DC plans to PRPPs.”
To improve the effectiveness of PRPPs, however, Pierlot believes the proposed tax rules should be changed. He recommends amendments to allow “tax-prepaid” savings within PRPPs, similar to tax-free savings accounts (TFSAs). As TFSAs are funded with income that has already been subject to taxation, he explains, no taxes are payable on withdrawals _ and withdrawals do not affect entitlement to income-tested benefits. Many low- and middle-income workers, Pierlot says, would be able to minimize the amount of taxes they pay over their lifetime by saving in this structure rather than a tax-deferred structure.
The federal government had released draft tax rules pertaining to PRPPs in December. And PRPPs will be available across Canada once the finalized rules have passed and once the provinces and territories introduce their own PRPP legislation. Quebec is the only province that has drafted such legislation; how- ever, the order paper expired with the calling of the recent election in that province.
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