Investment industry groups are hoping to see changes to the structure of the proposed legislation concerning pooled registered pension plans (PRPPs). These groups say their proposals would give Canadians greater flexibility in planning for their retirement and access to financial advice that will allow them to meet their savings goals.
“Right now, the way the regulations are designed, the way the PRPP is structured, it’s very difficult for an individual to manoeuvre [between retirement vehicles],” says Andrea Taylor, a director with the Toronto-based Investment Industry Association of Canada (IIAC). “More flexibility, more choice and more opportunity to get advice improves financial literacy and provides all kinds of opportunities to people to improve their investments and savings.”
PRPPs offer smaller and mid-sized employers a way to provide a low-cost, defined-contribution pension plan to their employees. These firms would not have to administer their plan – that would be the responsibility of the PRPP’s plan provider in the financial services industry – and the employer would not necessarily have to contribute to the plans.
The federal government passed legislation to create the PRPP, available to federally regulated businesses, in June. In October, changes to the Income Tax Act (ITA) to accommodate the creation of the PRPP were tabled in the House of Commons as part of Bill C-45, the budget bill. So far, Quebec is the only province to propose companion legislation for a provincial PRPP, known there as the “voluntary retirement savings plan.”
The IIAC, the Toronto-based Investment Funds Institute of Canada (IFIC), Toronto-based Advocis and others argue that the current PRPP rules hem in the ability of Canadians to build their retirement savings by allowing for only a low-cost savings option but not for a fee-inclusive advice option. These organizations contend that Canadians who receive investment advice can make better choices regarding their particular circumstances and generally enjoy better returns over the long term.
As Joanne de Laurentiis, president and CEO of IFIC, wrote in a February letter to the Department of Finance Canada: “It is, we believe, a false economy to focus on ‘low cost’ options as it discourages the provision of advice and leaves individuals with limited information and no guidance.”
Taylor echoes this position: “The IIAC has serious concerns about whether the PRPP, as currently designed, can achieve the stated policy goal of increasing the retirement savings of Canadians by providing – and quite possibly, mandating – a very ‘institutional’ type of PRPP program for self-employed individuals and small-businesses that could benefit greatly from more individualized, advice-inclusive savings options.”
Both the IIAC and IFIC also are concerned about the uneven tax treatment of PRPPs vs other retirement vehicles, such as group RRSPs. Although contributions to PRPPs are free of both employer-paid and employee-paid Canada Pension Plan (CPP) and Employment Insurance (EI) deductions, contributions to group RRSPs and employer contributions to individual RRSPs are subject to these deductions.
The uneven playing field, both IFIC and the IIAC argue, represents inequitable tax policy and could lead plan participants to make unsuitable decisions. Some employers, for example, could choose to switch from offering a group RRSP to a PRPP in order to benefit from the latter’s tax-favourable treatment, even though the switch might not be in the best interests of plan participants.
“Under the PRPP structure, employees will be auto-enrolled,” says Barb Amsden, director, strategy and research, with the IIAC. “And for many, this may be their only form of retirement savings plan. Without adequate advice on the benefits of other forms of savings – for example, through tax-free savings accounts – low-income Canadians in particular may be adversely impacted.”
A low-income person who saves primarily through a PRPP could receive little or no benefit of tax deferral, as he or she is taxed at a lower tax bracket to begin with, and also lose the full benefit of income-tested government programs in retirement when withdrawing PRPP funds.
Both the IIAC and IFIC would like to see the ITA amended to remove CPP and EI deductions on employer and employee contributions to group RRSPs. The IIAC also wants similar deductions on employer contributions to individual RRSPs removed.
The IIAC also has proposed changes that would allow the transfer of funds out of PRPPs, within certain limitations and conditions.
“The way the rules are designed now,” Taylor says, “once employees get locked into a PRPP, perhaps even choosing to consolidate all their holdings in a PRPP, it’s very difficult for them to get [funds] back out again and move into a different program where they can get more advice.”
Despite the concerns over the structure of PRPPs, financial services industry groups continue to believe that these retirement savings vehicles can be a valuable tool in addressing the issue of declining availability of employer-sponsored plans to Canadians. Banking, insurance and investment-sector advocacy groups, as well as others, have been urging provincial governments to introduce legislation that would allow more Canadians to take advantage of PRPPs.
Provincial governments, with the exception of Quebec, have been slow to introduce legislation. For example, legislation to create PRPPs was not included in the 2012 Ontario budget.
Taylor will be watching for the release of the agenda of the scheduled meeting of provincial finance ministers in December. “If the PRPP is on the agenda,” she says, “that would be a clear indication of where the priorities of the provinces lie, and perhaps [evidence of] movement on the PRPP at the provincial level.”IE
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