Thursday, December 16, 2010

The Pooled Registered Pension Plan

There was some very big news today from the office of Finance Minister of Canada. 
He released a report recommending that a new Pooled Registered Pension Plan to be established in Canada. It appears that the idea of enhancing the CPP is no longer viable and the PRPP is in play. 

Benefits Canada reports:
The draft claims that “moving forward with PRPPs will provide Canadians with a new low-cost accessible vehicle to meet their retirement objectives. This will be particularly beneficial to Canadians who do not have the benefit of an employer-sponsored pension plan, including the self-employed.”
A third party would take the role of managing the administrative aspects of the plan, which could be a benefit to small and medium-size employers. However, there are some tasks the employer would need to be responsible for, such as determining employer and employee contribution levels (if applicable), collecting and remitting contributions and informing the administrator of new members a termination of employment.
The investment industry reacted swiftly and favourably.
Canada's life and health insurance industry currently administers 70% of Canadian pension plans, so the in industry sees itself as a potential winner if the PRPP proposal is adopted.
What is a PRPP?

Here is the way similar plans work in other countries.   
The PRPP appears to be modeled after other successful plans around the world including the recently created NEST program in the UK and the Kiwi Saver Plan from New Zealand. In those plans, however, employer contributions are mandatory. It appears that the new PRPP plan will only be mandatory for employees. 

Employers will be given the option to make contributions into the PRPP. 

In other countries the plans are designed so that employees are enrolled on a mandatory basis. They will have to make an active selection to opt-out of the plan. In the experience of those countries that offer the opt-out very few employees actually make the move to opt out of the plan. 

It offers large pools of investments that are managed by the private sector insurance and investment companies. The investor is given the option to choose who he wants to invest it with.

Why a PRPP 

Jim Flaherty draws sharp political arrow from pension quiver
» The nose of the baby boom touched 65 last year, and many, many more will cross that threshold in the next decade. A frightening proportion have done too little to plan for their retirement, and are now faced with the realization that government programs will be nowhere near adequate to help them live the lifestyle they want.

» With interest rates stuck at record lows, even those who start pumping cash into retirement savings accounts today will be losing ground to taxes and inflation unless they take some risk with their money. For the last few decades Canadians have been getting more comfortable with risk products such as equities but the global stock market meltdown slashed RRSP account values and shredded the self confidence of many retail investors.

» Among the casualties of the stock market collapse have been large defined benefit pension plans operated by large corporations for their employees. Recent problems only accelerated a trend that had been under way for years. The “get a job after school, stay with a company for decades and retire with its pension” life arc is rare indeed, at least in the private sector.

Investment Basics
The financial services industry in Canada is very happy about the plan. They will be participating as providers for the savings plans. Although at much lower rates then they provide RRSP's and small group pension plans today. UK Nest program excites asset managers

Here is an example of the types of companies that employees will be able to deposit their savings with. Kiwi Saver Plan Providers. 

The advantages of this plan are reflective in the Saskatchewan Pension Plan. This plan is evidently being examined as a model for the new PRPP. Major changes to the Saskatchewan Pension were announced by Flaherty a few weeks ago. This was odd because pensions are provincial jurisdiction and the Saskatchewan plan had quite anemic performance in terms of member participation. The major plan changes announced for the Saskatchewan Pension were obviously made to help in announcing the PRPP. 

The Saskatchewan Pension Plan has had excellent investment performance.  This is mainly because of the lower investment fees within the plan, which should be a key part of the new PRPP. These MER's have a dramatic impact on the long term effect of pension plan performance. How do investing costs hurt returns?

I expect the only difference to the PRPP will be the ability to choose from various private sector investment management companies to manage your funds. 

The link to the plan can be seen here at Framework for Pooled Registered Pension Plans

Investment Advantage

The key advantage to this plan taken here from the Saskatchewan Pension include: 
  • Voluntary - no obligation to contribute;
  • Flexible - payment at any time during the plan year;
  • Portable - people can join and contribute to the Plan regardless of where they reside; and
  • Professionally managed - The return has averaged 8% since it started in 1986. 
  • Low investment management fees - The Saskatchewan Pension has management fees at about .75%. In the UK the plan fees are expected to be a low as .3%. 
  • Optional employer contributions - the CPP option would force employer into another payroll tax. It appears the employer can have an optional contribution in the PRPP. More dynamic thinking businesses will contribute to the PRPP as a way to retain and attract key employees. 
  • Personal Accounts - Today when a single person dies at age 66 his future CPP earnings are lost forever. With a personal account in the PRPP there will be a benefit to the estate of the deceased.
  • Greater participation - This will give employers the opportunity to provide a retirement plan for employees without the high perceived costs of setting up a pension or savings plan.
Tax Treatment 
The new TFSA has been receiving excellent reviews by investors an excellent tax efficient way to save money. So much so that at a Round Table with the Finance Minister  of Ontario concerns were cited about the long term loss of tax revenue from the TFSA accounts compared to the RRSP. 

The Finance Department has a chance to rectify this  boo-boo and create a mandatory PRPP that is treated the same way as RRSP's and recoup some of the taxes loss when the pension funds are redeemed.

Bill Tufts
Fair Pensions For All


  1. Your comment in the bottom section that the Finance Minister of Ontario has "concerns about the long term loss of tax revenue from the TFSA accounts compared to the RRSP" is VERY troubling.

    It shows a complete misunderstanding of the way RRSPs work. The income on savings (not including the RRSP tax credit) is free from tax in the RRSP exactly like in the TFSA.

    There is a possibility of higher taxes from the RRSP if retirement benefits are reduces as a result, or if the marginal tax rate on withdrawal is higher than when contributed, but I doubt any politician would consider these charges something to champion.

  2. A draft document entitled Framework from Pooled Registered Pension Plans, from the Department of Finance, was made available by the Globe and Mail:

  3. *Optional employer contributions - More dynamic thinking businesses will contribute to the PRPP as a way to retain and attract key employees. *

    ..... so by making it optional, they pander to the businesses which lack dynamic thinking?

  4. This comment has been removed by a blog administrator.

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