The halting quest to expand pension coverage in Canada took a step forward last month when Alberta and Saskatchewan tabled legislation to introduce Pooled Registered Pension Plans. But early supporters of the new savings tool are already losing hope it will do what it was meant to do: broaden workplace pensions beyond the 39% of Canadian employees who have them now. “It’s just sad, because we could do so much better,” says Keith Ambachtsheer, a pension expert and founder of KPA Advisory Services.
The brainchild of the federal Finance Department, passed in Parliament in December, PRPPs are portable pensions that would follow employees from job to job and present little hassle (and no actual cost, necessarily) to small employers. They haven’t been universally welcomed, with some provinces (which control pension law governing most workers) favouring instead the expansion of the existing Canada Pension Plan. However they will likely soon be available in the two western provinces.
Their intent was to fill the space vacated by traditional workplace pensions over the past two decades, especially in the private sector. This gap poses a risk not just to workers without them—few of whom are saving enough to maintain their lifestyle into retirement—but to government finances and the economy as a whole.
Employees of firms that offer PRPPs are automatically enrolled (they can opt out), and the funds are pooled and administered by a third party, such as a bank or insurance company. Sun Life Financial, for one, plans to offer PRPPs as soon as legislation is passed. Tom Reid, senior vice-president of group retirement services, says the fees will be less than those for retail mutual funds, which are typically 2%. “If they’re done right, PRPPs will become a significant part of the savings landscape,” he says.
To the dismay of some pension experts, though, neither Alberta nor Saskatchewan will require businesses to offer PRPPs to their employees. Chances are most of them won’t, Ambachtsheer says. He points out that group RRSPs are already available, and few employers make use of them. “So why will small and mid-sized employers now say, ‘Gosh, we’ve got to register our employees in this great pension plan,’” he asks. The only advantage of PRPPs is that their contributions will be exempt from certain payroll taxes—a meagre benefit.
Quebec took a different approach when the previous Liberal government introduced its version of a PRPP, the Voluntary Retirement Savings Plan, and mandated employers make it available. (Employer contributions are optional.) The proposal died when an election was called last year. The new Parti Québécois government promised to revisit the issue.
In Alberta, resistance to mandatory PRPP access comes from the business community. “It really needs to be up to the business owner, in consultation with employees, about whether this is something that’s necessary,” says Richard Truscott, provincial director with the Canadian Federation of Independent Business. The CFIB’s research shows that 36% of its members in Alberta would consider offering PRPPs. Adoption could increase, Truscott says, as more employers realize the administrative burden of PRPPs is low. Offering PRPPs could give some businesses an edge to attract talent in the province’s tight labour market.
But even if PRPPs become widely adopted, the design itself is flawed, according to James Pierlot, a pension lawyer in Toronto. “The PRPP will not do anything to help people in the private sector close the really massive gap with public-sector workers,” he says. Pierlot wrote a paper for the CD Howe Institute in 2011 showing that a person with a salary of $75,000 at the end of a 35-year career would accumulate more than $1.4 million in savings through a defined-benefit plan (wherein the pensioner is paid a set income based on past earnings and years of service, mostly confined to the public sector these days) compared to $674,711 for someone with no pension but a maxed-out Registered Retirement Savings Plan. Part of the reason is that RRSPs and defined-contribution plans are subject to tighter contribution limits than defined-benefit plans. PRPPs will be subject to limits too, so it’s unlikely they will narrow the gap.
Many lower-income Canadians, meanwhile, would be better off avoiding PRPPs, which would see their Old Age Security and Guaranteed Income Supplement benefits clawed back at higher tax rates. Pierlot suggests creating a tax-free savings option within a PRPP.
But given the difficulty of getting PRPPs to this stage, there is little appetite for tinkering. “To bring this back in a very serious way is going to require a different government in Ottawa,” Ambachtsheer says.