Jonathan Chevreau of the National Post asks, Will a pension overhaul save your retirement?:
Conservative government has let its plan for fixing the country’s
pension system fly under the radar of late while rival political
parties had their say. But that ‘quiet period’ ends Monday when they get
to the nitty gritty of launching their promised Pooled Registered
Pension Plans, or PRPPs.
State (Finance) Ted Menzies will be briefing pension administrators in
Toronto about the PRPP proposal first sketched out last December. It’s
the government’s preferred private-sector fix for the retirement income
Forget about the greatly expanded or “Big” Canada
Pension Plan the Liberals, NDP and Big Labour have pushed for. Mr.
Menzies is all about creating a system that will be run by the private
sector with risks born equally by employees and employers.
can also forget about mandatory participation, which would be inherent
in a CPP-centric solution. The essence of PRPPs will be to let either
employers or employees opt out.
forget about defined or guraranteed benefits in retirement: This plan
is based on defined contributions with the ultimate benefits tied to
Naturally, Bay Street is salivating at the prospect.
is a giant potential opportunity for the nation’s banks, mutual fund
companies, insurance firms and a growing number of manufacturers of
exchange-traded funds. Pension consultants, actuaries, financial
planners and investment advisors will also see various business
opportunities created as PRPPs catch on — primarily with small- and
medium-sized businesses that never before offered its workers a pension
plan. Mr. Menzies, the cabinet minister responsible for PRPPs, says
he’s travelled the country consulting with the provinces.
the concept of the pooled RPP was shared with the provinces and
territories they all came together to agree this makes sense.”
Minister Jim Flaherty still hasn’t ruled out a “modest” CPP
enhancement but Ottawa’s preferred pension fix is clearly the PRRP.
Monday, the politicians and pension industry will start by hashing out
details contained in a 13-page consultation document issued June 15,
bearing the admittedly unsexy title of Tax Rules for Pooled Registered
Pension Plans (PRPPs).
Neither governments nor corporations wish
to go back to the bad old days of bearing the burden of providing the
kind of guaranteed payouts used in traditional defined benefit employer
pension plans or similar assured payouts in the CPP.
PRPPs will be (hopefully) low-cost defined contribution schemes run by
the private sector where ultimate benefits will depend on how financial
markets perform. The PRPPs would resemble the United States’ 401(k)s or
Australia’s superannuation scheme.
will be administered by financial institutions rather than employers,
which is why Bay Street views them as a potential bonanza. As the
“pooled” part of their name suggests, assets are co-mingled for
investment purposes to keep down costs.
The original idea was
that PRPPs would be mandatory for employers that don’t offer their own
registered pension plan but Mr. Menzies says that decision would be up
to the provinces. “We’re putting it out there that there is an option
for the employer and for the employee. I’ve spoken to many small
businesses that said ‘finally here’s a low-cost affordable plan I can
enroll my employees in.’ It will be a retention and enticement tool.”
won’t be forced to make contributions, but may choose to do so.
Employees will be automatically enrolled at a base contribution rate,
but they can opt out.
There will be two types of members:
Employed and individuals. The latter include the self-employed and
employees of organizations that do not offer PRPPs. Benefits are
portable. Employers offering PRPPs can move to a new plan if they wish.
There are fewer portability restrictions for individual members,
making them convenient if they later change jobs and want to take their
pension with them.
Participating employers will make direct
contributions to the plan and remit employee contributions. Individual
members can make periodic or lump-sum contributions and will be
responsible for choosing to enrol, selecting contribution rates and
challenge next week is to modify tax rules so PRPPs fit within the
existing structure of Registered Pension Plans (RPPs) and RRSPs across
the country. Many administrative details must be hammered out, such as
accounting for pensionable service or permitting transfers between
existing RPPs and PRPPs.
Mr. Menzies says he hopes
federal legislation to implement PRPPs will be passed before the end of
the year. The Canada Pension Benefits Standards Act hasn’t been
modified since 1985, he said. Once passed, the provinces will have to
pass their own legislation to integrate PRPPs with their own pension
and tax regimes.
The first PRPP already exists as part of a
rejigged Saskatchewan Pension Plan (SPP). Established in 1986, the SPP
is also defined contribution in nature, with the money invested in a
balanced fund or a short-term option, according to Vancouver pension
consultant Greg Hurst.
At retirement, funds can be transferred
to a life income fund with a financial institution, or retirees can buy
annuities backed by the province. In December, when the Ministry of
Finance unveiled its draft framework for PRPPs, Ottawa and Saskatchewan
jointly announced changes to the SPP to align the plan’s tax regime
with RRSP and RPP rules.
Mr. Hurst, president of Greg Hurst
& Associates, has been a vocal opponent of an expanded CPP but is
optimistic about the PRPP. The revised SPP has several things in common
with the proposed PRPP: its administrators act as fiduciaries,
investments are pooled across the plan, it’s portable and there are two
classes of members.
Malcolm Hamilton says PRPPs have the laudable goal of helping employees
in smaller firms save for retirement without imposing excessive
burdens on their employers. However, he is concerned that achieving
this seemingly simple goal could prove to be “deceptively difficult.”
enrollment could be a problem for smaller firms to administer and
someone will have to come up with the default contribution rate and
default investment options, Mr. Hamilton says. He’s also concerned
about where participants will turn for objective yet affordable
advice, given the possible conflicts of the financial institutions that
will administer the plans.
Finally, Mr. Hamilton doubts
low-income workers making under $20,000 a year can benefit from PRPPs:
they should be saving modest amounts in Tax Free Savings Accounts
(TFSAs) rather than RRSPs or RPPs.
It’s not yet clear whether
PRPPs could also be made to work with TFSAs. That’s one of the fine
points to be hashed out next week.
There are many
"fine points' on PRPPs that need to be hashed out, but let's call a
spade a spade: PRPPs are a big giveaway to banks, insurance companies, mutual funds,
pension consultants and the entire private sector and they're just a bad
extension of RRSPs and thus doomed to fail. They should rename PRPPs to
Private Resources Pilfering Pensions
because that is the essence of this stupid, shortsighted proposal. The
private sector continues to rape employees with exorbitant fees and they
make more inroads into retirement savings, grabbing a bigger stake of
the shrinking pension pie.
Please go back to read my comment on why the fuss over pensions.
Everything else you read in mainstream media is private sector garbage.
I am tired of beating the pension drum on this issue and will continue
to expose the charlatans who claim to know what's best for our
retirement. They haven't got a clue which will be blatantly evident once
the new Minister of State (Finance) Ted Menzies unveils the details of
this new proposal. Mark my words, it's going to be a monumental failure
and Canadians are going to end up paying dearly for it down the road.