Pension solution or illusion?

The newly announced PRPPs may help Canadians save for retirement—but only if they’re mandatory.



From the February/March 2012 issue of the magazine.


PRPPs aim to help staff at small businesses save for retirement. (Photo: Thomas Barwick/Getty)
In November, the federal government introduced legislation intended to make saving for retirement easier for millions of Canadians. The new Pooled Registered Pension Plan (PRPP) was created in response to concerns that dwindling savings rates and the elimination of many employer pension plans will result in future retirees subsisting on Kraft Dinner and instant noodles.

With PRPPs, small businesses will be able offer employees a retirement savings vehicle, but the administrative and legal burdens will fall on the financial institution running the plan.

But even though PRPPs have many features that are considered hallmarks of an effective savings plan— automatic enrollment of employees, automatic saving from paycheques, and the use of low-fee investments—the reaction to the new plan from retirement experts has been decidedly cool. “It’s way too early to celebrate the success of the PRPP,” says Malcolm Hamilton, a partner with Mercer.

One of the biggest problems, according to Fred Vettese, chief actuary at Morneau Sobeco, is the fact that the federal government isn’t forcing businesses without existing pension programs to offer the plan. “If it’s going to have an impact, it needs to be mandatory for employers,” he says.

However, the auto-enrollment of employees is also a concern, because low-income workers are generally better off saving in TFSAs so they won’t face clawbacks in government benefits in retirement. PRPPs are a good solution for middle-income employees who aren’t currently saving regularly by means of low-fee investments—provided that their employers offer the plans.

If PRPPs are truly going to help Canadians save, the provinces need to go further when they roll out their own legislation for the plans. Employers should be forced to offer PRPPs—a route that Quebec already says it will take. However, employees should only be automatically enrolled if they’re making a middle-class income or more. This will go a long way in creating a retirement plan that will genuinely help Canadians build wealth throughout their lifetimes.

4 comments on “Pension solution or illusion?

  1. A couple of additional considerations when discussing forced participation in the PRPP program.

    1st) One of the main reasons Canadians are not currently contributing to an RRSP is affordability. They just don't have the extra savings to contribute. According to Scotiabank's latest investment poll (… only 39% say they will contribute to RRSPs with 61% of those not contributing saying they cannot afford to. So if you are going to force them to contribute to a PRPP, where do they cut their spending to make up for the decreased take-home pay? What is the impact upon the economy of their reduced spending?

    2nd) Why would you force those Canadian's already responsibly saving for their retirement to now contribute to a PRPP, thereby reducing the amount they can contribute to their existing savings accounts (RRSP, TFSA, etc)? If I am working hard, paying my bills, paying-down my mortgage and saving for my retirement, why should I now be forced to contribute to some plan that offers me fewer choices, less control and reduced flexibility to manage my financial future?

    3rd) Why should it be the responsibility of business owners to babysit employees and their savings? Canadian businesses already have enough "hurdles and bumps in the road" they must navigate. So now business owners are to be forced into being the "parent" for their employees. You may say it is not the employer, but the government imposing the PRPP, but employees see their employer deducting the money from their paycheque and it is the employer telling them how they can and cannot invest those deductions. The employee is going to view the PRPP as "something my employer makes me do"!

    4th) What happens if those forced savings are worth less at retirement because of poor investment management? Who's responsibility will it be then? – the business owners; the governments; the financial institutions administering and managing those savings or the poor guy who had no choice and now faces retirement?

    I may sound too cynical, but the state cannot mandate behaviour and I think a lot of responsible and hard-working Canadians pay a greater price as a result of any effort to do so.


  2. PRPP are really no different than an RRSP. If the government was truly serious, they would combine RRSP, PRPP and TSFA under the same rules that don't tax when withdrawn and provide a tax break when entering.


  3. Mandating employers to offer the PRPP is not new. Similar policies exist in a number of other countries. However, applying auto-enrollment only to employees that meet a certain minimum income threshold… that would be a first, wouldn't it?


  4. The gov't talks about low cost PRPP. Does anyone think the financial institutions providing these will give you a better deal on fees etc than their current mutual fund offerings. Not likely.


Leave a comment

Your email address will not be published. Required fields are marked *