How the new PRPP should work?
Back in December 2010, the government released a proposed PRPP framework (Here’s a link to the government site). The Pooled Registered Pension Plan is the government’s attempt at dealing with pension reform and the pension gap that exists in Canada. They chose this route over increasing CPP because of the economic environment and opposition by Alberta and Quebec.
Conceptually, it’s difficult to argue against a product that is going to try to put a simple, low-cost savings product into the hands of employers. It has been shown that workplace savings plans are very significant in helping people save for their retirement. However, true success will come in the details. As the government works out the details of the PRPP, I’ll weigh in on some key issues
Every province has it’s own pension laws. As a result, current pension laws are confusing and restrictive. If the government wants the PRPP to be successful, they need to make the rules uniform and simple regardless of what province or territory you live in. They cannot allow every province to have its own variation of the rules.
One of the negatives to expanding CPP was the burden it would place on employers if their CPP contributions would increase from the current because of the matching employer contribution. Although matching plans create more costs to the employer, I would still like to see employers provide some incentive to save. For example, even at 1% or 2%, it gives the employee an incentive to contribute. Some studies have shown that anyone can save with the right incentives. Pensions are great for employees and their retirement because of employer contributions and matching. Unfortunately, people need some incentives to save money. In our experience, group RRSP plans with no employer contributions are no successful. If the PRPP does not require employer contributions, I’m not sure how successful they will be.
Mandatory vs voluntary enrollment/participation
This issue is somewhat controversial in that many people do not want to be forced to participate in anything they don’t want to. For example, I personally object to being forced to participate in the Canada Pension Plan. On the other hand, Canadians low savings rates are an issue. Maybe the compromise is the have mandatory enrollment as opposed to mandatory participation.
- Mandatory participation means an employee must participate and contribute to a plan as a condition of employment.
- Mandatory enrollment means the employee would automatically be enrolled in the PRPP but still have the option to opt-out of the plan by formally requesting it. Data in the US has shown that there is a much higher participation rate with mandatory enrollment than with voluntary enrollment.
- Voluntary enrollment means the employee must formally request to participate in the plan.
To ensure that people will have money for retirement, there need to be some restrictions around accessing retirement savings. Disciplined savers don’t need these restrictions but unfortunately, that savings discipline is really lacking. Employees who participate in Defined Benefit Plans or Defined Contribution Pensions generally have a bigger retirement nest egg because it is difficult or near impossible to get access to these funds while working.
One of the problems with Group RRSPs is a large number of people who take money out of their RRSPs while working. This is counterproductive not only from a retirement perspective but also from a tax perspective.
For the PRPPs to be successful, the government needs to impose withdrawal restrictions to make it difficult to access money. One of the Reasons defined benefit pensions have been the foundation for retirement is because of the forced savings and also the difficulty in withdrawing money while you are working.
One of the goals of the PRPP is to make it a low fee solution for employees and employers. The only way this can happen is through scale and also simplicity. The more complicated it gets, the harder it will be to minimize the fees.
Although I am a big supporter of low fees, we cannot compare this to the retail experience. On the retail side, there is a segment of the population that is savvy and prefers to invest money on their own without the help of an advisor. This segment can really save money on fees.
The group experience is different because many employees are not savvy investors and could use some guidance and professional advice. My hope is that the fees for PRPPs are not so low that they have no education or support for employees who need some help.
I hope the government pays attention to these key issues around building a workplace retirement program that is not only cost-effective and simple but also a plan that works to solve the retirement gap in Canada.
Can’t agree more that the plan should have one set of regulations for every province. The whole mess that is locked-in registered accounts is ridiculous with every province having their own rules.
It sounds like you might be in favour of a more US-style retirement system where there are penalties for early withdrawal (ie 401K and Roth IRA).
I prefer more choice, but I know you are right when you say that a lot of people can’t save unless you force them to.
Cannot agree more with your comment that the only way for PRPP to work is through scale and simplicity. Small employers do not have the knowledge nor have the resource to try to understand pension plan. Counting on the Government and the financial institutions to work with each other to make the process seamless for them.