PRPPs are the future of pension reform

In January 2011, Finance Minister Jim Flaherty introduced the concept of a new Pooled Registered Pension Plan (PRPP) as a means of trying to address the big retirement gap in Canada. I was very fortunate to attend a workshop where one of the big discussions was about the PRPP and how it might affect Canadians.

What is the retirement gap?

Essentially, Canadians are taking on more debt and saving less money than ever. This lack of savings is a real problem and as a result, projections show that many Canadians will not have enough assets and income in retirement. According to some data presented by Manulife Financial, the collective savings gap is about $400 billion.

Another cause of this savings gap is that 7 to 8 million Canadians are not covered by a pension plan through work. The problem is most significant with employees working for companies with less than 500 employees where 90% are not part of a Pension Plan. The PRPP is expected to address this segment of the workforce.

What is a PRPP?

Essentially it is a defined contribution pension plan designed to help smaller businesses and self-employed entrepreneurs implement a lower cost Workplace Retirement Program for their employees to help them save for retirement.

The concept is that smaller employers can benefit by pooling resources with other small businesses to enjoy a cost-effective pension plan with really easy administration.

What do smaller employers do today?

From the statistics, not much. They could implement a group RRSP on their own as most of the insurance carriers have plans designed for small groups but there are still cost and administration for these programs. The whole idea of the PRPP is to make it easy, accessible, cost-effective and foster more savings from Canadians.

Will it work?

It all depends on the details and right now there is not a lot of details. The government is consulting with many different groups including the financial institutions but are they consulting with small businesses? I understand they are consulting with groups that represent businesses but for this to be a viable solution, they need to consult directly with the business owners that will ultimately implement the program.

My two cents

Although I principally support any endeavor that increases, encourages and promotes Canadians habit of savings, I have not been a big supporter of increasing Canada Pension Plan as a solution. It’s hard to really know the complete impact of the PRPP without details and right now, there are very little concrete details especially since the government is still working on the details of the framework.

As much as the financial institutions need to be part of the overall process in designing the PRPP, the government needs to include other parties that will be directly affected by PRPPs like the businesses that do not have Workplace Retirement Programs currently in place. These businesses also need to step up and make their opinions known.

Also, as a strong advocate of financial education, I believe a program that helps people save will work much better if education and advice are built into the program. My hope is that it’s not just about driving costs lower at the risk of creating a bare-bones program with no advice and no education. Every group RRSP and a pension plan that exists today is better when there is:

  • mandatory savings
  • employer matching
  • built-in education and/or advice for members
  • ease of administration

These are the key issues that governments need to look at as they develop the PRPP. Although I am a huge advocate that consumers and members are aware of their fees, it’s more important to develop that disciplined habit of savings first.

What do you think of the Pooled Registered Pension Plan? As the government is in the consultation mode, what advice would you give to the government as they create a newly defined contribution pension for Canadians?


  1. Frank Wiginton

    Hi Jim, you are right on many points here – without more information about how they will be structured it is really hard to assess the value of PRPPs. I think the major issue is whether the program is mandatory for employees or not! The reason why pensions work is because it is a force savings. People have to pay CPP and they don’t even realize the money is gone. Without the PRPP being mandatory there is nothing more here than a group RRSP plan and this will only be one more thing for people to get confused and frustrated over. I guess the only way to avoid that would be to have mandatory education to go with the non-mandatory program. Like I said we need more details!

    • Jim Yih

      Thanks for the smart comments Frank.

      There is a debate over mandatory enrollment vs auto enrollment with the ability to opt out. The tendency is to go with the later as studies have shown that the number of those that opt out is quite low (less than 20%).

      I’ve got another post coming with some of the issues being discussed


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