Posted: Friday, 18 February 2011

The purpose of this research note is to critically examine the proposed Pooled Registered Pension Plans and to compare this option to expansion of the Canada Pension Plan.

Introduction

At the December 2009 meeting in Yukon, and the June 2010 gathering in Prince Edward Island, federal and provincial finance ministers indicated their intention to explore expansion of the Canada Pension Plan as well as the option of pooled workplace pensions administered by financial institutions. The latter proposal has been developed and promoted by the Canadian Life and Health Insurance Association, the CD Howe Institute, and others.

On December 16, 2010, ahead of the December 19 and 20 meetings of federal and provincial-territorial finance ministers in Kananaskis, Alberta, the federal Department of Finance released a paper, Framework for Pooled Registered Pension Plans(PRPPs). The provinces agreed to proceed with further development of this option, though seven provinces also agreed to the option of “modest” Canada Pension Plan (CPP) expansion on which work will continue.

The federal paper provides only a very broad framework of what PRPPs might look like. Many details of the PRPPs have not been agreed upon let alone implemented, and officials have made conflicting public statements about basic characteristics of the PRPPs. Tax changes ultimately required to accommodate PRPPs have yet to be drafted and issued by the Department of Finance, and regulatory harmonization will need to be the subject of future negotiations between the federal and provincial-territorial governments. It seems clear that PRPPs might well vary from province to province even with respect to key design issues.

Pooled Registered Pension Plans are privately administered workplace pension plans similar in many respects to a defined contribution (DC) workplace pension plan, or group Registered Retirement Savings Plans (RRSPs). Like these vehicles, PRPPs may be better than RRSPs in terms of cost and increasing amounts saved for retirement. However, as a mechanism for addressing the deficiencies in Canada’s retirement income system, PRPPs are greatly inferior to an expanded CPP. They will not have the same impact on total retirement savings, and the cost to individual contributors will be far higher.

Unlike the CPP (where employers pay one half of the premium cost), PRPPs will not require contributions from employers. Unlike the CPP and defined benefit (DB) plans, PRPPs will not provide a secure retirement income at a set replacement rate of pre-retirement earnings. Benefits will be entirely determined by uncertain investment returns. Unlike the CPP, PRPPs will not offer protection from inflation, and will not necessarily last a lifetime. Conversion of a PRPP into a lifetime, indexed annuity at retirement might be possible, but this would be at a very high cost.

Unlike the CPP, which is integrated with the great majority of existing workplace pension plans, PRPPs will do nothing to make the pensions of members of existing defined benefit (DB) workplace plans more secure. Indeed, they may provide employers with a greater incentive to shift from defined benefit (DB) to defined contribution (DC) plans.

By contrast to PRPPs, the CPP is a nationally administered, defined benefit, compulsory, earnings-related program for the employed and self-employed. It provides retirement, survivor and disability benefits, as well as benefits for children of deceased and disabled contributors. The CPP currently provides a retirement benefit of 25% of pre-retirement earnings on annual earnings up to a year’s maximum pensionable earnings (the YMPE), an amount equal to roughly the average wage and salary ($48,300 in 2011). The Canadian Labour Congress has proposed that the retirement benefit be raised to 50% of average earnings, which would take place gradually after a phased-in premium increase.

CPP investment funds are managed at very lost cost compared to RRSPs and workplace pension plans by the CPP Investment Board (CPPIB). Benefits are secure, predictable, protected against increases in the cost of living, and fully portable across jobs. CPP expansion has been accepted in principle by seven provinces, and has received the support of the Canadian Association of Retired Persons, a former chief actuary for the CPP, and a range of academic and private sector pension experts.

While large pooled plans could have a somewhat lower cost than RRSPs or individual defined contribution workplace pension plans, management and operating expenses of PRPPs will be significantly higher than the low costs of the CPP Investment Board (Table 2).

Download the full research note here (14 pages)