Posted: Tuesday, 21 December 2010

(Revised December 21, 2010)

What are PRPPs?

For employees, a PRPP is like a Defined Contribution-Registered Pension Plan (or group RRSP) plan. It is a savings vehicle, limited by RRSP limits and regulations, that allows workers to save for retirement, but it does not guarantee retirement security. It is not a defined benefit (DB) plan. It does not provide a secure retirement income with a set replacement rate of your pre-retirement income. It is not fully transferable. If available, it might be transferable between similar plans. It is not indexed to inflation. Your retirement income won’t go up with the increasing cost of living over time.

Who will be eligible to contribute to a PRPP?

Essentially, anyone with income and room under their RRSP limits, but mainly workers with no DB workplace pensions. Workplaces with defined contribution (DC) plans might see PRPPs as an alternative option, and employers offering DB plans might use some of the characteristics of PRPPs, such as potential lower cost and fiduciary role, as selling points to get rid of their existing DB plans.

How to get in?

Employers will have to offer a PRPP to all employees not currently covered by a registered pension plan. Other individuals such as the self-employed will also have the option to join in, but they will have to take the responsibilities otherwise assumed by employers to set a PRPP.

What about enrolment?

If it becomes mandatory for employers to make the PRPP available to you, then you should automatically be enrolled, but there might also be the ability to opt out. Nothing in the proposed scenario guarantees that you will be informed of your rights

How much do you have to contribute?

Employers, not employees, will decide contribution levels. It will not be mandatory for employers to contribute or match your contribution to PRPPs. Without employers contributing, it is not a pension plan. In fact, employers not helping their employees save for retirement could end up with a competitive advantage over employers helping their employees save for retirement, all things being equal. This will have a huge limitation on the effectiveness of PRPP as a means to increase retirement security for all.

Who will manage it?

The financial industry will manage your investments, and you might have a say on investment options.

Is it guaranteed?

Your pension is not guaranteed. If the institution that manages your money is a bad manager, if there is a fraud or if it goes bankrupt, your money might be gone. Only institutions that are capable of taking on a fiduciary role will be able to administer PRPPs, but having a fiduciary role does not guarantee you a secure retirement income with a benefit payout you can rely on.

Will it be lower cost?

Group RRSPs tend to have a bit lower overhead cost than individual RRSPs, but there is not much of a saving and the same will be true of PRPPs. There are many financial institutions that will be able to offer several PRPPs, and individual options will be available. At the end of the day, this is a system of individual accounts which are not unlike high risk/high cost RRSPs.

Are PRPPs a better deal than other voluntary private saving vehicles or CPP?

The proposed PRPPs do not guarantee low management fees that would prevent large management fees from eating up such a large portion of your savings. In fact, there is only a promise that the design of PRPP will result in large pools of capital that might lower fees, with no guaranteed or legislated results. Nothing in the PRPP proposal sets management expenses at levels equal to or lower than those of the CPP. As a result, CPP is still a better deal than PRPP; not only because of its guaranteed indexed retirement income, but because of its much lower management fees.

What is the big difference between a RRSP, a DC-RPP, group RRSP and PRPP?

PRPPs are a better option than an individual RRSP and other alternatives, with potential lower cost (not demonstrated or legislated) and fiduciary role. But it won’t guarantee you a decent retirement income and is greatly inferior to the option of expanding the benefits under the Canada Pension Plan.