The following article is a guest post by Sean Cooper who blogs about personal finance at Sean Cooper Writer.
Are you struggling to save for retirement? You’re definitely not alone. With only 1/3 of Canadians with a workplace pension plan, the bulk of the responsibility falls on the shoulders of employees to save for retirement. With this prolonged low-interest rate environment and the fact that some Canadians can expect to live 30 years or more in retirement – we might be headed for a “retirement crisis” in Canada.
To avoid this crisis Canadians need to save more money than ever before. While the provinces have been asking the federal government to expand Canada Pension Plan (CPP), the government has introduced a solution of its own: Pooled Registered Pension Plans (PRPPs). What on earth are these things and will PRPPs be the answer to Canada’s retirement woes?
What is a PRPP and is every province the same?
A PRPP is a new type of voluntary deferred income plan designed to provide employees and self-employed individuals with a workplace pension plan. PRPPs allow federally-regulated employers to voluntarily establish this plan. Since the federal government cannot impose pension legislation on the provinces, it’s up to the individual provinces to adopt PRPPs. Alberta, Saskatchewan and British Columbia are the only provinces to adopt PRPPs so far. (Update: Nova Scotia just recently announced it will offer PRPPs on a voluntary basis.) Ontario decided to do something different, create its own Ontario Retirement Pension Plan (ORPP).
Quebecers did something different still. They established the Voluntary Retirement Savings Plan (VRSP) to address the nearly 1.9 million workers (47 per cent) in that province who do not participate in any type of group retirement plan. Unlike PRPPs, VRSPs are not optional for employers – it’s mandatory for Quebec employers with five or more eligible employees to offer VRSPs, unless those employers already offer Group RRSPs or Group TFSAs, or a registered pension plan. The VRSP still has the term “Voluntary” associated with it because employees have to opt in (they’re not automatically enrolled).
Why were PRPPs established?
The federal government recognizes the retirement crisis is real. PRPPs were established to level the playing field for the millions of Canadians who don’t have a pension plan or Group RRSP at work. Even though Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) are available most Canadians don’t take advantage of these accounts as much as they should. Although participating in PRPPs isn’t mandatory, contributing to them can be convenient through payroll deductions, arguably making them easier for employees to participate – an incentive the government is literally banking on.
What makes a PRPP vs. a Group RRSP so special?
PRPPs and Group RRSPs are similar in many ways: employees make contributions through a payroll deduction, the investments are tax-sheltered, and matching employer contributions are not mandatory. However, there are some distinct differences between the two:
- For employers, *PRPP contributions are not subject to payroll taxes. *Updated to be more clear.
- The government regulates investment fees for PRPPS, so PRPPs should have a fee advantage (as in less expensive for employees) over Group RRSPs. Since we all know high investment fees kill portfolios, employees may have a better chance of reaching their retirement goals sooner using PRPPs.
- Employees are less likely to raid their retirement account – the PRPP funds are locked-in while Group RRSPs are not.
What does this mean for employers?
Employers can choose whether to make matching contributions. PRPPs are designed to provide ease of administration over Group RRSPs, a benefit to small businesses. For example, employers are not responsible for administrative tasks like filing an annual information return (AIR) that comes with defined contribution pension plans. Provinces like Alberta, Saskatchewan and British Columbia can also use PRPPs as a tool for employee retention.
What does this mean for employees?
PRPPs are advantageous for employees who work for companies that do not currently offer a retirement savings program of any kind. PRPPs provide self-employed individuals with a way to save towards retirement.
Although PRPPs were a valiant effort by the federal government to encourage Canadians to save more for retirement, they actually fall short in many ways. The biggest flaw I see with PRPPs is they are not mandatory. Similar to an individual’s Registered Retirement Savings Plan (RRSP), the onus is on the individual to opt in and participate. With less than half of Canadians contributing to already-established voluntary savings vehicles like RRSPs or TFSAs some workers simply won’t opt in. PRPPs are just another retirement savings vehicle in the alphabet soup of existing ways Canadians should already be saving for retirement. If the provinces decide to make opting-in mandatory, PRPPs could be useful, but I don’t expect this program to solve the retirement crisis. There is no guarantee PRPPs will close the gap for the millions of employees without a workplace pension plan. It can be argued a better approach would have been to beef up CPP, what the provinces have asked for all along. By only targeting employees who do not have a workplace pension plan similar to the proposed Ontario Retirement Pension Plan (ORPP) I think CPP expansion would have a greater impact.
Sean Cooper is a financial journalist. He is a first-time homebuyer and landlord who aspires to be mortgage-free by age 31. He was inspired by Income Property’s Scott McGillivray to live in the basement and rent out the upstairs of his house. He is on Twitter @SeanCooperWrite and blogs on his personal website.