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.
My Take
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.
My Own Advisor: More reading about PRPPs in an article by Preet Banerjee can be found here.
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
I’m glad my article is generating so much discussion!
Group RRSPs vs PRPPs: I think it all comes down to investment fees. If the big banks weren’t charging such high MERs and set up fees, perhaps small companies would consider setting up pension plans for their employees. Remember, small businesses are the real engine behind economic growth. Canadians pay among the highest MERs in the world. Hopefully the investment fees offered for PRPP’s will be reasonable and won’t just pad the profits of the big banks.
PRPPs might not matter much in Ontario if the ORPP ever sees the light of day.
Fully agree with the “small businesses are the real engine” of the economy but I suspect it’s the structure of the Group RRSP that has given rise to the PRPP. We’ll see if the Ontario Pension Plan becomes reality…
This is really becoming some alphabet soup of registered plans. At some point, someone might try and standardize this stuff and make a whole whack of money doing so 🙂
>>>>>Why were PRPPs established?
The article seemed to miss the point behind these plans.
PRPP’s were established so that small businesses with few employees can have a pension plan.
Right now if you have 3 employees, the company isn’t reasonably going to be able to set up a pension plan for it’s employees.
PRPP’s are ‘pooled’ pension plans because the bank basically sets up a pension plan as if it were for a large company, but the participants are just a bunch 3-employee companies. So now small employers, if they choose to, can have access to the same large pension plans that larger companies have.
Fair enough: “PRPP’s were established so that small businesses with few employees can have a pension plan.”
Why not just change the rules for Group RRSPs then?
In the end, while PRPPs may help some folks Glenn (and employers maybe) I don’t think this particular tool in the pension toolbox is going to add tons of value. Well, maybe to shareholders of insurance companies. I’d be fine with that I guess.
I feel like the government is just spinning it’s wheels, creating more and more programs but to no benefit. We already have plenty of options, and this is no better an option than any of the others.
I think PRPPs have some promise but I’m with you when it comes to offering a cornucopia of options. I’d rather see a few programs, strive to work really well, versus offering a multitude of choices that are ineffective and disjointed.
ok mark, if the contributor dies before he retires does their estate get back their contributions? cpp keeps it all except for the $2,500. or less death benefit.
I believe so Gary, you mean for the PRPP?
Similar to other registered retirement plans, when a PRPP member dies, all property held in the PRPP account is deemed to have been distributed immediately before the date of death. The fair market value of the assets held in the account is included on the deceased member’s final income tax and benefit return. The deceased member’s spouse or common‑law partner becomes the qualifying survivor of the plan, taking over ownership and future direction of the PRPP account for the deceased.
The qualifying survivor is then entitled to receive a lump-sum amount from the PRPP or can choose to transfer the amount directly, on a tax‑deferred basis, into another investment plan such as another PRPP, RRSP, SPP, RRIF or RPP.
I certainly agree that it should not be mandatory, but it really should be an opt-out system. Sure, let people shoot themselves in the foot if they want, but don’t help them aim the gun 😉
Ha, interesting way of putting that 🙂
I definitely don’t see it as a problem that PRPPs are not mandatory. I sure don’t need the government telling me even more what I need to do with my money. I think it is foolish not to save but I fervently believe in your right to shoot yourself in the foot by making poor choices. The PRPP seems like a decent option to me, but I’m glad it’s just an option.
I think the thing I struggle with is, if there are already other options, then why create more?
I too don’t need the government telling me what to do with our money but for change, to change behaviour I mean, we need both “carrots” and “consequences” IMO. People don’t have many “carrots” for saving for themselves right now (other than their own desire and discipline) and they don’t have to worry about the “consequences” until decades down the road (at least most people feel this way). They save because they’ve heard saving for retirement is the “right thing to do”; I suspect most don’t care. I don’t think this makes much sense….it’s not a viable model.
At least with forced savings, CPP I mean, it takes the “carrots” and “consequences” out of the equation.
The PRPP seems like a decent option, yes, but it’s probably going to be more profitable for insurance companies and financial institutions than individuals. I guess I will continue to be a shareholder…
Cheers!
I have a group RRSP through work and it is not locked in; I can get access to the funds about 2 weeks after they are added. From there I usually transfer them out into my own investment account. Of course, the funds are transferred and not withdrawn (which would make them taxable)
I’ve heard a number of people do this, transfer their group RRSP to individual RRSP, making them a taxable benefit. I suppose you do this Dan to have more flexibility for investment products?
“For employees, Group RRSP contributions count as taxable income, PRPP contributions do not.”
What does this mean, exactly? I don’t get it.
Hey Sebastien,
If I understand your question correctly:
For pensions and group RRSPs: Employer’s contributions are viewed as additional taxable income by CRA in the year they are earned. The end result of this for employees, I believe, is that the company portion will create a pension adjustment (each year) and that impacts your RRSP contribution room (each year).
PRPPs are not the same, if the employer contributes on the employee’s behalf, these contributions are not a taxable benefit and immediately belong to the employee. The money contributed by an employer is not included in an employee’s taxable income (in the year is was earned) and the employee does not pay income tax on this money until it is withdrawn. Consider it a “back-end hit”. I think I have this right but Sean can likely confirm.