What Are Pooled Registered Pension Plans (PRPP)?

by Mike Holman

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Pooled Registered Pension Plans (PRPP) were first announced by the Conservatives during the last election campaign. As is my custom, I ignored it since most campaign promises never see the light of day after the election.

Now that the Conservatives have a majority government and recently issued more information on PRPPs, I thought it would be worth a quick look to see how the plan works and who can benefit from a PRPP.

What exactly is a Pooled Registered Pension Plan (PRPP)?

A PRPP is a defined contribution pension system offered by third party financial institutions such as banks and insurance companies.  The plan administration and fiduciary duty will be the responsibility of the financial institutions.  This should make it fairly easy for small to medium sized companies or self-employed workers to set up a PRPP.

The actual investment instruments have not been clarified, but the government has mentioned large “pooled” investment funds with low costs.

Group RRSPs are an option for companies who want to offer a workplace savings plan, but they are a fair bit of work to administer and the employer has the fiduciary duty as well.  Group RRSPs are not as practical for smaller companies or the self-employed.

What is the reason behind PRPPs?

The government is proposing PRPPs as a way to “improve the range of retirement savings options for Canadians. Unfortunately, improving the range of options doesn’t necessarily translate into any extra retirement savings.

The goal is to provides access to 3.5 million Canadians who don’t have access any kind of registered pension plan through their workplace (such as a defined benefit pension plan or a group RRSP).

Those people currently have access to RRSPs and TFSAs, but a lot of them are not properly utilizing either account type.  Lack of saving discipline and investment knowledge is likely the main reason. It takes a bit of work to get an investment account at a bank or through a financial advisor and some people can’t be bothered.

Since the plans aren’t going to have mandatory contributions, they will basically just level the playing field for employees of smaller companies, so they have easier access to what is essentially a group administered RRSP.

There are some big benefits of a workplace savings plan.  Contributions made from payroll deductions are very convenient. The ability to make a contribution from your pay cheque into a registered account without having to pay any withholding tax is also a great feature.

Who will benefit from PRPPs?

Employees who work for a company that does not currently offer any kind of workplace pension saving program will benefit from having access to a PRPP. Even if the employer doesn’t offer a PRPP, employees or self-employed workers can still join one on their own.

Employers that are too small for group RRSPs should be able to offer a PRPP, which might serve as a good recruiting and retention tool.

Employers that currently offer group RRSPs might be interested in switching to a PRPP in order to reduce administration costs and remove their fiduciary duty.

Who won’t benefit from PRPPs?

Employees that have a defined benefit pension plan or an employer-sponsored defined contribution pension plan (such as a group RRSP) won’t have access to a PRPP, which makes sense since they don’t need one.

Anyone who is not currently employed will not benefit from PRPPs.

What kind of investments will be offered through PRPPs?

This part of the new pension plan type is not clear. The government has referred to an “investment pool”.  I’m not sure what that refers to.  Will there be specific funds run by a private company that any worker can invest in?  Will there just be a few big funds that everyone will invest in? Ie Will employees of XYZ Autobody shop will be investing in the same Canadian equity fund that the employees of the local pizza place are investing in? Or can the plan administrator offer any funds/ETFs publicly available?

Hopefully more details will be forthcoming on this issue.

On the PRPP government framework page, it says “lower costs that result from large pooled funds.”

That statements seem pretty naive to me. How exactly will the fees be kept low?  Will this be mandated by the government?  Economy of scale means nothing – just look at Canada’s largest mutual fund – the $14 billion Investor’s Group Dividend fund for an example of how economy of scale saves money for investors.  The MER on that fund is a whopping 2.68% in spite of the massive size of the fund.  In this case, all the economy of scale savings are going straight to the Investor’s Group shareholders – not the mutual fund investors.

Will money in a PRPP be locked-in?

According to the PRPP framework, employer contributions will be locked-in – similar to money in a LIRA account.  This is really dumb and will add a lot of hassle to the plans. It should be up to the employer to decide on a vesting period for any employer contributions, after which the employee can do whatever they want with the employer contribution money.

Will the PRPP be mandatory for employees?

No, it will be up to the employee to make use of the PRPP.  It’s possible that employers might have to auto-enrol every employee, but they can’t force the employee to contribute.

Will the PRPP be mandatory for employers?

It’s up to each province to decide if offering an PRPP will be mandatory for employers.

Will PRPP contributions affect RRSP contribution room?

Contributions to an PRPP are treated like RRSP contributions as far as taxes go.  Any employer contributions are also considered contributions.  IE If you have $8,000 of RRSP contribution room available for a particular year and your employer contributes $2,000 to an PRPP and you contribute $3,000 to the PRPP – that means you have used up $5,000 of RRSP contribution room.

Summary

These plans will close a gap in workplace pension saving coverage by offering a defined contribution pension plan to workers who don’t currently have access to one.  The term “coverage” only refers to giving access to these workplace plans.  It doesn’t mean that any employees will use them.

I’m skeptical that PRPPs will make much of a difference, but if this plan is offered with financial advice and the costs are low, it might help some people get started with their retirement savings.

This won’t do anything for the large segment of the population that can’t or won’t save money for their retirement. You can lead a horse to water….

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{ 22 comments… read them below or add one }

1 MRED

Seems strange to me that the government is promoting PRPP`s and then putting a limit on contributions and how much can be used tax free as an income tax deduction?e.g.RRSP`s.?

Why all the restrictions ?if their purpose is to help Canadians save for their retirement ? Is it just that they want control over the masses?

It makes no sense to me to have limits on contributions or tax deductions for those contributions if the government is TRULY interested in helping people save for retirement?

I contributed into an RRSP for many years and paid very little income tax>now that I am forced ~! to remove x -amount of money from my RRIF every year I am paying tons more tax than I did when I was working ?

Since RRIF withdrawels are taxed at the maximum rate (interest) and not allowed to declare losses, and dividends as income .

This plan is definiteley not quite what it seems

If I were to do it again ? I would invest my money in top dividend paying stocks and REITS and not bother with either a RRSP or PRPP.

Pay the taxes as they accrue at a minum rate and tell the government to go rub salt where the sun doesnt shine when I retire.

I would NOT be required to remove any funds from this open account.

And~!! my heirs would have some funds to access when I die.

The whole idea of mandatory withdrawels is that there will be nothing to pass on to heirs and make them well-off, which would result in them becoming MORE independant of government and government would lose control over them.(Except for RRIF left to a spouse ?) but he/she will be under the same withdrawel restrictions .

IMHO? this is nothing but a con game by the government.

2 Mike Holman

@MRED – Limits on retirement savings contributions are pretty universal, in Canada and elsewhere. Nothing new there.

Contributions limits are irrelevant to the issue of Canadians with inadequate pensions. Canadians who contribute the limit won’t have any retirement issues.

It’s the people who make minimal or no contributions that are the problem. Raising limits won’t help.

Regarding RRIF – It sounds like you didn’t understand how the RRSP/RRIF process works until it was too late. Why do mandatory RRIF withdrawals mean no inheritance? You don’t have to spend that money.

3 Linda

I *think* what MRED meant about money not being available in the estate after death is that pension contributions cannot be passed on to his/her children. This is value lost whereas, if the person did their own savings and investing (inside or out of an RRSP), that money (after taxes) remains in the estate.

My husband’s pension “value” is similar to my RRSP based on a twenty year projection but my capital is preserved and, for him, there will be nothing for our kids when we’re gone. Of course, we hope to have spent our last 10 bucks on a pitcher of beer at the 19th hole and be holding hands when we’re struck by lightning but that’s a story for another day…. :)

4 Michael James

I’m not too clear on what stops a financial institution from offering something equivalent to a PRPP right now. Since PRPPs seem to look just like RRSPs (perhaps with added restrictions on withdrawals) why couldn’t a bank offer something like a PRPP and sign up some employers to allow automatic payroll deductions? The only benefit of PRPPs that I can see is if the government somehow manages to strong-arm financial institutions into offering inexpensive investments. What am I missing here?

5 My University Money

I agree with the sceptical outlook Mike. If people can’t be bothered to take a couple hours and learn how to save for retirement on their own, why are we wasting time with this program? My guess is that it is being pushed HARD by the mutual fund/big bank lobby that you mentioned. This will mean billions of dollars that will have MERs over 2%, just watch. More yachts for those guys. If people would just wake up and put their money in a few basic indexes inside a tax-advantaged account, they would realize you don’t need to be a stock market guru to invest for retirement. It is so simply, yet we do such a terrible job of getting the word out due to big bank interests.

6 Mike Holman

@Linda – I’m pretty sure MRED was referring to RRIF withdrawals.

Regarding the inheritance factor. It’s only defined benefit pensions that have an issue. Any kind of defined contribution plan like a group RRSP or this new PRPP will leave an inheritance. You also have to remember with DB plans is that for the same amount of savings, they will have a higher payout than an equivalent RRSP (on average), so there is a trade-off for not leaving anything to the kids.

@Michael James – Good point. There are companies that currently offer group RRSPs services for other companies. For example the company I work for has a group RRSP that is managed by 3rd party financial institution. I don’t know how this is any different than a PRPP.

My guess is that for smaller companies, it’s not worthwhile to have a group RRSP, even if it is managed by a third party and they take the fiduciary responsibility as well. Perhaps the group RRSP providers can’t make enough money with smaller companies?

Either way – I’m not clear how the government will change things so that a small company can sign on with a 3rd party institution for a reasonable cost and the 3rd party institution can still make some money. I actually don’t see how that can happen.

@My Uni $$ – You sound a bit jaded. ;) I agree that for most people who aren’t currently saving enough – a non-mandatory retirement program will not change their behaviour.

7 Michael James

@Mike: I suppose that just having the government declare that PRPPs will be the way of the future will change the economics of the situation. If a financial institution announces they have a PRPP, presumably many small employers will come to them to sign up instead of having to pound the pavement to pick up clients in ones and twos. And from the point of view of a small company, the existence of PRPPs may push them to offer it to their employees for fear that competing employers might offer PRPP access.

An important question is what the costs will be. It would take a huge effort on the part of the government to make MERs (plus any other costs) reasonable.

8 Mike Holman

@Michael – Having employers come to the financial institution will save a bit of money, but I still don’t think the economics work unless there is some kind of government subsidy.

When I first heard of the plan, I had assumed that the government would be doing the admin for these plans and even running the investment side of things. Ie kind of similar to having an optional CPP defined contribution account in addition to the regular CPP.

The PRPP is still in the proposal stage, so I guess we’ll have to wait and see what the final product looks like. It really seems like this plan was motivated by a desire from the government to be able to say they “increased” pension coverage to all working Canadians, even if in reality the plan might not have much effect at all.

9 Jim Yih

Lots of great information and comments here. Here’s my two cents:

1. @Mike – The Group RRSPs are not tough to administer. The PRPPs will not be any easier or harder. The difference is fees. Financial Companies do not have low fee Group RRSPs. The fees are not as high as retail but IMFs are still about 2%.

2. @ Micheal – Payroll deductions is important to foster a good savings habit. I know it sounds crazy but going to the bank is an extra step. The key discussion point here is mandatory enrollment vs auto enrollment. right now, it is the employer’s decisions to make a plan voluntary or mandatory whether it’s a pension, Group RRSP or PRPP. I think the government still wants to give employers that decision.

I gotta run but I’ll comment more later

10 Mike Holman

@Jim – I have to disagree on both counts.

I’m no expert on group RRSPs, but there are certain record keeping and reporting requirements . This can be outsourced, but as I noted – it might not be practical for a small business since they won’t generate enough fees. Don’t forget we could be talking about businesses with a handful (or less) employees.

Regarding fees – There is a big range on fees for group RRSPs – I’ve talked to people who have only expensive options ie 2%+, but many others (like me) who have much better options and pay in the range of 1.0 to 1.5%. In my case, the funds I have access to charge about 1.1% on average which is probably a bit less than half of the regular retail rate. Of course, I still transfer that money to Questrade and buy ETFs. :)

I definitely agree about payroll deduction – it’s hard to go wrong with that.

11 Jim Yih

Hey Mike, We consult with employers and group plans for our business on a regular basis.

The only administration required from employers is the payroll deduction. most financial institutions have systems that make this very simple and easy. There are some companies that do not have formal group plans where they are really a group of individual plans. These individual plans are not great because of the administration and the high fees.

There is something called CAP compliance (Capital Accumulation Plans – http://groupbenefitsonline.ca/employers-need-to-understand-capital-accumulation-plan-cap-guidelines/). These are considered “BEST PRACTICES” and currently are not law. There is no enforcing body to ensure that these guidelines are met. Formal Pensions like DC and DB pensions do have formal administration records to keep but small groups are not as likely to have a pension plan.

In terms of fees, I quoted fees for small groups. I’m not sure who you work for but with fees of 1%, I assume it’s a sizable company. The group industry, just like the individual retail business is a scalable business which means the more money you have, the more bargaining power there is. Just like you, I am a proponent of low fees but there is no EFT option on the group side that compares to the individual side. I think the PRPPs are trying to be the low cost solution for small groups but as it stands, there is little available from a low fee perspective.

Anyhow, I really appreciate that you have written on the topic. I am very keenly interested in what will happen with the PRPP. It’s an interesting opportunity so I hope the government does it right.

12 Mike Holman

Thanks for the update Jim. I had thought group RRSPs were a bit of work, but you know more than I do.

I’m interested in these as well. I’m hopeful that the final product is something useful (and low cost) for small employers. Not holding my breath however – I just don’t see how it’s going to work the way the gov’t is saying.

13 My Own Advisor

Really nice overview.

I kinda side with Micheal (James) here – you wonder if the administrative overhead has been the main drawback stopping financial companies or lifecos from offering a PRPP? Or, these companies make more money off other products and services? (Which is understandable).

I need to read more about this, the paradigm definitely must shift given our changing demographics.

14 Mike Holman

@MOA – Thanks. Yes, we really need more details to know if this program will be any good or not.

15 Leo

I think I’m chiming in a little bit late here, but I have only recently discovered this thread. One of the big barriers to offering group rrsps to small companies is the economics. It just isn’t economical today for the financial institutions (really just the lifecos here in Canada) to reach out to small businesses. The acquisition cost of such a small plan far outweighs the fees that they will collect from the plan.

The only way that PRPPs can be economical sustainable for the FIs would be that the employers are mandated to offer the plan if they don’t already offer a RPP or other type of CAP. Employees can opt out, but we all know that for the same reason that they are too lazy to sign up for an individual RRSP/TFSA, they would be too lazy to fill out the paperwork required to opt out.

Also, auto-enrollment coupled with a default contribution and auto-escalating features for the member/employee are must haves for PRPP to work. If these plan designs do not make it into the final framework, then I think this will be a royal waste of time. Without these features, there just won’t be enough assets to create the type of scale the government is looking for. Hopefully, with scale and some competition (i.e. more entrants into the group retirement market), employees will actually get to reap the benefit of lower fees. Though, I am just as skeptical about this point as the rest of the posters here.

@Mike, I have to disagree with your comments re: locked-in money. I’m going to throw out two reasons off the top of my head. 1. Locking in the money will keep the average folk from withdrawing money to buy that big new shiny toy (TV, car etc) so that the money stays invested and is made available during retirement. Remember, this is to help the masses that are bad with saving money – not the few responsible ones that are already managing their money wisely. 2. Having the money locked in also means less administration on FI’s behalf – which means lower admin costs – which theoretically should lead to lower fees.

16 Mike Holman

@Leo – Thanks for the comment.

Unfortunately, I have to agree with you that I was wrong. :)

Most people are likely better off with locked-in pension assets.

17 Leo

@Mike, it’s not about being right or wrong, but it’s really awesome that we can engage in an open dialogue with like minded people who are opened to accepting other’s views!

Cheers

18 Thicken My Wallet

I have to disagree with Jim. I sit on the other side of the fence as him as an employer of under 10 employers. We looked at group employee RRSP plans. Most financial institutions cater towards much larger companies. There are plans for smaller number of employees but you need a plan administrator on the employer side. Unless the financial institution is going to foot that salary, it is a hit on cash flow to take someone away from their normal duties to handle another administrative task. We ended up adhering to the KISS approach- employees show us their contributions quarterly and we match it.

Let’s face it, most small businesses do not have HR departments to deal with this and, given the state of the economy, most of us are not rolling around in excess cash flow to outsource this to a HR company (this is not a shot at Jim who I quite respect but I always find it funny when people who manage other people’s money tell people who run their own businesses with their own cash how “easy” something is in business).

PRPP is a step in the right direction but culture eats strategy for lunch every time. If we have a culture of non-savers, what good are all these programs?

Great summary. Great post.

19 Jim Yih

@ Thicken My Wallet – being a business owner with less than 10 employees myself, I can appreciate the issues of running a small business. There are many group RRSP options out there to accommodate small employers but your approach is also fine. Not sure if PRPPs will alleviate the administrative requirements of a workplace savings plan . . . those details are yet to be released.

20 YFS

Hi,
Thanks for letting me know about something new and that is PRPP. Earlier I had no idea what it is!

21 Randy Bauslaugh

Like you I doubt PRPPs will be a big success. A bigger question is whether we really even need them. I know 60% of the population is not covered by occupational pension schemes, but how much of that 60% really needs to save for retirement, given our public plans and the tax sheltered savings vehicles we already have (including the principal residence and the capital gains exemption)? Persons earning less than $70,000 probably ought to avoid PRPPs and RRSPs and put their money in a TFSA, since that won’t claw back their OAS. Maximiizing TFSA contributions is probably all the extra they need. Why would a self-employed person join a PRPP rather than an RRSP — where their money won’t be locked in or subject to other restrictions? Is slightly better creditor proofing worth that? I really don’t get it. This is likely to be of interest to large employers who already have DC arrangements under an RPP, group RRSP or combination Group RRSP/DPSP structure since they may be able to migrate to a PRPP and shed some (not all) fiduciary responsibility and obtain “low cost” whatever that means.

22 Mike Holman

Great comment Randy.

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