ECONOMIC ANALYSIS

Economic Analysis: Pooled Registered Pension Plan



Economic Analysis: Pooled Registered Pension Plan

Introduction

On November 17, 2011, the federal government introduced the much anticipated Bill C-25, An Act relating to pooled registered pension plans and making related amendments to other Acts, also known as the Pooled Registered Pension Plans Act (the “PRPP Act”). The proposed legislation follows high-profile consultations with the provinces and the industry, which resulted in the government first announcing, in December 2010, the creation of pooled registered pension plans (“PRPP”) as an interim alternative to an expanded Canada Pension Plan. The PRPP is intended to provide a lower-cost option for smaller employers who might otherwise not offer employees a retirement plan. However, other employers may also be interested in the PRPP due to the perceived lower administration risks of participation.

PRPP

A PRPP is a new type of savings plan that will provide Canadians with another way to accumulate capital for retirement in a tax-assisted manner. They will operate much like defined contribution (DC) registered pension plans (“RPPs”), but will hold assets pooled together from multiple participating employers and will be administered by eligible licensed financial institutions, such as insurance companies and banks.

The PRPP is intended to address the existing gap in pension coverage by providing a new, accessible, large-scale and low-cost DC pension option to employers and the self-employed. An employer can offer a PRPP for employees who do not participate in an employer-sponsored retirement plan, including a group registered retirement savings plan. The legislative scheme places the bulk of the fiduciary risk of administration on the licensed institutions offering PRPPs, and reduces the risk and cost burden on employers that would normally accompany a decision to offer a retirement plan to employees (Canadian Labour Congress, 2011).

Key Features of the PRPP Act

The PRPP Act applies to employers who are federally regulated. Provincial governments will need to enact enabling legislation to permit provincially regulated employers to participate in PRPPs. In many respects, the PRPP Act is similar to existing minimum standards pension legislation applicable to federally regulated RPPs, and will be regulated and enforced by the federal Superintendent of Financial Institutions (the “Superintendent”), or her provincial counterparts. However, the legal responsibility for administering a PRPP will not fall on the employer as is the case under minimum pension standards legislation.

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 ...