The Problem With the PRPP

Panel question its value for working Canadians.

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story_images_Piggy-BankTouted as a practical solution for those who currently don’t have access to a workplace pension, the pooled registered pension plan (PRPP) also holds the potential to create a new revenue stream for the industry.

Several of the large retirement service providers have already jumped at this opportunity and are ready to roll out PRPP products when (or if) the scheme receives approval by provincial governments.

However, opinions are strong and emotions run high among industry professionals concerned about whether the PRPP provides actual value to most working Canadians.

“The PRPP is a step in the right direction, but I believe it’s inadequate and no more attractive than RRSPs,” said Susan Eng, vice-president for advocacy with CARP, during the pension panel discussion at the Advocis Regulatory Affairs Symposium, held earlier this week in Toronto. “We are looking for a national or regional vehicle to help address this issue.”

Eng says CARP members would prefer an expanded Canada Pension Plan (CPP) to the PRPP, with the main reason being that CARP members are skeptical of the private sector and afraid the fees will cut into savings.

Malcolm Hamilton, a partner with Mercer and another guest on the panel, said an expanded CPP or the PRPPs could work, but, as it currently stands, a large portion of the population would not benefit financially from PRPPs.

“I don’t have a problem with the structure of a PRPP—it has better options, operates efficiently—but you lose all advantages when you stream below-average income earners into the wrong vehicle.”

For example, Hamilton said if someone works full time for minimum wage for her whole career and retires at 65, in retirement she would actually make more in retirement than in her working years. “[At minimum wage], your [annual] take-home during your working life is $17,500. When you retire, your take-home will be $18,100. Government programs will replace 104% of your income, without savings.”

Even someone making an average income of $40,000 is better off saving in a tax-free savings account (TFSA), he says. Someone making $40,000 a year should save $1,600 a year in a TFSA. While the person is working, his annual after-tax income is about $30,000. In retirement, his savings, combined with current government subsidies, would replace about 85% of his working income.

“The structure and idea [of the PRPP] is fine, but the defaults are all wrong,” Hamilton said. “It’s fine for wealthy people and those making way above the average worker. [But], if we exploit low-income earners, it won’t be good for anyone.”

Hamilton and Eng both agree that it is the middle-income earners who need the most help and that the current PRPP isn’t the solution.

“The government should have done more asking first,” before introducing the PRPP legislation, said Eng. “Most low-income earners don’t stay low income their whole lives. But low-income earners are not an interesting group to politicians or industry. Those who are most concerned are those who have above-average income, who need help in retirement.”

Hamilton suggested a PRPP with no contributions for the first $40,000; however, he admitted that the challenge would be defining what the contribution rate should be—resulting in the wrong rate and the wrong tax shelter for most people.

But not everyone sees the PRPP in this way. Bill Tuffs, founder of Fair Pensions for All, a group that promotes responsible investment by pension funds and fund managers, thinks the PRPP is the best option on the table right now. His main concern is seeing it come to fruition. “It doesn’t look like there is any movement with PRPPs across the country. If we don’t do something, the political reality is that we will be back to expanding the CPP system.”

In his opinion, revamping the CPP is an expensive move that would result in a “complete socialization of the retirement system.”

Despite the gaps, the Canadian retirement system compares well on a global scale. Hamilton suggested that people look at the U.S. or the U.K. “I don’t think anyone would want to trade, but we’ve increased complexity to what should be a simple system,” he said.

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GERRY.WAHL.7

We keep going down the same rat hole on PRPPs: the "60% of workers", or whatever the magic number is this week, without pensions are likely people with very limited discretionary income. If they do manage to save they don't want any risk of losing it. Low income people also have little need for tax deductions. A segregated national annuity policy (SNAP), no frills, minimal cost i.e. you get what you pay for (no promises of a free lunch etc) invested in federal and provincial bonds would be a far more practical approach. “The government should have done more asking first,” .. maybe listening part is the what was missed. Who will benefit most from PRPPs besides the financial service industry?

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