Canada’s retirement savings and income system consistently ranks among the best in the world. It provides a balanced mix of universal income funded by the tax system, mandatory employment-based income replacement, supplemental workplace savings through employer-provided pension plans and discretionary savings through registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs), home ownership and other personal savings.
Still, there are holes in the system and many Canadians are not expected to have sufficient savings to maintain their desired standard of living in retirement.
Only one-half of private sector workers participate in workplace savings plans, and even fewer workers in small and medium-sized businesses have access to such plans, according to a 2010 survey of 2,001 Canadians by Environics Research Group. Many Canadians fear their savings are inadequate to live comfortably during retirement, and this is especially true among older workers (61 per cent for those aged 45 to 59).
For most of us, workplace and personal savings are a big piece of the retirement income security puzzle. And a solution is now available with the introduction of pooled registered pension plans (PRPPs).
PRPPs are defined contribution (DC) pension plans that pool the administration of retirement savings amongst many different workplaces. Like any pension plan, savings are locked in so they can provide retirement benefits. But there are other important advantages to PRPPs.
While managing a traditional pension plan can be complex, especially for small employers, PRPPs transfer this responsibility to a licenced service provider, typically a financial institution.
For employers, offering a PRPP will be simple. The plans will not require employer contributions, removing a significant cost barrier for employers.
For workers, PRPPs offer important design features that overcome inertia and help workers to start saving for retirement, while retaining flexibility and choice. These simple behavioural “nudges” can have big payoffs in terms of the incomes they produce.
For instance, employers will automatically enrol workers into a plan. Workers will have the right to opt out, but jurisdictions that have introduced auto-enrolment have shown only a small percentage actually do so.
PRPPs will offer an array of prudent investment choices. If an employee doesn’t make an investment choice, an appropriate default option will apply. Lifecycle funds that adjust investments to less volatile asset classes as the individual ages — thereby protecting the income those assets can produce — are likely to be a common default option.
PRPPs should also be low cost. By enrolling many employees from multiple employers in a single plan, PRPPs obtain economies of scale.
Where they’re at now
All of Canada’s finance ministers declared their support for PRPPs in 2010. The federal government adopted “template legislation” for PRPPs in June 2012. But because most pension plans are provincially regulated, each province must adopt its own legislation before PRPPs become widely available.
Since then, Alberta and Saskatchewan have each adopted PRPP acts, and Quebec currently has similar legislation to establish voluntary retirement savings plans before the National Assembly. British Columbia introduced legislation prior to the last provincial election, but it had not been passed prior to the election being called. B.C. is expected to reintroduce legislation to create PRPPs in the next few months.
Ontario announced its intention to proceed with PRPPs in its last budget. Other provinces are also expected to move forward soon.
Keeping PRPP regulations and supervisory processes harmonized will be a major factor in keeping costs low, and several provinces are working with federal officials to develop common approaches.
There are, of course, hurdles that must be cleared before PRPPs become a reality across Canada. The federal government, through the Office of the Superintendent of Financial Institutions (OSFI), must issue a licence to any institution intending to act as a PRPP provider. Provincial governments may require parallel licensing or may piggyback on OSFI’s process.
The PRPP provider must then obtain approval from the Canada Revenue Agency that the plan complies with relevant rules under the Income Tax Act, as required for a traditional pension plan.
Once an employer decides to offer a PRPP, it must advise potential plan members of the intent to offer a plan and any other business arrangements the employer has with the PRPP provider.
The provider must then inform potential plan members of their status as automatic enrollees in the plan, together with a description of all of the features of the plan. Only after each of these prescribed steps will contributions begin.
Of course, no savings plan will achieve its policy goals if Canadians don’t participate. Quebec has proposed an important nudge in this area, which would require all employers with five or more employees to offer a workplace retirement plan, be it a PRPP, RRSP, TFSA or traditional pension plan.
Coupled with automatic enrolment, this universal access model greatly improves access and participation, and drives the economies of scale needed to minimize costs.
Provincial governments need to act now to seize this opportunity since the most important step in savings is getting started.
Frank Swedlove is president of the Canadian Life and Health Insurance Association. For more information, visit www.clhia.ca.