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October 31, 2012
PRPPs “just a new coat of paint”: C.D. Howe Institute

The federal government’s new pooled registered pension plans (PRPPs) are registered retirement savings plans (RRSPs) with “just a new coat of paint” and are unlikely to help low and middle income Canadians save for retirement, the C.D. Howe Institute says.

In an unusually critical report, the Institute says the new registered retirement savings vehicle “presents only an appearance of reform, because they are, for the most part, a re-release of an existing retirement savings vehicle,” according to Institute pension specialist James Pierlot.

If adopted nationally, the PRPPs will allow all workers, including self-employed individuals and those working for companies that do not offer pension plans, to contribute to a national defined contribution plan that would be administered by federally regulated financial institutions, such as banks and insurance companies.

Under the new pension scheme, all employers would be compelled to offer the PRPP. However, the plan itself would be administered by a third party organization such as a bank. In this sense, a PRPP would function similar to a multi-employer pension plan. Employees could contribute to the plan but would have the right to opt out of it. Meanwhile, employers would be freed from the administrative complexity and costs associated with running a pension plan.  (See the January 2011 and August 2011 editions of the Coughlin Courier for background.)

To date, reaction to the plan by the provinces has been mixed.  While Quebec quickly adopted its own version of the PRPP, other provinces have been slow to legislate their introduction within their jurisdictions.  Ontario has opposed the plan, favouring an increase in Canada Pension Plan benefits and contributions.   The majority of pension plans in Canada are regulated by provincial legislation.

The C.D. Howe Institute argues that the similarity of PRPPs to existing RRSPs and defined contribution pension plans will discourage low and middle income earners from accepting the new programs.

“Worst of all, PRPPs should be avoided entirely by low to middle income workers, who will face taxes and government benefit clawbacks on PRPP retirement benefits that are significantly higher than the refundable rates that apply to contributions,” the Institute says.

The research organization recommends that PRPPs allow tax-free accumulation in tax-free pension accounts so that members will not face higher taxes when they convert their savings into retirement incomes.  The plans should also be allowed to pay out retirement savings as lifetime pensions to make PRPPs more comparable to defined benefit pension plans, the Institute says.

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