Is There a PRPP in Your Future?

By JoAnne Sommers

Your-MoneyThere’s good news on the horizon for small- and medium-sized employers who want to offer retirement savings plans to their employees.

In June 2012, federal legislation governing Pooled Registered Pension Plans (PRPPs) received royal assent. This means that a new kind of defined contribution pension plan will be available to employers, employees and the self-employed across Canada once federal tax legislation is passed and the provinces pass their enabling legislation.

The legislation will allow regulated financial institutions – banks, insurance companies and investment companies – to begin offering PRPPs to small businesses and self-employed individuals who would otherwise not have a pension like those available at larger companies.

PRPPs will enable smaller businesses to offer their employees registered pension plans that will be simple to administer, says Dan Kelly, president of the Canadian Federation of Independent Business (CFIB), which represents 109,000 small- and medium-sized enterprises (SMEs) across the country. Only 15 per cent of Canada’s small employers currently offer some form of retirement savings to their employees, Kelly notes.

“PRPPs will be an excellent addition to the retirement savings options for small business owners and their employees. Small firms tell us that the main reasons 80 per cent of them do not have any form of company retirement plan for the business owner or their employees are the costs and administrative burden of offering a plan. If properly implemented by the provinces and financial institutions, we expect PRPPs to move the ball forward on both fronts.”

New CFIB member data recently revealed that one-third of small firms would consider offering a PRPP in their workplace, while another one-third would like to receive more information about them.

Current pension plans are beyond the reach of most entrepreneurs and Group RRSPs quickly become unaffordable because employers must also pay Employment Insurance, Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) and Workers’ Compensation premiums on top of any contributions to the plan. RRSP management fees are often very high (in the range of 2-2.5 per cent) compared to other forms of retirement savings, Kelly says.

PRPPs should enable smaller firms to offer pensions at a cost usually available only to very large pension plans, said The Honourable Ted Menzies, Minister of State (Finance). “Because PRPPs will involve pooling large funds, Canadians will benefit from lower management costs. In effect, they will be buying in bulk, leaving more money in their pockets when they retire.”

For smaller businesses, one of the principal attractions of the PRPP is that it is fully voluntary, says Kelly. Employers may choose whether to offer it and, if so, whether they wish to contribute to it. Employees would be automatically enrolled but could opt out.

The employer’s role would be limited to deducting the employee’s contribution from his/her pay cheque and remitting it to the financial institution. All other responsibilities, including how the funds are invested and the associated costs, would rest with the financial institution and the individuals who participate. The financial institution would act as both trustee and plan administrator.

“Unlike CPP, small business owners can decide whether or not they wish to participate,” Kelly notes. “CPP is the biggest payroll tax of all and we pushed back against recent proposals for increased premiums. This is a much better solution to the problem of insufficient retirement savings.”

PRPPs could also help small businesses to attract and retain key employees, he adds. “Many smaller companies are trying desperately to find and hang on to workers and this will put them in a position to compete with larger firms for top talent.”

Kelly doesn’t consider PRPPs a panacea, however, and he warns that, “They could easily be screwed up by the financial services industry or the provinces. Regulatory headaches are a possibility and the financial services sector must ensure low-cost administration. We will be monitoring financial institutions to ensure that administration fees are significantly lower than those associated with current RRSPs.”

CFIB is also calling on the provinces to move quickly to implement the necessary legislation and to ensure that PRPPs remain entirely voluntary.

“We hope the provinces don’t implement a patchwork quilt of policies. We want PRPPs to be fully portable so that a worker who switches employers can take their pension with them, even if they’re moving to another part of the country.”

Ontario has already announced that it won’t proceed with implementation of the PRPP until Ottawa agrees to increase CPP premiums. “They’re using it as a political football,” says Kelly, adding, “We’re deeply disappointed with them.”

Quebec proposed legislation to implement PRPPs earlier this year but it died when the provincial election was announced.

Kelly says CFIB is hoping that a western province – Saskatchewan, Alberta or B.C. – will take the initiative in passing enabling legislation. “We need a larger province to move this forward because financial services companies are unlikely to develop PRPPs for smaller provinces alone,” he explains.