Private Resources Pilfering Pensions?

Jonathan Chevreau of the National Post asks, Will a pension overhaul save your retirement?:

The Conservative government has let its plan for fixing the country’s pension system fly under the radar of late while rival political parties had their say. But that ‘quiet period’ ends Monday when they get to the nitty gritty of launching their promised Pooled Registered Pension Plans, or PRPPs.

Minister of State (Finance) Ted Menzies will be briefing pension administrators in Toronto about the PRPP proposal first sketched out last December. It’s the government’s preferred private-sector fix for the retirement income system.

Forget about the greatly expanded or “Big” Canada Pension Plan the Liberals, NDP and Big Labour have pushed for. Mr. Menzies is all about creating a system that will be run by the private sector with risks born equally by employees and employers.

You can also forget about mandatory participation, which would be inherent in a CPP-centric solution. The essence of PRPPs will be to let either employers or employees opt out.

And forget about defined or guraranteed benefits in retirement: This plan is based on defined contributions with the ultimate benefits tied to market performance.

Naturally, Bay Street is salivating at the prospect.

This is a giant potential opportunity for the nation’s banks, mutual fund companies, insurance firms and a growing number of manufacturers of exchange-traded funds. Pension consultants, actuaries, financial planners and investment advisors will also see various business opportunities created as PRPPs catch on — primarily with small- and medium-sized businesses that never before offered its workers a pension plan. Mr. Menzies, the cabinet minister responsible for PRPPs, says he’s travelled the country consulting with the provinces.

“When the concept of the pooled RPP was shared with the provinces and territories they all came together to agree this makes sense.”

Finance Minister Jim Flaherty still hasn’t ruled out a “modest” CPP enhancement but Ottawa’s preferred pension fix is clearly the PRRP.

On Monday, the politicians and pension industry will start by hashing out details contained in a 13-page consultation document issued June 15, bearing the admittedly unsexy title of Tax Rules for Pooled Registered Pension Plans (PRPPs).

Neither governments nor corporations wish to go back to the bad old days of bearing the burden of providing the kind of guaranteed payouts used in traditional defined benefit employer pension plans or similar assured payouts in the CPP.

Instead, PRPPs will be (hopefully) low-cost defined contribution schemes run by the private sector where ultimate benefits will depend on how financial markets perform. The PRPPs would resemble the United States’ 401(k)s or Australia’s superannuation scheme.

They will be administered by financial institutions rather than employers, which is why Bay Street views them as a potential bonanza. As the “pooled” part of their name suggests, assets are co-mingled for investment purposes to keep down costs.

The original idea was that PRPPs would be mandatory for employers that don’t offer their own registered pension plan but Mr. Menzies says that decision would be up to the provinces. “We’re putting it out there that there is an option for the employer and for the employee. I’ve spoken to many small businesses that said ‘finally here’s a low-cost affordable plan I can enroll my employees in.’ It will be a retention and enticement tool.”

Employers won’t be forced to make contributions, but may choose to do so. Employees will be automatically enrolled at a base contribution rate, but they can opt out.

There will be two types of members: Employed and individuals. The latter include the self-employed and employees of organizations that do not offer PRPPs. Benefits are portable. Employers offering PRPPs can move to a new plan if they wish. There are fewer portability restrictions for individual members, making them convenient if they later change jobs and want to take their pension with them.

Participating employers will make direct contributions to the plan and remit employee contributions. Individual members can make periodic or lump-sum contributions and will be responsible for choosing to enrol, selecting contribution rates and remitting contributions.

The challenge next week is to modify tax rules so PRPPs fit within the existing structure of Registered Pension Plans (RPPs) and RRSPs across the country. Many administrative details must be hammered out, such as accounting for pensionable service or permitting transfers between existing RPPs and PRPPs.

Mr. Menzies says he hopes federal legislation to implement PRPPs will be passed before the end of the year. The Canada Pension Benefits Standards Act hasn’t been modified since 1985, he said. Once passed, the provinces will have to pass their own legislation to integrate PRPPs with their own pension and tax regimes.

The first PRPP already exists as part of a rejigged Saskatchewan Pension Plan (SPP). Established in 1986, the SPP is also defined contribution in nature, with the money invested in a balanced fund or a short-term option, according to Vancouver pension consultant Greg Hurst.

At retirement, funds can be transferred to a life income fund with a financial institution, or retirees can buy annuities backed by the province. In December, when the Ministry of Finance unveiled its draft framework for PRPPs, Ottawa and Saskatchewan jointly announced changes to the SPP to align the plan’s tax regime with RRSP and RPP rules.

Mr. Hurst, president of Greg Hurst & Associates, has been a vocal opponent of an expanded CPP but is optimistic about the PRPP. The revised SPP has several things in common with the proposed PRPP: its administrators act as fiduciaries, investments are pooled across the plan, it’s portable and there are two classes of members.

Mercer Partner Malcolm Hamilton says PRPPs have the laudable goal of helping employees in smaller firms save for retirement without imposing excessive burdens on their employers. However, he is concerned that achieving this seemingly simple goal could prove to be “deceptively difficult.”

Automatic enrollment could be a problem for smaller firms to administer and someone will have to come up with the default contribution rate and default investment options, Mr. Hamilton says. He’s also concerned about where participants will turn for objective yet affordable advice, given the possible conflicts of the financial institutions that will administer the plans.

Finally, Mr. Hamilton doubts low-income workers making under $20,000 a year can benefit from PRPPs: they should be saving modest amounts in Tax Free Savings Accounts (TFSAs) rather than RRSPs or RPPs.

It’s not yet clear whether PRPPs could also be made to work with TFSAs. That’s one of the fine points to be hashed out next week.

There are many "fine points" on PRPPs that need to be hashed out, but let's call a spade a spade: PRPPs are a big giveaway to banks, insurance companies, mutual funds, pension consultants and the entire private sector and they're just a bad extension of RRSPs (and thus doomed to fail). They should rename PRPPs to Private Resources Pilfering Pensions because that is the essence of this stupid, shortsighted proposal. The private sector continues to rape employees with exorbitant fees as they make more inroads into retirement savings, grabbing a bigger stake of the shrinking pension pie.

Please go back to read my comment on why the fuss over pensions. Everything else you read in mainstream media is private sector garbage. I am tired of beating the pension drum on this issue and will continue to expose the charlatans who claim to know what's best for our retirement. They haven't got a clue which will be blatantly evident once the new Minister of State (Finance) Ted Menzies unveils the details of this new proposal. Mark my words, it's going to be a monumental failure and Canadians are going to end up paying dearly for it down the road.