Millions of Canadians without a retirement plan in the workplace could benefit from the new Pooled Registered Pension Plan (PRPP) designed for those in small- and medium-sized businesses, as well as the self-employed, says Sue Reibel, Senior Vice-President and General Manager, Group Retirement Solutions, Manulife Financial.
The PRPP is a new retirement savings vehicle set out in federal legislation introduced in November. It is designed to close a retirement coverage gap for Canadians: just over seven million Canadians working in the private sector do not have a workplace retirement savings plan, and the majority of those work for companies that employ fewer than 500 people.
If the federal government wants to increase retirement savings access and adequacy, "the PRPP's design is definitely on the right track," Ms. Reibel says.
Still, the new vehicle may meet resistance until it's better understood, she says. Online research conducted by Manulife Financial with small business owners found widespread reluctance to offer retirement savings options. "Small employers cite cost and complexity as barriers," she says. "And while the PRPP is intended to address this, few employers are keen to put it in place yet." Why not? "They're busy people with many competing priorities and they don't believe it will be as easy as initially promised."
Small businesses tend not to be equipped to administer traditional registered pension plans, Ms. Reibel says. "Plans can be complicated and the employer is required to contribute. There are annual filings with the government. Small business owners don't have an HR Department with pension experience. They have a general manager or owners do everything themselves. It's just too overwhelming and too expensive for them."
The PRPP removes those burdens from the employer and moves most administration on to financial institutions or other providers of the plan, she says.
"Take Manulife – Manulife will offer a Pooled Registered Pension Plan for employers, but we'll be the provider of that plan. We'll do the filings to the government. We'll be responsible for communicating to employees and educating them about the plan. Those responsibilities used to fall to the employer, so now the employer's responsibilities will be greatly diminished. Also, there isn't a requirement for the employer to contribute to the plan, which makes the plan very affordable."
The duties of small businesses will be minimal, she says. "Their responsibilities will include deciding which provider they'll choose; they will have to set up a plan – which should be relatively simple – then remit ongoing contributions."
As the rules stand now (before the introduction of PRPPs), employers who wish to set up a pension plan for their employees cannot join with other employers to reduce costs. "It's looked at as an individual plan for that employer," says Ms. Reibel.
"Pooling" means "putting a large number of unrelated employers together under one plan," and placing all the investments in one pot, driving down costs, she says, The employees of small- and medium-sized companies plus the self-employed will benefit from the same investment advantages enjoyed by larger retirement plans.
As a "registered" option, the PRPP will offer tax-deferred saving, similar to an RSP, or any other type of defined benefit or defined contribution pension plan. "It's an easy way to save," says Ms. Reibel. "Your contributions immediately reduce the tax you pay. Where employers opt to provide a match, there's an immediate return on investment."
The Pooled Registered Pension Plan has the potential to reshape opportunities for Canadians without workplace retirement savings. The PRPP is intended to improve retirement savings access and retirement income adequacy – an increasing consideration as more Canadians approach their retirement years.
Quebec has already announced that it intends to launch its version of the PRPP, what it calls the Voluntary Retirement Savings Plan (VRSP). Quebec has also confirmed that it intends to require employers (with some exceptions) to offer access to some kind of workplace retirement savings plan. Employers would not be required to make contributions.
"Increasing retirement savings is an important policy objective for governments and requiring employers to offer access to a workplace savings plan is one of the key levers available," says Ms. Reibel. With federal legislation tabled, each province must now determine how the PRPP will fit into its pension and employment legislation. "This will be a key decision for each province that implements the PRPP."
Over the past four years, the federal and provincial governments have worked together to study ways to improve Canada's retirement savings system. Studies have found a significant gap in workplace savings coverage in small- and medium-sized businesses. The PRPP targets this gap.
Governments also have discussed the possibility of increasing Canada Pension Plan (CPP) contributions, but some provinces and some business groups are opposed to increasing CPP contributions. Small business representatives have made it clear that higher CPP contributions are viewed as a payroll tax that increases costs for businesses in a challenging economic climate, Ms. Reibel says.
Employers will be waiting to see what final PRPP structure the federal and provincial governments agree on, she says. However, the PRPP represents a significant step in the direction of improving retirement savings access and adequacy through the workplace, she says.