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The Globe and Mail

New pooled pension plan's success will depend on business owners

John Hadfield, Co-owner of Gastown Photo, poses for a portrait at Gastown Photo in Vancouver, British Columbia, Thursday, November 17, 2011.

Rafal Gerszak/rafal gerszak The Globe and Mail

Small business owners will soon be getting a lot of phone calls from banks and insurance companies in the wake of new federal legislation that gives the private sector a key role in boosting the pension savings of Canadians.

Pooled Registered Pension Plans will be government-regulated, private-sector funds aimed at the more than 60 per cent of Canadians who are not saving for retirement via a workplace pension and payroll deductions. Financial institutions will be legally required to provide the funds at "low cost."

Small business owners are the main target. They will be given the option of offering payroll deductions for retirement. But Ottawa won't force employers to offer the plan, nor contribute toward it.

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That means the program's ultimate success will depend on whether fund managers can convince a large number of small business owners to sign on. Clearly many in the sector see a big market. Banking, insurance and pension fund managers sent out a flurry of press releases Thursday praising the federal legislation. But rather than the consumer-focused advertising blitz that the industry launched in support of the government's 2009 Tax Free Savings Accounts, the PRPP campaigns will likely involve personal appeals to business owners.

"What we see as the market is employers who don't offer any kind of savings plan," said Frank Swedlove, president of the Canadian Life and Health Insurance Association.

John Hadfield, co-owner of Gastown Photo in Vancouver, says he'll sign up for the plan because he thinks automatic payroll deductions will help employees save.

"It's nice having it done from your paycheque, where you don't actually get a hold of it first," he said. However, signing up his business will be the extent of his involvement. "We won't be matching [employee contributions]" he said, "because it costs money."

Those in the industry say it's hard to say at this point how many firms will offer the products or what they will cost because key details are missing from the legislation tabled Thursday.

The bill now before Parliament empowers the government to work out central details after the fact through regulation, such as what "low cost" actually means.

The enthusiastic support from Canada's financial sector comes as no surprise to critics of PRPPs, who say offering another voluntary savings option that is only slightly different from the existing Registered Retirement Savings Plans won't address what some believe is a looming pension crisis.

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The Canadian Union of Public Employees called PRPPs "a great deal for banks and the finance industry" that is "woefully inadequate" in addressing Canada's savings problem. That was the common criticism Thursday from unions and the opposition NDP, who argue another voluntary savings option won't work and that the answer is an expansion of the mandatory Canada Pension Plan through higher premiums and benefits.

NDP MP Wayne Marston noted that savings in PRPPs are vulnerable to stock-market losses, while CPP investments are secure. He also argued that an increase in mandatory CPP contributions would ensure all Canadians aren't ultimately on the hook for those who retire without any savings.

"By investing now, we'll actually save for them and for the country in the future," he said.

Ted Menzies, the Federal Minister of State for Finance, stressed in an interview that PRPPs are the best way to go at the moment, particularly given that there isn't enough provincial support to go ahead with CPP reforms.

While details remain sparse as to which firms would offer the plans or what they would cost, Mr. Menzies said he's been assured by the industry that the management fees will be much lower than what citizens currently pay for RRSPs.

"All I want to say is it will be substantially less," he said.

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What's a PRPP?

A PRPP is very similar to a Registered Retirement Savings Plan. Contributions to a PRPP are treated in the same way as an RRSP for tax purposes. The main differences are that PRPPs can be set up by small businesses so that contributions automatically come off an employee's paycheque (employees would be allowed to opt out); the government also promises that PRPPs would have lower management fees because contributions would be "pooled" with others in large pension funds, creating economies of scale.

Who manages a PRPP?

Private-sector financial institutions – such as banks or insurance companies – can apply for a licence to run the funds. They will be required by law to manage the funds at "low cost," but industry officials say they need more detail from government before they can say just how much less they will cost.

- Bill Curry

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