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“The notion that small businesses will join a PRPP because it’s simpler than existing employee-sponsored options is a bit of pipedream.”
Toronto (17 January 2011) – The introduction of the new Pooled Retirement Pension Plan (PRPP) will do little to fill the gap in retirement income, Paul Forestell, a senior partner at Mercer consulting, told a crowd of investment managers in Toronto last Thursday.
In the private sector, 75% of companies offer no pension plan at all and only 38% of Canadians contributed to a RRSP in 2009, according to Statistics Canada.
In December, federal Finance Minister Jim Flaherty announced he was moving ahead with the PRPPs. The plans will offer defined contributions administered by a third party, probably a financial institution. The savings vehicle is supposed to be relatively low-cost because of its sheer size and simplicity.
“It sounds great and if implemented will be a positive step for retirement savings in Canada but probably just a very small step”, Forestell said.
“The notion that small businesses will join a PRPP because it’s simpler than existing employee-sponsored options is a bit of pipedream”, he suggested.
“I’m not certain that this will be enough incentive for employers who do not currently provide any retirement savings options to join a pooled RPP.”
That’s because many of the defining characteristics of the PRPP can also be attributed to the typical RRSP or the tax-free savings account and many small business owners simply don’t have the time or money to offer such a plan.
Those who already offer group RRSP or a defined contribution pension plan may opt to switch to a PRPP and that could dilute retirement income of plan members.
Under the new regulation, provinces can choose to mandate PRPP automatic enrollment for small businesses and the self-employed but that’s unlikely to happen, Forestell said, since setting base line contribution level would be nothing short of a nightmare.
If it’s too low, the plan won’t do much to address the funding gap. It it’s too high, employees are more likely to withdraw from the program.
“It’s starting to sound a lot like the story of Goldilocks and the Three Bears. You need to set a contribution plan ‘just right’ to make a mandatory plan work.”
The “just-right” contribution level of course depends on age, income, retirement needs and other factors.
Pension reform will remain atop of the agenda in 2011, 2012 and beyond, Forestell said
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