With more than 60 per cent of Canadian workers currently without any company pension plan, the government on Thursday tabled legislation to create a new savings vehicle aimed at that large segment of the population.
The idea, hammered out with the provinces last December, is aimed at small firms that can't afford to go it alone in offering workers a pension plan.
Soon they will be able to "pool" resources with others, along with the self-employed, to create voluntary, defined-contribution pension plans that would be managed by private sector financial institutions.
The new PRPPs are similar in approach to personalized registered retirement savings plans, but the government believes more workers will save if contributions are automatically deducted from paycheques — rather than if they have to be set aside from disposable income as in an RRSP.
As well, pooling will create large, diversified funds less prone to investment errors and with lower management fees than many RRSPs.
"Basically, Canadians will be able to buy in bulk, buying in bulk means lower prices ... lower prices means Canadians will get greater returns on their savings and more money will be left in their pockets when they retire," said Ted Menzies, minister of state for finance, in making the announcement in Toronto.
But experts doubted the new plans would make a big dent into the coverage deficit among Canadians.
"It's a good first step, but the fact is less and less Canadians are covered by pension arrangements and this will not do much for the coverage issue," said Ian Markham, a senior actuary with Towers Watson in Toronto.
The coverage may be greater if provinces mandate that all firms must offer the plans to employees, although it is not clear Ottawa would agree to the option.
Among the drawbacks, according to critics, are that the proposed plans will be voluntary, they do not require employers to contribute and they fail to offer defined benefits upon retirement. Instead, the size of benefits will depend on the size of individual contributions and the earnings by a particular PRPP.
The NDP and labour groups said Ottawa erred in not using the opportunity to expand the Canada Pension Plan.
A six per cent hike in premiums to the CPP phased in over seven years would result in a doubling of benefits in 35 years, according to the Canadian Labour Congress.
"CPP is a defined pension plan; people will know what they will have at the end of the day," said NDP critic Wayne Marston.
Meanwhile, the PRPPs backed by the government promise a windfall for financial institutions, which will profit from fees for managing the new pools of money.
Liberal critic Scott Brison said his party favours the creation of the PRPP funds, but also wants to government to allow Canadians to participate in a voluntary, supplemental CPP add-on that would pay off in defined benefits.
Given the current high unemployment rate of 7.3 per cent and weakness in the economy, now is not the time to increase payroll taxes that discourage hiring, Brison said, using much the same argument as the government.
One key element of the new plans that may increase participation is that employees will automatically be enrolled in any PRPP offered by the employer unless they choose to opt out. The ease of entry will likely cause more workers to participate, said CLC chief economist Andrew Jackson.
And that is the problem, he added. Once the new savings vehicles are established, there will be less pressure on government to expand the CPP.
"I think it's an either or choice and I think they are making the wrong choice," he said.
In negotiations with the provinces in December, Ottawa backed away from expanding CPP after a few provinces, most vocally Alberta, rejected the proposal. Since then federal Finance Minister Jim Flaherty has suggested the option could be revived in the future.
Prime Minister Stephen Harper appeared to downplay the likelihood the government would move in that direction soon, however.
"Canadians are looking for options," he said in response to an opposition question. "Canadians are not looking for a hike in their CPP premiums."
The pooled pension plan was widely supported by industry groups, including the banks and businesses.
The Canadian Federation of Independent Business praised the Harper government for making the PRPPs voluntary and called on provinces to follow Ottawa's lead.
The Canadian Bankers Association, whose members already manage hundreds of billions of dollars of investment assets for Canadians and businesses, said the PRPPs will allow self-employed individuals to participate in private sector pension plans for the first time.
The Ontario Medical Association, which represents the province's mostly self-employed doctors, also issued a statement in support of the pooled pensions.
However, two of Canada's largest organizations for unionized workers — the CLC and the Canadian Union of Public Employees — were critical. Both favour an expansion of the CPP.
"Polls have shown that 74 per cent of Canadians don't make contributions to RRSP and other private pension vehicles because they can't afford it. This new PRPP legislation does nothing to address this simple fact," said CUPE national president Paul Moist.
Moist called on provincial and territorial finance ministers to pressure the federal government to move ahead with CPP reforms when they meet with Flaherty next month.
— With files from David Paddon