07/31/2012 03:34 EDT | Updated 09/30/2012 05:12 EDT

Why PRPPs Will Not Ensure Pension Security for Canadians


Bill C-25, an Act Relating to Pooled Registered Pension Plans received Royal Assent on June 28 this year, making it officially part of Canadian Law.

The Act provides "a legal framework for the establishment and administration of pooled registered pension plans that will be accessible to employees and self-employed persons and that will pool the funds in members' accounts to achieve lower costs in relation to investment management and plan administration."

The government states that the intent of the legislation is to provide an option for retirement savings to the 60 per cent of workers who currently do not have a defined benefits plan.

In testimony before the Senate Banking Committee on this legislation in June, the Canadian Federation of Independent Business (CFIB) indicated that 78 per cent of small businesses in Canada have no workplace pension plan beyond the Canada Pension Plan (CPP). The Pooled Registered Pension Plan (PRPP) is voluntary and, according to the CFIB, only one-third of its members would choose to exercise this option for their employees.

The regulations surrounding the administration of PRPPs are yet to be established; but unless the cost of administration is low, and unless the pooled amount of investment is high -- which is unlikely given the non-mandatory nature of the plan -- PRPPs will not be any more relevant as a retirement savings option to Canadian workers than RRSPs. In other words, the banks will profit and workers will continue to struggle to make ends meet before and after retirement.

The voluntary nature of this savings plan is not the only drawback. PRPPs as a retirement savings vehicle function like RRSPs. They are taxed on withdrawal and affect net eligibility for Old Age Security (OAS). PRPPs and RRSPs only serve middle- to high-income earners (those averaging wages of $50,000 or more) at retirement. Workers making less actually run the risk having their income drop to below poverty levels at retirement because of the fact that their PRPP income is taxed and clawed back from OAS eligibility.

According to CBC News:

• Only 34 per cent of Canadians are covered by a workplace pension plan.

• About a third of us have no retirement savings at all.

• The maximum CPP retirement benefit for someone who retires at age 65 is $960 a month, but the average CPP pension is actually just $512.

• The median value of an RRSP for workers 55 and older is just $60,000.

• In a typical year, only a quarter of us put anything into our RRSPs, and most of us don't contribute nearly as much as we could.

The fact of the matter is that the average Canadian worker does not have the disposable income to put towards retirement savings. At both the Parliamentary and Senate Committee hearings on Bill C-25 there were few who disagreed that the CPP is a solid, reliable and functional program of retirement savings for Canadians.