The federal government introduced pooled registered pension plans (PRPPs) because legislators were worried about the low levels of pension plan coverage in the private sector. Recent data from the Office of the Superintendent of Financial Institutions (OSFI) support those concerns.
Ottawa’s PPRP legislation reached royal assent in June 2012. It speaks to federally regulated employees specifically, but the government said provinces probably would follow suit quickly. So far, few have[S1] .
Nonetheless, OSFI information suggests that pension coverage in the private sector is slipping. OSFI’s recent report, Registered Pension Plan (RPP) and Retirement Savings Coverage (Canada), found that, while the number of registered pension plan members increased by 12% between 2000 and 2010, the number of members as a percentage of the labour force actually declined to 32% from 34% over the same period.
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The numbers continue to highlight the significant disparity in coverage between public and private sector employees in terms of pension coverage. OSFI’s data show that while pension plan coverage has remained relatively constant in the public sector (at 87% of that workforce), only 24% of private sector employees were covered by a pension plan in 2010, down from 28% in 2000.
Direct contribution plans on the rise
The type of pension plan available to those employees with pension coverage is also shifting over time. While the proportion of active members in DB plans has declined to 74% from 84% between 2000 and 2010, the number of active members in DC plans has increased to 477,000 in 2010 from 18,000 in 2004. It is also important to note that 98% of employees belonging to DC plans are in the private sector.
It is important to recognize that employer-sponsored pension plans may be supplemented by voluntary savings in RRSPs. However, an examination of average RRSP contributions made by Canadians reveals that few are fully utilizing these plans. Data from Statistics Canada indicate that the median RRSP contribution in 2009 was $2,680, down from $2,700 in 2008. The total value of RRSP contributions was $33 billion in 2009, down from $33.3 billion the year before.
At the same time, Canadians seem more willing to contribute to tax-free savings accounts (TFSAs). OSFI’s data indicate that the number of Canadians contributing to a TFSA has increased by 40% between 2009 and 2010 to 6.7 million, up from 4.8 million. It remains to be seen whether these numbers will continue to rise.
There are also signs that Canadians are willing to embrace PRPPs/VRSPs to help them save for retirement. According to the results of a recent Manulife Financial survey, 64% of respondents support PRPPs over an increase to CPP/QPP contributions as a means to save for retirement. In addition, 74% of respondents indicated that it was either “important” or “very important” for their province to introduce the legislation required to make PRPPs available. Support for PRPPs is highest in Quebec (85%) and Newfoundland and Labrador (84%).
PRPP Framework
The framework for PRPPs was established by Bill C-25, the Pooled Registered Pension Plans Act. The framework’s features include the following:
- low-cost investments;
- a default investment that’s suitable for contributors with different risk profiles;
- no required employer contributions;
- an employee contribution rate that’s set by the employer, with an opt-out option for employees;
- locking-in requirements for balances;
- the portability of assets; and
- administration by a federally licensed institution (i.e., bank or insurance company) that must accept fiduciary responsibility for the plan.
Additional details governing PRPPs can be found in draft regulations released for comment in August 2012. The tax treatment of PRPPs is detailed in a Notice of Ways and Means Motion, which was released in October 2012.
Karen DeBortoli is director, pension and benefits research, and Colin Ripsman is senior investment consultant with Eckler Ltd. kdebortoli@eckler.ca; cripsman@eckler.ca