“At the fork of a road
In the Vale of Va-Vode
Five foot-weary salesmen have laid down their load.
All day they’ve raced round in the heat, at top speeds,
Unsuccessfully trying to sell Zizzer-Zoof Seeds
Which nobody wants, because nobody needs.”
Dr. Seuss’s Sleep Book
The Ontario Retirement Pension Plan (ORPP) design consultation period recently ended and media coverage showed both small business leaders and the insurance industry in a frenzied state. Small business leaders see the proposed 1.9% ORPP employer contribution as a job-killing payroll tax, while insurers see the limitation of the exemption for employers that provide a comparable pension plan (DC registered pension plans, deferred profit sharing plans and group RRSPs) as a direct attack on their business.
Read: The GST/HST kiss of death for PRPPs?
Both small business and insurance industry leaders exhorted the Pooled Registered Pension Plan (PRPP) as a preferable option over the ORPP. But PRPPs may be akin to Dr. Seuss’s Zizzer-Zoof Seeds, at least outside of Quebec.
Only the federal government has fully implemented a PRPP regulatory framework. British Columbia, Alberta, Saskatchewan, Ontario and Nova Scotia have all tabled or passed PRPP legislation, but regulations have yet to be completed. Under all of these jurisdictions, PRPPs would be voluntarily offered by employers and employees would be able to opt out of participation.
Read: The case for ETFs in PRPPs
Quebec has implemented the Voluntary Retirement Savings Plan (VRSP), which is similar to the PRPP, except that it will be mandatory for employers with more than five employees and without a registered pension plan or payroll contributions to either an RRSP or TFSA to implement a VRSP with automatic enrollment of employees. Employee contributions will ultimately be at the rate of 4% of salary, however, employees may opt out. Employer VRSP contributions will be optional.
Outside of Quebec’s mandatory VRSP version, does anybody need a PRPP? Does anybody want a PRPP? Or is the PRPP like Zizzer-Zoof seeds, “which nobody wants, because nobody needs.”
Read: Trying to solve Canada’s pension problem
The early bloom on the PRPP rosebush was that employers could provide a retirement program while at the same time avoiding fiduciary responsibility. This bloom soon withered as most commentators observed that employers would still have responsibility for selecting and monitoring a PRPP provider (which activities may have fiduciary characteristics), and this doesn’t seem much different from existing responsibilities relating to group RRSPs or DC plans.
For employees, PRPPs are supposed to have lower investment fees. For employers who must take the initiative to voluntarily implement a PRPP, fees netted out of investment returns are buried “out of sight, out of mind,” except perhaps at the time of selection of a retirement program provider. PRPP fees are also unlikely to be much lower than current fees charged under insurance contracts to most medium-size employers. Thus it’s unlikely that lower fees alone could induce an employer to implement a PRPP.
Read: Business, labour groups divided over ORPP
Would employees appreciate a PRPP? It would appear that the only potential advantages of a PRPP over an RRSP are auto-enrolment, payroll deduction of contributions and lower fees.
Auto-enrolment in a PRPP for existing employees will be a negative for many, as it will reduce their take-home pay.
Payroll deduction can be replicated with auto-contribution features offered by most financial institutions for RRSPs and (perhaps strangely) the advantage of immediate tax relief is very often seen as less valuable than the lump sum refund at tax time.
Lower fees of PRPPs come with a trade-off, a smaller selection of investment options and minimal advice—individuals with investment savvy will know of similarly low priced investment options (such as exchange-traded funds). Those who are less savvy may well appreciate the added value of advice available along with retail investments—most certainly their advisors and financial institutions will do their best to convince them of this!
I predict that employees would greet a PRPP with indifference, at best.
Read: 4 ways to make the ORPP work
As long as DC pension plans, deferred profit sharing plans and RRSPs are available and there is no mandatory requirement for an employer to implement a pension plan, nobody needs a PRPP. I suspect nobody will want them either.