PRPPs useless for low-income earners

A new report released by the C.D. Howe Institute today says that Ottawa should rethink the tax rules for pooled registered pension plans (PRPPs) if they want the retirement savings vehicle to be effective. As it stands right now, they are useless for low-income earners.

In the report, Pooled Registered Pension Plans: Pension Savior – or a New Tax on the Poor?, James Pierlot, a pension specialist and member of the Pension Policy Council of the C.D. Howe Institute, and columnist, says, “As currently proposed, PRPPs present only the appearance of reform because they are, for the most part, a re-release of an existing retirement savings vehicle—RRSPs—with a new coat of paint.”

PRPPs were introduced for federally regulated employees in June 2012 but since most employers under federal pension legislation are already providing pension coverage to their employees, PRPPs were introduced in the expectation that provincial governments would follow the federal lead and adopt PRPPs for the vast majority of Canadian workers, who are under provincial jurisdiction.

However, since tax rules for PRPPs—essentially identical to those that apply to RRSPs and similar to those for DC plans—will prevent many private-sector workers from saving enough for retirement and from receiving retirement income in the form of a life pension, PRPPs are only a mild improvement to the current options.

Low to middle-income workers steer clear
The reports warns that PRPPs should be avoided entirely by many low- to middle-income workers who will face taxes and government-benefit claw backs on PRPP retirement benefits at rates that are significantly higher than the refundable rates that apply to contributions.

The authors’ recommendations for how to improve on PRPPs include the following:

  • PRPPs should allow tax-free accumulations (possibly in new tax free pension accounts) so low- and middle-income workers don’t face punitive effective tax rates when they retire;
  • members should have the option of accumulating self-funded “target” pension benefits under the same rules that apply to the federal workers and to members of other DB pension plans, but which are not available in RRSPs, DC plans and the proposed PRPPs;
  • lifetime accumulation limits should be introduced to help level the playing field with DB pension plans and to provide equal access to tax-free pension saving; and
  • PRPPs should be allowed to pay out retirement savings as lifetime pensions, which only DB plans are now allowed to do.

Read the full report here. Also, stay tuned for James Pierlot’s article on next week.