The Pooled Registered Pension Plan – Oops

Draft legislation was tabled today for a PRPP program (Pooled Registered Pension Plan). The exact details have STILL yet to be determined, but here are the highlights:

  • The PRPP is aimed at small businesses and the self-employed to help them save for their own retirement
  • Employees will be automatically enrolled, but can opt out
  • Employers can also make contributions but will not automatically be enrolled
  • It’s expected the economies of scale will reduce costs of managing the funds
  • Financial institutions will be allowed to manage the funds, but the details of how this would happen are unclear

So while there is a lot of good intention to help put small businesses on par with big company pension plans and increase retirement savings for Canadians en masse, I have my reservations based on the speculated details.

  • The people most likely to opt out are the ones who arguably need the most help with saving for retirement
  • What defines low cost? The CPP is roughly 0.43% to run. Alberta’s sovereign wealth fund (The Alberta Heritage Savings Trust Fund) is about 0.13%. A retail individual portfolio might be 2.00%. A DIYer can get down below the CPP’s MER.
  • This affects roughly half of working Canadians, some will participate but a lot of people assume an investment portfolio = financial planning. Will they be less likely to seek financial advice?
  • Or more likely to seek advice because there is something else to confuse them?
  • It’s a defined contribution plan. Others have argued an expansion of the CPP (defined benefit) would be better.
  • You can already set up a group RRSP with a small business with as few as 3 people
  • Businesses smaller than that, or the self-employed, can currently save for retirement already.

But most importantly:

How do you mandate lower costs on a PRPP but not on mutual funds? Mutual funds were designed for smaller investors to pool their money together to get a professionally managed portfolio at lower cost.

So if the costs are limited by legislation, and these costs are below mutual fund MER averages in Canada, the government is basically acknowledging investment costs in Canada are too high. If they set the maximum fees to be anywhere near mutual fund MER averages, the PRPP switches from suspect to useless.

Here’s a short two minute piece from CBC’s Havard Gould that appeared on The National:

Click here if you can’t see the video link.

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 7 comments
  • Richard Kennedy

    From what I have read or heard, a combination of etf’s & low cost mutual funds will still be cheaper than this PRPP. If it gets me a pooled mutual fund, it’s available today. What “I” want is an investment strategy similar to the CPP. This includes infrastructure, real estate (not REITs), and other investments. It would be great to own the new RBC building knowing your main tenant will give you cash flow for years to come. As someone who does not have a company pension, I don’t see the benefit.

    • Preet

      Yes, it’s hard to see what real difference this PRPP will have compared to what is already avaialble. More details needed.

  • Michael James

    I find it amazing that we still have no useful details about how PRPPs will work. About your point that group RRSPs are available even to very small businesses, I don’t think this is very useful. I’ve been in a few company group savings plans over the years and transferring my savings out is always very painful with confusing paperwork, ignored phone calls, and repeated mistakes. In addition, each employer places different types of restrictions on company matching amounts that make it difficult to take this money with you when you change jobs. The practical reality is that changing jobs and getting your money out of your previous employer’s group plan can be very painful. If PRPPs make this transition easier, then this will be one point in their favour.

    • Preet

      It is odd that almost three years later not much more is really known.

      From my personal experience, group RRSPs are quite easy to transfer if you do it enough. The average person will not do it often so it may seem cumbersome, but I imaging that a PRPP is going to be subject to the same problems of confusing paperwork, unreturned phone calls and repeated mistakes. Especially if financial institutions are administering parts or all of the plan.

      If the rumoured PRPP details are as described, then really all they need to do is enforce cost limits and enforce the existing transfer rules between institutions with group RRSPs and they’ll achieve the same goals.

  • Leo

    I’m going to stay away from bring up fees for now as we will find out soon enough whether PRPPs will truly be “low cost”.

    However, there are two things going for PRPPs that I want to point out.

    1. Provinces can pass legislation to make PRPPs mandatory for employers to offer if they don’t already offer another group plan. Quebec has already done so. If the rest of the provinces follow suit, then employer pension plans will become more accessible to Canadians.

    2. If employees are automatically enrolled, then at least we can have hope that more people will stay in (as they have to do nothing) then opt out (where in this case, they have to actually fill out paperwork).

    There are many flaws with the PRPP, but if #1 and #2 happen, then at least there will be more Canadians with at least some savings in their PRPPs when they retire…

  • Bill

    How did you determine the CPP’s MER? Just curious.

    I looked at their latest annual report (http://www.cppib.ca/files/PDF/CPPIB_ARsummary_2011.pdf) and I get wildly different numbers!

    Also, I am curious about how the CPP MER compares to the Sask. Pension Plan. SPP looks interesting even though the limits are much smaller. Your returns are not guaranteed but the payout is in the form of an annuity, like CPP. Seems like a reasonable idea, if the expenses are reasonable.

  • Preet

    http://arno.uvt.nl/show.cgi?fid=81991 – technical, but read the section “Possible explanations for the findings”

    Aslo:

    http://www.carp.ca/o/pdf/nova%20scotia%20pension%20submission%20-%20september%2017,%202010.pdf

    See page 10.

    The exact number was pulled from CARP’s paper. It varies year to year of course.