PRPPs take another step forwardPosted: June 20, 2012
The recent passage of Bill C-25 or the Pooled Registered Pension Plans Act brings PRPPs one step closer to becoming another option for retirement savings. But there are still significant hurdles to clear, says Douglas Nelson, Winnipeg financial planner and author of Master your Retirement, and numerous variables to consider before their value as a planning tool can be assessed.
"It is difficult to know exactly how PRPPs fit into the range of retirement options,î adds Nelson, "until we see an actual product with real pricing.î
Envisioned as a low-cost retirement savings option for Canadians who do not have access to workplace pension plans, PRPPs will pool employee and employer contributions under the administration of a qualified third party. These licensed administrators will be subject to a fiduciary standard of care, explains the federal government, ensuring that funds are invested in the best interests of plan members.
"Since these plans will involve large pooled funds, plan members will also benefit from lower investment-management costs,î said Minister of State (Finance) Ted Menzies in a press release.
The Act now proceeds to the Senate for approval. Then, it will be up to provincial governments to enact enabling legislation based on the federal framework. After that, licensed administrators ó probably financial institutions and investment counselors ó will launch PRPPs.
As Nelson points out, there are numerous unknown variables that will become clear as the process develops. There are a number of things for which Nelson, who is a Real Wealth Managementô specialist in retirement and business succession planning, will be watching:
ï Costs. Many pension options for mid-sized to large companies charge annual fees around 1%, vs. 2.5% for a mutual fund. Will fees for PRPPs be closer to 2.5% ó or 1%?
ï Employer contributions. PRPPs will be available to employees with or without a participating employer. If employer contributions to PRPPs are optional, are small business owners likely to opt out? If so, what impact does this have on an employee whose employer does make contributions? Also, with many large pension plans today, employers have underfunded their contributions; what happens if employer contributions to PRPPs are underfunded?
ï Taxation. PRPPs will allow for greater income splitting at an earlier age, but what happens if the pension payout amount is less than a retiree would have received from a group RRSP? The pensioner would probably transfer his or her money to another income option, so as to have more control. Then the pensioner would be back where he or she started ó with income from a life income fund (LIF) that can't be split prior to age 65.
ï Survivor benefits. Will PRPPs have better-than-average survivor benefits for the surviving spouse and heirs?
"It will be interesting to see what happens to other product offerings,î says Nelson. "Will the pricing for group RRSPs decline so they are more competitive, allowing a small-business owner to offer a lower-cost group RRSP, in which employees choose where to invest their money?î