The jury is out on PRPPs

Employer contributions are optional for emerging pension alternative.

Deanne Gage 6 March, 2015 | 6:00PM

The field is crowded with possibilities for retirement savings. There's your employer's defined-contribution pension plan, assuming you have one. There's the registered retirement savings plan and tax-free savings account.

Now, a new savings and investment alternative is emerging: the pooled registered pension plan (PRPP), and in Quebec, the voluntary retirement savings plan (VRSP).

PRPPs will be managed by financial institutions that are licensed to administer these plans. You could be enrolled by your employer, if your employer chooses to participate. Alternatively, employees can approach a PRPP administrator directly. In this case, self-employed individuals can also join a PRPP.

A PRPP has many similarities to a defined-contribution (DC) plan. As its name implies, a PRPP "pools" together the funds of employees. The pooled funds are invested and employee contributions can be deducted automatically from an employee's paycheque.

But unlike with a traditional DC plan, employers who participate in a PRPP are not required to make contributions. Some may choose to do so, as a way to attract and retain participants.

The fact that it's not mandatory for employers to contribute anything will be a sticking point for employees who have many choices for their retirement dollars. But for those who are simply intrigued with a pension plan that's professionally managed, the PRPP could be a viable option once it's implemented.

Legislation concerning federally regulated PRPPs passed in October, enabling PRPPs to be offered in workplaces under federal jurisdiction (such as banks), and in the three territories. But provincial legislation and regulations still have to be finalized.

So far among the provinces, only Alberta and Saskatchewan are on board, and British Columbia is pending. While Ontario hasn't said no to PRPPs, it has expressed more interest in tabling its own Ontario Retirement Pension Plan, which the provincial government says will be an enhancement to the Canada Pension Plan.

Each province will decide the minimum number of employees needed for participation in a PRPP. But generally, all full-time employees will be eligible to participate, while part-time employees must have been working for the employer for a minimum of two years.

PRPP contributions are locked in. If employees leave their job, they can transfer their PRPP contributions to another locked-in account or a registered pension plan, or use the assets to buy an annuity.

While PRPPs will be optional for employers to set up, VRSPs will become mandatory, starting in 2016, for Quebec employers who don't offer a pension plan and have an eligible amount of employees . VRSPs will be completely phased in by 2018.

The PRPP/VRSP concept dates back to late 2008 when markets fell by as much as 40% and governments started debating retirement and pension issues. There was a gap for people who didn't have a pension plan or other savings plans in place, says Evelyn Jacks, president of The Knowledge Bureau in Winnipeg.

PRPPs will be administered by the financial institutions and insurance companies that already manage products like group RRSPs. "They already have the structure in place to be able to adapt and provide a PRPP," says Doug Carroll, vice-president of tax and estate planning at Invesco Canada Ltd.

If employers opt to launch a PRPP at the workplace, they will have three main requirements. First, they must set up a PRPP through a licensed administrator. (Manulife, Sun Life, Great-West Life, Standard Life and Industrial Alliance are licensed to sell PRPPs in Canada.) Employers will then need to enroll employees and set up deductions and remittances through their payroll systems.

Compared to group RRSPs, there will be some disadvantages for PRPP members. Even if their employers participate, they don't have to fork over funds for CPP and employment-insurance premiums with their PRPP contributions. Nor are employers responsible for investment decisions and plan performance.

Employees would be automatically enrolled in PRPPs in which employers participate, and would have 60 days to opt out if they didn't want to join the plan, Carroll notes. For those who chose to stay in the program, the PRPP administrator would determine an automatic percentage of the employee's pay to deduct for the PRPP. "You as the employee can reduce that amount if you want to."

Another requirement of PRPPs is that all investments must be offered at a low cost to employees, which means below the costs of a standard defined-contribution pension plan, Carroll says. Accordingly, low cost will limit the number of investment options that a plan sponsor is willing to offer. "So you'll see balanced funds and target-date funds offered under a PRPP," Carroll predicts.

About Author

Deanne Gage

Deanne Gage  Deanne Gage is a Toronto-based writer who has specialized in personal-finance issues since 1999. A recipient of several journalism awards, including one from the Investment Funds Institute of Canada, she is also a former editor of Advisor's Edge and Advisor.ca. She can be reached at deannegage@gmail.com.