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5 reasons PRPPs may not solve the pension crisis

Posted by on Nov 20, 2011 in Retirement | 0 comments

  Nov 18, 2011 – 12:04 PM ET | Last Updated: Nov 18, 2011 4:16 PM ET

Independent financial commentator Gail Bebee — author of No Hype: The Straight Goods on Investing Your Money — has listed 5 reasons why she thinks the new Pooled Registered Pension Plans (RPPs) won’t be the panacea for the pending pension crisis. The comments below each point are my own.

1.     Employers are not required to offer this, or any other, employer-sponsored pension plan.

This statement may or may not prove to be true. At this point, the federal legislation (Bill C-25) does not make PRPPs mandatory for employers to provide. But as I pointed out Thursday, this is not the federal government’s call. It’s up to the provinces and one hopes that the provinces will make it mandatory to offer at least some kind of workplace pension: if not a PRPP then the already existing Group RRSPs or Defined Contribution RPPs (or for that matter, and better yet, old-fashioned Defined Benefit RPPs).  Quebec is going down this path with its Voluntary Retirement Savings Plans. The voluntary refers only to the fact individuals can choose to opt out.

Vancouver pension consultant Greg Hurst sums the situation up nicely:

The government has decided not to take the opportunity to exhibit leadership to make it mandatory for federally-regulated employers to offer a pension or retirement savings plan to employees. This is disappointing, as it will make it more difficult to achieve lower costs – PRPPs will have to be sold in a competitive marketplace  and economies of scale will be more difficult to achieve. Hopefully, the provinces will bring in mandatory employer offering requirements.

2.     Employees will be able to opt out at will.

Probably right, unless some provinces find a way of compelling workers to join. Even if employers are required to offer some kind of workplace pension, letting workers opt out will severely undermine the program. You end up in the same place as underutilized RRSPs. According to a Department of Finance backgrounder, participation in RRSPs peaked at 45% of the labour force in 1997 before levelling off to 39% in 2008.

This is one strength of the Canada Pension Plan and Liberal and NDP proposals to enhance the CPP: full-time workers have no choice but to contribute and cannot choose to opt out. However, the Liberal proposal is for a voluntary supplementary CPP, which reintroduces the problem of opting out. The “tough love” approach arguably saves workers from themselves. Time and again, it’s been shown that forced savings programs are more effective — even if you’ve borrowed to invest and are in effect forced to repay the investment loan. The Harper government has not ruled out CPP expansion but has never said it would entertain more than a “modest” expansion, never explaining how much “modest” means. Remember too, that CPP is a DB-style plan, not DC in nature like PRPPs, DC-RPPs and indeed RRSPs.

3.     The financial industry, the same folks who charge Canadians some of the highest mutual fund fees in the world, will be managing the pension funds and will have a major say on the fees charged to do so.  

This argument has been made by the Liberal party and is a possible concern. Too many high-fee players undermined Australia’s superannuation program, the equivalent of the PRPP. Ottawa keeps referring to the economies of scale and lower investment management costs that “pooling” of assets will facilitate. Certainly, if the financial industry that has welcomed PRPPs goes down the active management route, then high or at least medium costs are possible. Even the DB pension industry has shown a marked preference for active management.

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