Pension solution or illusion?

In November, the federal government introduced legislation intended to make saving for retirement easier for millions of Canadians. The new Pooled Registered Pension Plan (PRPP) was created in response to concerns that dwindling savings rates and the elimination of many employer pension plans will result in future retirees subsisting on Kraft Dinner and instant noodles.

With PRPPs, small businesses will be able offer employees a retirement savings vehicle, but the administrative and legal burdens will fall on the financial institution running the plan.

But even though PRPPs have many features that are considered hallmarks of an effective savings plan— automatic enrollment of employees, automatic saving from paycheques, and the use of low-fee investments—the reaction to the new plan from retirement experts has been decidedly cool. “It’s way too early to celebrate the success of the PRPP,” says Malcolm Hamilton, a partner with Mercer.

One of the biggest problems, according to Fred Vettese, chief actuary at Morneau Sobeco, is the fact that the federal government isn’t forcing businesses without existing pension programs to offer the plan. “If it’s going to have an impact, it needs to be mandatory for employers,” he says.

However, the auto-enrollment of employees is also a concern, because low-income workers are generally better off saving in TFSAs so they won’t face clawbacks in government benefits in retirement. PRPPs are a good solution for middle-income employees who aren’t currently saving regularly by means of low-fee investments—provided that their employers offer the plans.

If PRPPs are truly going to help Canadians save, the provinces need to go further when they roll out their own legislation for the plans. Employers should be forced to offer PRPPs—a route that Quebec already says it will take. However, employees should only be automatically enrolled if they’re making a middle-class income or more. This will go a long way in creating a retirement plan that will genuinely help Canadians build wealth throughout their lifetimes.