Pooled pensions proposal needs major changes, think-tank says
Tax changes needed to make PRPPs worthwhile for most workers, C.D. Howe says
The C.D. Howe Institute is calling for significant changes to Ottawa's proposed new pension system, dismissing it as a re-release of the existing RRSP shelter "with a new coat of paint."
In fact, a new study by the Toronto think-tank released Thursday says that Pooled Registered Pension Plans as currently designed should be avoided by many low- and middle-income Canadians.
However, the report, entitled Pooled Registered Pension Plans: Pension Savior — or a New Tax on the Poor? says PRPPs could be vastly improved by changes to tax rules.
"As currently proposed, PRPPs present only the appearance of reform because they are for the most part a re-release of an existing retirement savings vehicle — RRSPs with a new coat of paint," said James Pierlot, a pension specialist and member of the Pension Policy Council of the C.D. Howe Institute.
Introduced for federally regulated employees in June, PRPPs are intended to improve pension coverage and retirement-saving outcomes by reducing costs and improving investment returns through asset pooling and third-party administration.
But since most employers under federal pension legislation are already providing pension coverage to their employees, the expectation was that most provincial governments would follow the federal lead and adopt PRPPs for the vast majority of Canadian workers, who are under provincial jurisdiction. So far that has not been the case.
Minister of State for Finance Ted Menzies defended PRPPs as a new tool to help Canadians save differently.
"That's why our government introduced the TFSA — the most successful savings tool since the RRSP. We are now expanding the retirement savings system with PRPPs," he said in a statement Thursday.
"Taken together, these products are providing more savings options for more Canadians than ever before."
Workers urged to avoid proposed plan
But the Howe Institute study says PRPPs represent only a mild improvement over existing options such as RRSP and defined-contribution pension plans because tax rules for all three are essentially similar.
As a result, that will prevent many private-sector workers from saving enough for retirement and from receiving retirement income in the form of a life pension, the Howe Institute says in a release.
"Worst of all, as the authors show, PRPPs should be avoided entirely by many low- to middle-income workers, who will face taxes and government-benefit clawbacks on PRPP retirement benefits at rates that are significantly higher than the refundable rates that apply to contributions," it says.
Among the recommendations by authors James Pierlot, a principal at Pierlot Pension Law, and Alexandre Laurin, associate director of Research, at the C.D. Howe Institute:
- PRPPs should allow tax-free accumulations — possibly in new tax-free pension accounts — so that low- and middle-income workers do not face punitive effective tax rates when they retire.
- PRPP members should have the option of accumulating self-funded, target pension benefits under the same rules that apply to the federal government's workers and to members of other defined-benefit pension plans, but which are not available in RRSPs, defined contribution plans and the proposed PRPPs.
- Lifetime accumulation limits should be introduced to help level the playing field with defined-benefit pension plans and to provide equal access to tax-free pension saving.
- PRPPs should also be allowed to pay out retirement savings as lifetime pensions, which only defined benefit plans are now allowed to do.