CFN – Ottawa should rethink the tax rules for Pooled Registered Pension Plans (PRPPs) or they will not realize their potential to be a good pension savings vehicle for Canadians, according to a report released today by the C.D. Howe Institute. In “Pooled Registered Pension Plans: Pension Savior – or a New Tax on the Poor?” authors James Pierlot and Alex Laurin show that PRPPs should be avoided by many low- to mid-income Canadians, and also that they could be vastly improved by changes to proposed 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 2012, 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. Since most employers under federal pension legislation are already providing pension coverage to their employees, PRPPs were introduced in the expectation that provincial governments would follow the federal lead and adopt PRPPs for the vast majority of Canadian workers, who are under provincial jurisdiction.
But PRPPs represent only a mild improvement over existing options such as Registered Retirement Savings Plans (RRSPs) and defined-contribution (DC) pension plans. This is because tax rules for PRPPs – essentially identical to those that apply to RRSPs and similar to those for DC plans – will prevent many private-sector workers from saving enough for retirement and from receiving retirement income in the form of a life pension.
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.
Among the authors’ recommendations:
- 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 (DB) pension plans, but which are not available in RRSPs, DC plans and the proposed PRPPs;
- Lifetime accumulation limits should be introduced to help level the playing field with defined-benefit (DB) pension plans and to provide equal access to tax-free pension saving;
- PRPPs should be allowed to pay out retirement savings as lifetime pensions, which only DB plans are now allowed to do.