Monday, 16 January 2012

The New Pooled Registered Pension Plan

The pooled registered pension plan, or PRPP, is a new savings vehicle being introduced by the Canadian government. Here's what it might mean for you.

On November 17, 2011, the Canadian government introduced legislation that will give Canadians yet another way to save for retirement. The pooled registered pension plan (PRPP) will be targeted to people whose workplace doesn't offer pension plan options -- mostly small to medium-size businesses and the self-employed. While the details are still being worked out and may change, here are five things you should know about this new savings vehicle.

Why introduce the PRPP?
Many Canadians -- an estimated 3.5 million, mostly people who work for smaller companies that don't offer any employee retirement savings options -- don't have any sort of pension plan. The government wants to offer us yet another way to save for retirement.

How will the PRPP work?
If small to medium-size businesses use a PRPP, they'll automatically deduct an amount from employees' paycheques to put into this savings account. However, businesses won't have to top up funds through the PRPP program, and employees can opt out of participating, which leads some experts to question the value of the program as opposed to a simple RRSP.

Where does the PRPP money go?
PRPPs will be offered to small businesses by the usual financial suspects: banks, insurance operations, fund companies and, likely, anyone else who offers financial products. Money would be put into an account and then the institutions would invest that dough in the hopes that it will grow. Because it's the financial institutions doing the investing, some people say this will make PRPPs cheap and easy to set up. But that remains to be seen.

What will be the investment strategy?
That's still unclear, but since its retirement savings we're talking about, it's highly likely that plan administrators will invest the cash in balanced funds -- funds that typically hold 60 per cent equities and 40 per cent bonds. That lets people grow some of their money (via the stock portion) and protect against downturns (with bonds). Usually, financial institutions offer plan members (the company) and its employees an array of options related to risk tolerance.

What are the drawbacks to the PRPP?
Many experts say this is nothing more than a glorified RRSP and that if people don't have a registered account now -- and many don't -- then they won't suddenly start using a PRPP. Another option for the government to look at was increasing employee contributions to the Canadian Pension Plan, which people can't opt out of, but they chose instead to give business owners the option to help their staff save via top-ups.

It's still too early to say exactly what the PRPP will look like, or if anyone will buy in, but having more savings options is never a bad thing. Depending on the uptake, smaller companies could offer this as an extra incentive to prospective employees. At the very least, those who do use it will, hopefully, have a larger nest egg come retirement time.

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