Dear readers: Your humble scribe has been producing content on what is being called an imminent pension crisis, for the the Alliance for Retirement Income Adequacy (ARIA), a site designed to foster an informed discussion about retirement issues. It has been quite an education, and I thought I’d share the stories with you. A category has been created, ‘Not so golden years,’ where this content will be archived.
“Uniform lifetime accumulation limits make sense for middle- and upper-middle income workers who save in RRSPs, group RRSPs, DC plans and PRPPs because under current contribution limits, you can’t hope to accumulate a decent pension, particularly if you start late.” – James Pierlot
By John Devine
An oft-heard criticism of the federal government’s Pooled Registered Pension Plan (PRPP) is that it isn’t a pension plan at all. Rather, it’s another capital-accumulation vehicle much like DC plans and RRSPs.
There’s a good reason for that, says James Pierlot, a pension specialist and founder of Pierlot Pension Law. Indeed, as currently constituted, he says the federal plan won’t achieve its stated goals: namely, to provide a viable pension-saving option for low- and middle-income Canadians not enrolled in occupational pension plans.
“The PRPP isn’t a pension plan because it doesn’t allow you to fund towards a target pension, nor will it pay a pension when you retire. So why is it called a pension plan?”
Pierlot, a member of the C.D. Howe Institute Pension Policy Council, has written extensively on pension and retirement issues. An August paper he co-wrote with a C.D. Howe Institute economist panned PRPPs as RRSPs with a new coat of paint.
In its current form, PRPPs could actually prove to be detrimental to the target group the federal government has identified: modest- and middle-income workers without pension coverage, he adds.
“If indeed that is who will be saving in PRPPs, many will be worse off, because the PRPP savings they withdraw in retirement will reduce income-tested benefits such as the Guaranteed Income Supplement (GIS), which is clawed back at a rate of 50 cents for every dollar of taxable pension income – including CPP income.”
He says that with a few changes, PRPPs could help their target membership, by allowing members to fund towards a target benefit – as happens in defined-benefit pension plans, allowing tax-free saving within PRPPs so that low- and middle-income workers can save for retirement without losing the GIS and other income-tested benefits, and allowing PRPPs to pay lifetime pension incomes. Pierlot believes that PRPP members should be allowed to accumulate the same pensions as are found in DB pension plans.
As a preferred solution, the C.D. Howe report also recommends that lifetime accumulation limits for retirement saving be implemented, with a limit of $2 million for tax-deferred PRPP saving and $250,000 for tax-free PRPP saving. The limits would apply to savings in all plans – DB and DC pension plans, RRSPs, TFSAs and PRPPs.
“Uniform lifetime accumulation limits make sense for middle- and upper-middle income workers who save in RRSPs, group RRSPs, DC plans and PRPPs because under current contribution limits, you can’t hope to accumulate a decent pension, particularly if you start late.”
For these workers, a lifetime accumulation limit would level the playing field with career members of DB pension plans, who often enjoy tax-deferred saving room of up to five times as much as those who save in other plans, explains Pierlot, because contributions permitted to DB plans are unlimited up to the extent required to fund retirement benefits.
“We have a two-tier system where one set of workers can effectively contribute very large amounts to their plans and fund pensions that are worth $1 to $2 million at retirement … and then you have a second class of workers who can’t hope to accumulate even half of those amounts because their contribution room is limited.”
An accumulation limit of $2 million of for tax-deferred saving was suggested (in a 2011 paper), he adds, because that’s the approximate value of the pension the tax-deferred system allows currently for DB plan members.
“Most people in the workforce would not accumulate $2 million; some might get to $1 million, others to $500,000. But just like having too much RRSP room doesn’t do any harm, having too much accumulation room won’t hurt either.”
The contribution ceiling now found in RRSPs not only prevents Canadians from funding towards a target benefit, it doesn’t allow them to catch up when savings take a hit during market downturns, says Pierlot.
“If you go through a market downturn such as 2008 where many people lost as much as 30 per cent of their savings, you get no room to catch up in an RRSP or a DC or a PRPP. But in a DB plan, the tax rules give that 30 per cent back to you in contribution room – so you are able to catch up.”
The C.D. Howe report’s suggested accumulation limit for tax-free pension saving – $250,000 – is intended to allow lower- and middle-income workers to save effectively for retirement, while limiting tax-avoidance opportunities for higher-income workers.
The reality of one group of workers being able to fund towards a secure, target benefit, while the other can’t is a significant societal problem, says Pierlot, one that will only be solved by changing the tax rules governing savings plans. Apparently, that’s easier said than done. Pension tax rules first appeared in 1917, and it wasn’t until 1965 that pension standards evolved, first in Ontario and then in other jurisdictions.
“Anything you want to do in terms of pension innovation must flow from the tax rules. How can you build a target benefit plan in the private sector if the tax rules do not allow employee contributions to fund a target pension? Right now, only an employer can, subject to very limited exceptions, and increasingly employers do not want to take that risk.
“If tax rules continue to allow DB pension plan members much more contribution room than people get in RRSPs, and PRPP contribution are subject to RRSP limits, it’s hard to see how PRPPs could make any difference to the people who need them.”
And, he adds, a meaningful solution can’t be based on a ‘race to the bottom’ and needs to recognize the value of Canada’s large DB pension plans.
“The question is how can we bring people up, not bring people down? The worst thing we could possibly do is to dismantle the public pension systems we have in Canada. They are among the best in the world, with all-in operating costs for investment management, administration, employee communications, etc., between .35 and .7 per cent of assets. Few plans in the private sector can match that.”
The way ahead, he says, to providing more Canadians a secure, dignified retirement is by creating new pension vehicles to increase Canadians’ flexibility to save in the way that makes sense for them – increasing their saving room, and allowing them to contribute towards predictable, target pension benefits.
“Why don’t the rules allow me to contribute my own money to buy a target pension in a fund where my money is professionally managed on a non-profit basis, is well governed and everyone is paid to act in my interest?”
John Devine writes for the Alliance for Retirement Income Adequacy. Read the ARIA blog at ariapensions.ca, and follow ARIA on Twitter.