Joining the array of options available when it comes to retirement savings plans, pooled registered pension plans (PRPPs) are slowly being adopted across Canada. British Columbia, Saskatchewan, Nova Scotia and Quebec, along with federally regulated employers, have said yes to the new plans, with Ontario most recently joining the pack.
PRPPs are meant to be a low-cost option for workers without a pension plan, and the self-employed. In theory, members benefit from lower administration costs that result from participating in a large, pooled pension plan. In practice, however, it could take some convincing for both employers and employees to get on board.
As a concept, the PRPP sounds great, said Plamen Pletkov, vice-president for the Ontario branch of the Canadian Federation of Independent Business in Toronto.
“It offers some very significant advantages over some of the other tools we have right now — but there are so many additional influences right now that could really spell doom for the PRPP.”
Benefits of plan
The PRPP should be of particular interest to small and medium-sized businesses, he said. Most don’t have any sort of a pension plan because they can be expensive and burdensome to administer. The PRPP allows small employers to pool assets into a bigger plan, which reduces costs and
administration, said Pletkov.
“This is a group of groups, so to speak, where multiple employers with multiple employees are able to pull in/pool assets and, from an administration perspective, the financial institution generates economies of scale, so we do expect then that the management fees are going to be lower.”
The same drivers impact costs, said Ron Sanderson, director of policyholder taxation and pensions at the Canadian Life and Health Insurance Association in Toronto.
“It’s the cash flow and the asset base, and as any of these plans grow, the fees will come down, and I would expect that the impact on one type of plan will reflect the experience in another type. So because the assets are invested in the same types of investments in group RSPs and PRPPs, a reduction in PRPP fees will drive group RSPs down as well — there will be a level playing field between those two.”
The federal legislation being adopted by the provinces provides that costs must be at or below those incurred by members of a defined contribution plan that provides investment options to groups of 500 or more members, said James Fu, an associate at the Toronto office of Borden Ladner Gervais.
“It’s definitely a benefit for it to be low cost because, in terms of returns, every cost can have an effect on that return. So, that’s a good development.”
The other big advantage is there will be no payroll tax on PRPP contributions, unlike RSP contributions, said Pletkov.
“That allows the employer to either generate some savings or to be able to increase those contributions, so instead of paying payroll tax, everything goes into the contribution.”
Unlike traditional pension plans, there’s no requirement for an employer to contribute, and that’s a significant incentive to get into this kind of arrangement, said Sanderson.
“Arguably, the PRPP doesn’t provide any more incentive to those employers than a group RSP would. From a retirement income adequacy perspective, though, the fact that pension funds are locked in for retirement is a big plus, and certainly some employers actually think about that for their employees. They say, ‘Am I going to be on the hook if I don’t assist employees in developing retirement income adequacy?’ So I think that’s a positive step,” he said.
“Pensions are generally preferable from an employment law and regulatory perspective, but the right answer is probably a mix, in that consumers need to have some flexibility in their savings, as well as some guarantees in terms of retirement income.”
And there’s very little work required of an employer, he said.
“Typically, those employers already have group-term life benefits for their employees, they may have a group health plan. To the extent that those are paid for by the employees, it’s just an additional deduction and if it’s going to the same financial institution that’s providing the other benefits, it’s pretty seamless.”
It’s likely the enrolment process would be managed to a large extent by the financial institution, so it’s just a matter of making sure there’s a staff list and way to contact people, said Sanderson.
“It really is more sponsorship than anything, from the employer’s perspective.”
The PRPP is pretty much the responsibility of the administrator — a financial institution, said Fu.
“The employer has some obligations with respect to communications and disclosure, but it’s not as onerous in general compared to, for example, a pension plan… and other types of plans.”
Once set up, the new type of pension plan should be pretty straightforward in terms of payroll deductions. And the liability will be around the financial institution, said Pletkov.
“Small and medium-sized employers don’t have the expertise to offer a PRPP, so this way it will done by an expert, a financial institution, and this way hopefully it will provide more confidence that the money will be invested properly.”
Essentially, it’s a contract drafted by the insurance company, said Sanderson.
“Financial institutions, be they insurers or others, are the ones who are going to be responsible for the operation of the plan to make sure it does what it should.”
There’s a specific provision in the federal PRPP act that states an employer is not liable for the acts and omissions of the administrator, said Fu. Even in a group RSP or tax-free savings account (TFSA), unless the employer is signing on with a service provider that only has one investment option, the employer still has to pick investment options, so there are certain considerations and risks that come with that.
“Whereas in this case, with a PRPP, all the investment options, generally speaking, will be picked by the plan administrator,” he said.
“On the flipside, it may be seen by some employers as a challenge because they want to set their own investment options. So it’s a bit of a determination by the employer in terms of whether or not they would prefer to have the benefit of plan administrators selecting and, from that perspective, mitigate the risk from the employer having to select, or if they want to select on their own because they’ve determined that is the prudent course in their own circumstances.”
And offering a PRPP will help with attraction and retention of employees, said Pletkov.
“Obviously, if you’re able to offer some retirement savings plan, then chances are you’ll be able to attract more qualified employees.”
Employees may say this as a benefit they expect to find in an employer and if it’s not offered, they’ll look elsewhere, said Sanderson.
“There will some mass pressure for employers to get in the game.”
But there are some challenges to the new plans, said Pletkov.
“It’s a good concept but it does require the employer and employee to have the financial capacity to contribute. If you don’t have that extra money on your payroll or as an employee, if you’re not able to put aside money to PRPP contributions, then certainly it’s not going to take off. So the financial capacity is key.”
And the expected lower fees are based on volume, he said.
“Participation is key and obviously the more companies that participate, the larger the economies of scale being generated, and that would help to reduce the cost of running it, but also would perhaps help with investing it in better portfolios, so to speak. Sometimes when you invest a larger amount of money, you’re able to generate higher returns.”
The whole purpose of a PRPP is to pool a large group of people, said Mitch Frazer, a partner and chair of the pensions and employment practice at Torys in Toronto. But in talking to employers with existing pension funds, none of them are saying they plan to get rid of that and institute the PRPP.
“There’s nothing I read out there which says there’s this groundswell of takeup. I think if the government wants more people to do it, they’ll have to really advertise it, and find ways to incentivize employers to do that. You want to make sure there’s no liability whatsoever and you have to market it, and show people that it’s a good tool to attract employees,” he said.
Most employees would want a pension plan if it’s cheaper than a group RSP, and if fees are capped at a certain amount, said Frazer.
“But if you’re going to cap fees at a certain amount, then how many (financial institutions) are going to offer the product? There’s a bit of a balance there. You’ve basically got to get mass scale,” he said.
“If it was mandatory, and everyone put money in, boy... your fees would be really, really low because the size of the pool would be huge.”
The PRPP is also challenged by the development of alternative retirement plan designs over the past few years, said Fu. Some are mandatory (such as Quebec’s voluntary retirement savings plan or VRSP, which is mandatory for employers) and the now-defunct Ontario Retirement Pension Plan (ORPP), along with the planned expansion of the Canada Pension Plan (CPP).
“The question is: Is there going to be an appetite for employers to sign on to another optional type of retirement savings plan?” he said. “I’m of the view that the more types of these retirement savings plans that the federal and/or provincial governments set in place and offer as options to employers, it’s a good thing... But… there’s always a focus more on the mandatory obligations versus the optional (ones).”
With CPP rates going up in about three years or so, employers and employees will be asked to pay more, which means a more reduced capacity to contribute to a PRPP, said Pletkov.
But the CPP rate hike will take a few years to fully kick in, and it’s not a huge amount, said Frazer, adding it’s targeted at a different economic level.
“The groups who are benefiting from the CPP increase are not typically saving a lot of money for retirement, so people who are middle class to upper-middle class and they’re trying to maintain a lifestyle in retirement — that’s what I would think is your target market for PRPPs.”
A lot of employers were looking at the ORPP and CPP expansion and deciding to gather information, consider their options, and wait to see how things develop, said Sanderson.
“I’m not sure there are a lot of employers who were waiting with bated breath to jump in… so I think it will be a slow, gradual start.”
But the entry of a large market such as Ontario could help, he said.
“The larger those numbers are, the smaller the fees will be, so you really do need that significant scale in order to make the product commercially viable for people in B.C. and Saskatchewan or Nova Scotia. Even in those jurisdictions, they’ve been waiting, I think, to see if Ontario is going to get in the game.”
There has to be a framework, ideally, across the whole country to ensure that if an employee moves, she can take that PRPP with her or switch it to another PRPP in another province, said Pletkov.
“Most of the financial institutions operate across the country, so from an administrative perspective, it shouldn’t be problem, but if a province doesn’t have the legislative framework to allow for it, then that becomes an issue.”
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