While several provinces were hoping for an announcement about changes to the Canada Pension Plan, the federal government took a different route in late December by introducing pooled registered pension plans (PRPPs) to help address the country’s retirement income dilemma.
This type of plan will “provide Canadians with a new, low-cost, accessible vehicle to meet their retirement objectives,” said the government, and also be more attractive for employers, particularly smaller ones, because a third-party administrator would take on most of the responsibilities (such as management of the pension fund, day-to-day administration and offering appropriate investment options).
“Most, if not all, of the heavy lifting in terms of administration will be done by the service provider. So, right out of the gate, that will be very beneficial for a lot of employers who haven’t considered putting a plan in place to date,” said Bill Kyle, executive vice-president of wealth management at Great-West Life.
The role of the employer will be limited to selecting the appropriate plan and service provider and determining employees’ contributions. This should effectively promote the growth of PRPPs, said Mark Newton, a partner in the pensions and benefits group at Heenan Blaikie in Toronto.
However, the PRPP could also cause some upheaval for employers that already have plans set up, he said.
“They will have a fiduciary duty now to look at this new vehicle to see if it’s even better for employees, with the pooling, for instance, and lower investment fees — almost certainly this PRPP will potentially be a better vehicle for employees.”
But employers that currently provide pension plans do so for a competitive advantage, so the PRPP is probably not the right vehicle to offer, said Christopher Brown, president of the Association of Canadian Pension Management (ACPM) in Calgary.
“(These employers will) want to maintain control over the design of their plan and the investment options.”
The PRPP isn’t a one-size-fits-all solution, he said, citing the ACPM’s five-point plan to improve retirement-income coverage in Canada, which advocates the continued maintenance and creation of defined benefit plans, greater innovation, simpler administration and increased incentives.
“It’s one important piece of a broader set of solutions to the pension dilemma facing the country,” said Brown.
Finance Minister Jim Flaherty’s proposal is no replacement for real retirement income reform and expansion of the Canada Pension Plan (CPP), according to Gil McGowan, president of the Alberta Federation of Labour. PRPPs are “nothing more than glorified group RRSPs” which have already proven to be a failure in addressing the looming crisis in retirement income, he said.
Unlike CPP, these pooled pensions will not provide a guaranteed benefit and employer contributions will not be mandatory, he said. PRPPs would also be managed by financial institutions that charge high fees and with no limit on the number of pooled funds, they would undermine the economies of scale you’d have from CPP, he said.
“There’s no guarantee the fees will be low — there’s not even named targets for what the fees will be.”
But because the proposed PRPP will be a large-scale pooled plan, it’s expected investment fees or management expense ratios will be lower, said Newton.
“Right now, if you are a large employer setting up a defined contribution pension plan, you’d definitely have room to negotiate much lower fees than are available in the retail marketplace. And if you’re a smaller employer, you simply do not have that bargaining power.”
However, there are challenges when it comes to Canada’s landscape, said Brown.
“It’ll be important that the rules around these vehicles be developed on a pan-Canadian basis because, obviously, the most critical component to keeping fees low is economies of scale. So if we have one province adopting these plans, another one dragging their heels and not doing it, well then it becomes hard for the providers of these plans to operate on a multi-jurisdictional basis.”
The government said the financial institution will assume fiduciary responsibilities toward plan members and be required to act in their best interests, said Newton. So an employer simply signs up and the financial institution does much of the legwork behind the scenes.
“The thrust of it seems to be to cut back on the headache that’s involved on behalf of an employer in setting up a plan,” he said. “(Continuously monitoring investment vehicles is) time-consuming, it’s something that smaller employers really don’t have the time or expertise to look after.”
It’ll be interesting to see, as the details of the plan are worked out, how employer liability is dealt with, said Kyle. If the government wants to increase the coverage and availability of plans, it’s critical the employer be incented to do that.
“Removing some of the administrative burden is a great step, but anything to eliminate any potential liability down the road would also be a welcome feature,” he said.
But with the growing number of savings options — such as tax-free savings accounts or group RSPs — there may also be some confusion among employees so it’s critical organizations communicate effectively around this new vehicle, said Kyle.
Employers would determine the level of contributions at the employee level and, if applicable, the employer level. Employers will also have the ability to increase a worker’s default contribution rate along with salary, “potentially subject to the employee’s ability to opt out,” said the government.
“Employers may be permitted to enrol their employees into a PRPP during the tenure of the employee’s employment and not simply at the hiring stage. This may be accompanied with a provision allowing these employees to opt out shortly after being enrolled.”
It appears the federal government prefers mandatory participation with an opt-out feature, said Newton, and each jurisdiction will determine whether it wants to require employer participation.
But this is another flaw of PRPPs, said McGowan
“Auto-enrolment is not the same thing as mandatory participation and it’s no replacement for that.”
There are still many details that need to be fleshed out, said Brown.
“The whole concept of mandatory or auto-enrolment with opt-out has a lot of validity to it because you create a situation where you kind of use behavioural science for people’s benefit.”
As for when the PRPP will be available, that depends on the federal government and the provinces.
“History tells us the provinces will want to bring their own flavour to this new plan type. I would imagine that will happen, as much as ideally a uniform approach would make things more simple,” said Kyle.
There are no particular impediments to the PRPP being brought in quickly, said Brown, though income tax will have to be tweaked as well. But the government has agreed this is a priority so if everything falls into place, we could see PRPPs within one year, he said.
The federal government is firmly focused on the PRPP and once that is put in place, the next step would be to revisit the CPP, said Newton.
“But they’re looking at a modest increase as opposed to some of the recommendations by labour groups, to expand by 50 per cent or more. That is simply not going to happen.”
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