Pooled registered pension plans (PRPPs) will be attractive to employers that wish to shed the risks associated with the fiduciary obligations for employers that offer traditional retirement programs. The new draft PRPP regulations, released on August 13, further stack the deck in favour of employer abandonment of RPP sponsorship by baldly permitting employers to demand, or PRPP providers to offer, inducements to transfer membership and assets from traditional plans to a PRPP.
It seems extraordinary to me that the regulations would explicitly condone inducements. What are the federal government’s purposes for the permitted inducements? The specific provisions in the PRPP regulation are as follows:
Free toaster, anybody?
The first permissible inducement of providing “a product or a service on more favourable terms…” to the equal benefit of employees eligible to be members of the PRPP does not indicate that such products and/or services need be related to the PRPP itself. Perhaps it might be a free toaster. This “free toaster” inducement provision would seem to permit tied selling of other products and services of a PRPP provider or related party to an employee group.
There is no doubt that financial services providers will be keenly interested in opportunities to cross sell their products and services to PRPP members.
The second permissible inducement of recompensing employers for their costs incurred in relation to a transfer of assets is very broad. Although it reflects, to a degree, current practices in competition between providers of traditional retirement savings programs, the practical value of such inducements in the current environment is highly constrained by the potential for conflict with the employer`s fiduciary obligations to its employee plan members. The explicit permissibility provided by the regulation would seem to circumvent such constraints, and the broadness of the provision could easily cover all costs associated with winding up of an existing traditional program in favour of promoting asset transfers to a PRPP.
There can be no doubt that this will stimulate aggressive competition among PRPP providers as they eye the prizes of existing large asset pools of traditional programs, but it is unlikely that this provision will result in any meaningful benefit to PRPP members. In the long run, the added costs of such inducements to PRPP administrators will be somewhat offset by more rapid movement to economies of scale to support lower PRPP costs, but marketplace competition is more likely to continue to focus on enhancing inducements rather than passing lower costs on to PRPP members.
The asset-transfer inducement has no value for employers who do not currently offer retirement savings programs, so it cannot serve to promote an objective of expansion of pension coverage. For many employers that currently sponsor traditional plans, the incentives of the available inducements coupled with shedding fiduciary and administrative risk of traditional employer-sponsored plans will significantly favour abandonment of existing arrangements.
The availability of inducements to promote PRPPs may well prove to make them successful; however such will be at the cost of cannibalizing existing traditional programs without any assurances of effectiveness in expanding private sector pension coverage in the absence of requirements for mandatory pension coverage.
My final observation is that inducements might ultimately result in emasculation of the low cost plan provision of the regulation as the prized larger plans are swallowed into PRPPs, leaving the PRPPs themselves as the only benchmark with 500 or more members.
These are the views of the author and not necessarily those of Benefits Canada.