Building accountability into the PRPP framework

Greg Hurst | January 21, 2011

It has been a month since Canada’s finance ministers emerged from their Kananaskis, Alta. meeting and announced agreement on moving forward with the pooled registered pension plan (PRPP), and shelving Canada pension plan (CPP) expansion for now. Predictably, perhaps, the financial services industry has applauded the PRPP, while the labour movement have decried it as pandering to Bay Street.

In my column last month, Saskatchewan’s new pension plan-Canada’s first PRPP?, I hailed the PRPP as “very welcome” and noted the need to for provinces to establish mandatory requirements for employers to offer a pension plan. As the various finance ministers emerged from the Kananaskis meeting I was not disappointed when a number remarked on the need for a mandatory element in relation to the PRPP framework. This would most likely be in the form of a mandatory requirement for employers to offer or participate in a registered pension plan (which could be a PRPP) with automatic enrollment (subject to voluntary opt out) for employees.

It is no secret that I have been a somewhat vocal opponent of CPP expansion. However, notwithstanding that I have laid out a welcome mat for PRPPs. Like Canada’s labour movement, I have significant misgivings with the concept of simply turning PRPPs over to Bay Street. In a nutshell, Canada’s financial institutions have not been able to earn the trust of Canadians when it comes to their financial security in retirement, and I would question whether they can be effective as fiduciaries given the conflicts of interest embedded in their activities as profit-making enterprises.

Questionable practices
The Globe & Mail published a report last month that should be alarming to the public policymakers engaged in creating the architecture for PRPPs, particularly since life insurers are likely to be the dominant providers of such plans. The report, What your insurance broker doesn’t want you to know, first published December 21, outlines a number of questionable sales compensation practices in the insurance industry and the lack of disclosure concerning basic commissions as well as additional compensation and perks paid to brokers as incentives to favour one company over another. The practices described in the article are commonplace in the group retirement savings marketplace.

Earlier in December, the Association of Canadian Pension Management (ACPM) published Innovation in Pension Coverage: A Framework for Institutional DC Plans. In the paper, the ACPM bills itself as “the informed voice of Canadian pension plan sponsors, administrators and their allied service providers”. Since pension plan sponsors/administrators will have little need for the PRPP (unless the wish to abandon the plans they already sponsor), it would seem reasonable to assume the paper essentially represents the views of the service provider’s that are members of the ACPM (dominated by insurers).

Sadly, the paper provides no comfort whatsoever on the question of whether potential PRPP providers can be effective as fiduciaries—the word fiduciary is not even present in the document.

Instead, the ACPM recommends that providers operate PRPPs “in accordance with the Pension Judgment Rule,” the terms of the plan and a set of “internal governance by laws.” The Pension Judgment Rule is defined as “a standard requiring a plan provider to operate the institutional defined contribution (DC) plan in good faith, on an informed basis (including obtaining expert advice, where appropriate), in the interests of members, and with appropriate processes to address conflicts of interests.”

The ACPM paper also notes that “further protection of member benefits is afforded by the prudentially regulated nature of certain plan providers,” and where such is not the case an “independent review committee” established by the provider.

I feel in respect of segregated funds of life insurers (and unlike mutual funds) offered under group plans there is no prudential regulatory framework.

This is essentially the status quo for the most of the current DC marketplace, minus the fiduciary role played (at least nominally) by employer plan sponsors. Under PRPPs, participating employers will not have a fiduciary role, and thus no oversight requirement should questionable intermediary compensation practices continue to occur in the insurance marketplace. Indeed, such practices will be even less visible.

If PRPPs are to become a credible alternative to other solutions to the pension coverage problem (such as CPP expansion), in addition to the mandatory elements to ensure individuals have pension coverage, fiduciary accountability requirements together with strong independent oversight of PRPP providers will be required enhancements to the PRPP framework.