Pains of a small pension plan

Statistics Canada reported in its Pension Plans in Canada survey that, in 2006, just under 220,000 Canadians were members of small registered pension plans (plans with fewer than 100 members). This compares to large registered pension plans, each with 1,000 or more members, totalling more than 4.4 million members in Canada. In the 15 years leading up to 2006, the number of small plans decreased by 50,000 members, despite the overall increase in plan membership.

This decrease in membership comes as no surprise. While plans of all sizes in Canada face challenges in their daily administration, plan governance and funding requirements, the size of small plans undoubtedly magnifies these challenges and may have contributed to their decline.

Bigger Picture
One thing that small plans have in common with large plans is the move toward membership in DC pension plans from DB pension plans. The percentage of members in small DC plans increased to 72.5% in 2006, from 54.4% in 1991. For the same years, membership in large DC plans, relative to large DB plans, increased to close to 10%, from 3.7%.

Day-to-day issues
Staying on top of plan administration involves many daily tasks, from managing member data to responding to requests for information, to dealing with challenging life events such as death and divorce. Plan administration involves a constant commitment from dedicated professionals—a resource that may be less readily available to a small plan administrator.

From a governance perspective, minimum pension standards legislation imposes on plan administrators increasingly onerous requirements, such as the CAPSA Pension Plan Governance Guidelines, which set out a one-size-fits-all framework for good governance but often fail to consider the constraints faced by small plans. Whereas regular meetings may be delegated among a number of individuals by larger plan sponsors, small plans tend to have only one or two persons responsible for meeting with actuaries, for example, at regular intervals.

In addition, funding requirements, which have constrained many plan sponsors over the past two years, may handcuff small plans more than their larger counterparts. Large plans may be able to access greater funds internally or by leveraging well-established networks. Small plans are less likely to have this flexibility.

The secret of success
While small plans may face additional pressures due to their size and, by implication, their more limited resources, there remain opportunities for small plans to be successful. A small plan sponsor may have the ability to communicate with members more directly through face-to-face meetings. It may also be better able to design a plan that is suited to its particular workforce. For example, a small plan sponsor may decide to offer immediate eligibility and/or vesting where it knows that its workforce has a low turnover rate.

As an alternative to a pension plan, small companies can offer a group RRSP. While group RRSPs have been available for many years, industry leaders are beginning to offer them designed especially for small employers that want access to the same services offered to large plans but at a competitive cost. Additionally, the pooled registered pension plan (PRPP), announced last December, will eventually become a retirement savings option available to small employers. While the formalities of establishing and maintaining a PRPP remain to be seen, this new retirement savings vehicle is designed to address concerns over accessibility and coverage and may benefit Canadians without access to an employer-sponsored pension, including the self-employed. PRPPs may also benefit those small plan sponsors that currently sponsor a plan but are interested in making another pension option available without the burdens of full sponsorship.

While there has been a decrease in membership of small plans, perhaps some of the new retirement savings vehicles will be seen as a welcome addition for small employers.

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Elizabeth Brown is a partner and head of the pension and benefits practice group at Hicks Morley. Susie Taing is an associate in the pension and benefits practice group.