On Nov. 17, the Pooled Registered Pension Plan Act was tabled in the House of Commons. Its stated purpose “is to provide a legal framework for the establishment and administration of a type of pension plan that is accessible to employees and self-employed persons and that pools the funds in members’ accounts to achieve lower costs in relation to investment management and plan administration.”

One must wonder what happened to the purpose of increasing pension coverage for Canadian workers, particularly those in the private sector where less than 25% of workers have access to a pension plan. According to the report of one Conservative MP (Dan Albas, Okanagan-Coquihalla), “One of the major barriers in providing pension plans is the significant legal and administration costs that are very prohibitive for small business employers,” which is what the PRPP Act purports to address. However, in practical terms, this barrier only really applies to defined benefit pension plans, not defined contribution pension plans, where the largest part of the costs are borne by employees, not employers, in the fees charged to their accounts. From an employer’s perspective, the PRPP as it stands under the federal Act will have very little advantage compared to a group RRSP.

This begs the question of whether the PRPP Act provides any incentive for employers that do not currently provide their employees with access to a pension plan. Sadly, there are none. In fact, the lock-in rules and lack of requirements for employer contributions are likely to be negatively viewed by employees. This will far outweigh the slight cost disadvantage group RRSPs have for employers relating to payroll taxes (CPP and EI premiums), which apply to employer contributions to group RRSPs but not to PRPPs (or so it is expected).

Employers that currently offer DC plans may favour PRPPs over their current arrangements because they will be able to mostly abandon the governance and fiduciary roles they currently play. This does nothing, though, for the pension coverage problem, and may even serve to further weaken the workplace pension system.

The solution to the pension coverage problem is to make it mandatory for employers to provide access to a workplace pension plan, coupled with the PRPP (as envisioned under the PRPP framework) as an alternative to a traditional employer-sponsored registered plan. In the absence of such a mandatory requirement, it will be difficult for PRPP providers to obtain any significant cost reductions to achieve the stated purpose of the PRPP Act.

There are essentially three elements to the current cost structures of traditional retirement savings programs: investment costs, administration costs and sales costs. Investment costs are already pooled across the DC marketplace, and only marginal savings are likely to result from increasing or concentrating investment pools. Administration costs are relatively fixed for each individual account, and can only be diluted relative to assets by increasing the average assets per account (lock-in rules will be very helpful here), but will only work to the extent PRPPs are actually used. Sales cost, which account for 30% to 50% of current total costs of traditional DC arrangements accessible to small and medium-sized enterprises, are the area where real cost savings could be realized for PRPPs by a mandatory pension coverage requirement. Without a mandatory requirement, PRPPs must still be sold in a competitive marketplace, so little savings in sales costs are likely to result.

It is fair to note that any mandatory requirement for employers to provide access to a registered pension plan in the PRPP Act would only apply to federally regulated employers. Further, most such employers are large organizations that already offer pension plans, so the extent of the pension coverage problem is much lower in the federal sector. It will be crucially important for the provinces to adopt mandatory pension plan access requirements, and Quebec has already signalled they are prepared to do so. It is disappointing, though, that the federal government failed to lead by example by implementing mandatory pension coverage in the workplace.

Copyright © 2020 Transcontinental Media G.P. Originally published on benefitscanada.com

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V.C.:

It will be a while before PRPPs really kick-start.

Hopefully sooner than later, small and medium size businesses will actually offer the product to their employees. Then, hopefully, PRPPs will attract enough funds to make the pooling of assets worth something.

Canadians really have to stay optimistic on that one, but should not expect to make any retirement income anytime soon with a PRPP. Retirement savings build over a working career, so it is likely that PRPP will come much too late for the 75% of private sector workers that need it now. But maybe in 30-40 years from now, PRPPs will be a good asset to have.

Tuesday, November 29 at 8:42 am | Reply

Roto:

Not sure all the benefits considered. My DC plan requires registration with the province and annual fees in addition to fiduciary requirements, so a PRPP has significant advantages over a DC plan. If payroll taxes are not applied (as expected) this will encourage/enable ER contributions that otherwise would not exist. Payroll taxes are more than just EI and CPP. AS for the convenience of keeping the same PRPP from employer to employer also an advantage and individuals may roll their DB assets, their RRSPs into a single account which may result in the better management of such money.

As to fixing the problems I think the pension industry has a view it is the only place where individuals lack planning/savings, many have issues with daya to day living, reducing debt or saving for other purposes

Tuesday, November 29 at 2:23 pm | Reply

Greg Hurst:

The primary thrust of the article is that the PRPP Act does nothing to expand pension coverage. You make some good points, but switching from an existing DC plan to a PRPP does not improve pension coverage, nor would there be any impact relative to payroll taxes (there is only a gain here when compared to employer contributions to a group RRSP).

Tuesday, November 29 at 8:20 pm

Bob Meldrum:

The new PRPP is far from a perfect solution, but one feature that does make sense is the locking in provision. Greg Hurst thinks this is a drawback but it seems to me that one of the problems with current group rrsp’s is that the money far too often moves out of the plan, either for home buyers, life long learning, paying off the credit card etc. If Group RRSP’s and single RRSP’s had had a locking in feature at the outset , more people would have more money in their account for retirement. So while there are many shortcomings with the new PRPP, locking in the funds is a good idea , not a drawback.

Tuesday, November 29 at 2:46 pm | Reply

Greg Hurst:

To be clear, I only regard locking-in as a drawback from employees’ perspective. From a policy standpoint, I strongly support lock-in provisions. From a practical standpoint, though, employees will not accept locking-in unless there are also employer contributions to sweeten the pot, and even then many will choose against a locked-in plan.

Tuesday, November 29 at 8:17 pm

Charles Ward:

As a financial advisor for 43 years, it is always good to encourage government, along with financial and insurance companies, to be conscious of the need to assist working Canadians in saving for retirement. However, in to-day’s economic climate, many people simply are not able to commit to systematic contributions into a pension plan due to facing ever-increasing daily living costs. Further, many employers do not have the extra funds to contribute on behalf of their employees and a mandatory requirement could be cripppling to such employers. In my view, unless there is encouragement offered by paid company representatives/financial advisors to new and existing clients to take advantage of the the PRPP, assuming such a Plan is preferable to other options available for the consumer, success of the PRPP is questionable.

Friday, December 23 at 5:15 pm

John:

A brilliant core idea has been tarnished and sabotaged by the financial industry. They prevented maximizing help for millions of Canadians, it is actually kind of incredible.

If the goal was truly to expand pension coverage for the middle class and not to protect market share of the financial industry, the PRPP concept should have been administered by the Govt as a Vol attachment to CPP. The administrative structure and low costs are already in place.

Why do small and medium size business not have pension coverage? Has anyone bothered to ask this simple question honestly or is the ability of the pension industry as an arm of the financial industry incapable of such self-scrutiny?

Small and medium size business do not want to waste their time talking to the financial industry, they have businesses to run.

How do you make it simple for them and less time consuming? Add another option onto their current CPP deductions.

Voluntary CPP (PRPP) – Employer can choose to match or not to match their employees “voluntary” contributions. Locking-in is in place just like CPP etc etc. Even the smallest business already has payroll structures in place to contribute to CPP, you just give them another element.

Millions of middle class Canadian would certainly prefer this simple and far more cost effective option for them. Can anyone match the low management fees of the CPPIB?

In Canada of all countries you would think people would recognize that there are limits to what the free market can do in the greatest interest of society. Schools, roads, health care etc.

The erosion of middle class pensions has been going on for decades in Canada. The industry only jumped to attention when the first whisper of a Govt run PRPP was raised.

They care nothing of truly addressing the pension problem of the eroding the middle class in Canada only of protecting their market share and profit.

But that is the future isn’t it, we see it globally. Cannibalistic Capitalism and the two-tier society.

Canada should not be the United States and it is a shame that Canadians within the pension industry do not have the fortitude to publicly endorse the better option in this case – which is the PRPP as an extension of the existing CPP and under CPP legislation.

Wednesday, November 30 at 10:46 am | Reply

Greg Hurst:

John makes a number of really good points, as well as some I might argue but the argument would be more in the way of nitpicking than substance.

I have to say though that I believe many people in the pension industry have honestly advised policymakers in ways that reflect the public interest more than self interest. The core reason that governments have chosen to hand PRPP administration to the financial services industry is that governments have no appetite to fund the required infrastructure costs. The gun registry would seem to have much simpler administrative requirements than those for DC pension accounts, and it has been a massively costly boondoggle.

And yes, the industry has the potential to match or even beat CPP investment and administration costs (they do it already for many employer sponsored plans), but it remains to be seen whether PRPPs will offer the right conditions for such lower costs – they won’t (as I say in my article) without a mandatory requirement for employers to offer access to such plans.

Thursday, December 01 at 5:35 pm

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