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.