Canadian DC plans are still at the early development stage: other than the CAP Guidelines there is little specific legislation or jurisprudence to assist sponsors or administrators in overseeing DC plans. The federal government’s Pooled Registered Pension Plan (PRPP) is a type of DC plan but it is not clear how or if the CAP Guidelines will apply. This adds to the debate and uncertainty regarding the purpose and shortcomings of PRPPs.
The PRPP Act and regulations presented an opportunity for the federal government to provide legislation which would address a number of grey areas and set a precedent for CAPs and provincial PRPPs. Unfortunately the federal legislation and regulations avoid contentious issues and are ambiguous in key areas. The result – more questions than answers!
Provincial PRPP legislation however still presents an opportunity to address many of these issues and advance the evolution of CAPs and PRPPs.
For sponsors with existing DC or other CAPs the opportunity to transfer their fiduciary roles and responsibilities and the potential legal and financial risk to a third-party administrator should be appealing. The question is – would this be in the best interests of the members?1
Part 1 of this three-part article will deal with the obvious issue of conflict of interest. In Part 2 a relatively simple way to minimize areas of potential conflicts of interest will be discussed. In Part 3 fees, communication and education requirements will be covered.
Conflicts of Interest
The potential for conflicts of interests in PRPPs should be a huge concern. Conflicts could take the form of administrators (employees of the financial institutions) selecting suboptimal or new proprietary investment and default funds, use of higher cost products, ‘tailoring” of communication and education, promotion or locking members into certain types products, or, extensive use of related parties (e.g. advisors) and services of a financial institution.2 The Act and regulations address some of these areas but do not address many key issues.
Accountability is limited in the Act and regulations – resulting in poor governance. For example it appears that the oversight of a PRPP is primarily the responsibility of the financial institution providing the PRPP. There is no requirement for independent boards or a governing body. The PRPP administrator has sole discretion in selecting the investment funds. Performance and benchmarking criteria, which are important in assessing service provider performance, are not prescribed. There is no direction on whether a sponsor should or can intercede on behalf of members: at this point the sponsor simply collects contributions for the administrator. The administrator also has total discretion in terms of setting and changing contribution rates.3 Would it not be more appropriate for the sponsor and or member to have some say in this? What are the checks and balances?
Even the simplest form of accountability (i.e. a member leaving a PRPP if dissatisfied), is stymied: members only have one, initial, opportunity to withdraw funds from a PRPP account.4 If there is a problem, a sponsor could change PRPP providers but this is not without cost and risks (particularly if Target Date Funds (TDFs) have been included as Investment Options). A further impediment to changing a PRPP is the requirement that the sponsor must bear the cost of transferring assets from one PRPP to another.5
Inconsistencies undermine credibility and create confusion: under the Act an administrator must not offer an employer an ‘inducement” to have a PRPP while this allowed under the regulations.6 Under the Act the employer is not responsible for the “acts or omissions of the administrator” which leads one to question – Who oversees the PRPP administrator?7 Can the Financial Consumer Agency of Canada (FCAC) or OSFI for example be expected to do this effectively? Profit-driven administrators and sponsors with little accountability together are a recipe for future problems.
A 2011 study undertaken by Blackrock found that 52% of employees felt DC sponsors weren’t helpful in safeguarding assets after retirement. With the sponsor now once removed from the PRPP pension program will PRPP members feel any differently – what’s their recourse?8
The regulations are the responsibility of the Governor in Council, which acts on the advice of the Federal Cabinet. Political agendas and lobbying, by profit-oriented financial institutes with deep pockets could easily result in conflicts with the needs of PRPP members. As was the case with DC plans with time, a few court cases and CAPSA involvement, a whole new level of costly sponsor intervention may be required.
The question remains – who is responsible for looking after the interests of PRPP members?
Summary
The risk of potential conflicts of interests are high in a PRPP, given the provider is associated with a financial institution offering related products and services, yet there is little in the legislation to minimize the risk.
Many of these areas for potential conflicts of interests could be minimized by limiting the type of investments used in a PRPP. This is discussed in Part 2.
Endnotes
- PRPPA SS 45(1)
- PRPPA SS 41(5) & (2)
- PRPPA S45 & Regs SS 21(1)
- PRPP Act P41(5) & (2) and SS43 (2)
- PRPPA SS 43(3)
- PRPPA S24 & PRPP Regs S19
- PRPPA S30
- Benefits Pension Monitor May 25, 2011