PRPPs: Not a silver bullet

PRPPs have the potential to increase pension coverage and retirement savings for Canadians, but only if the advantages outlined by the Department of Finance are realized through the design and implementation of a carefully constructed regulatory regime.

Accessible and straightforward
Harmonization of the rules applicable to PRPPs across jurisdictions would make the plans more straightforward as well as reduce administrative costs. It is particularly important to harmonize the identity and role of the administrator, the regulator and the employer.

Each provider should have standard plan terms and standard fees that are available to all employers—both large and small—and self-employed workers. Negotiation of plan terms and fees adds to the cost of the plans for everyone involved: first, due to the costs of the negotiations and, second, since customized terms add to the administrative complexity. Moreover, if this were not the case, it is highly likely that smaller employers would not be able to negotiate the lowest rates. The primary driver behind the PRPP proposal is the potential to attract small employers and the self-employed to a straightforward, low cost plan so having the same terms and fees for all participants is an essential requirement.

Also, plan terms should be filed with the regulator. The regulator should review the plan terms to ensure compliance with the legislation.

Additionally, employers should have no fiduciary role or duties with respect to PRPPs other than a duty to forward contributions to the plan administrator. While employers should have the role of choosing the PRPP administrator (and the ability to switch between providers), this should not translate into a fiduciary responsibility.

The responsibility and potential liability of assuming a fiduciary role is a factor in the decision of employers not to offer a pension plan. The regulatory regime should ensure that all PRPP administrators and plans meet the necessary fiduciary standards.

In the best interests of members
The framework suggests that lower investment management costs will result from membership in a large pooled pension plan. Given the high investment management fees currently paid by Canadians who pool their funds (directly or indirectly) through mutual funds and segregated funds, steps must be taken to ensure that this is, in fact, the case. Competition has not resulted in low management fees in the Canadian marketplace.

Fees must be in a form that is easily understood, and compared, by employers and plan members. A government-designed standard form for disclosure of all fees, commissions and other compensation (i.e., all administrative and investment costs) would help to achieve this result. This form should be filed with the regulator and be made available to everyone on a government website.

Electronic information should be provided on how these costs compare to administrative and investment costs incurred by other types of plans such as plans for public sector employees, the Canada Pension Plan (CPP) and, perhaps, some international comparators.

Allowing large pension funds, such as OMERS, to offer PRPPs, may also put downward pressure on fees.

In order to limit the fiduciary role of employers in PRPPs (and thereby increase coverage), the choice of investment options under a plan would likely rest with the PRPP administrator.

If the administrator’s compensation is affected by the choice of investments, a clear conflict of interests exists. This conflict could be solved through one or more of the following options.

• The regulation should state that the administrator’s compensation must be in the form of a flat investment management fee that is not dependent on the choice of investments offered to, or chosen by, the plan members (and that this fee is clearly and publicly disclosed).
• Create a government board to review and approve all PRPP fee structures. PRPP administrators could apply to the board periodically to increase their fees and/or change their fee structure.
• Regulation should also state that  fees (on a per capita or per assets under administration basis, as appropriate) cannot exceed the prior year’s costs incurred by a comparator group.

And, the legislation should make it clear that the PRPP administrator is the plan fiduciary. While some groups have suggested other terms, the key is to clearly define who is responsible for each of the duties involved in the administration (including the investment) of the plan and to clearly state that each of these duties must be undertaken with a view to the best interests of the plan members and in accordance with a defined standard of care.

Legislation should make it clear that plan funds are protected in the event of the bankruptcy of the PRPP administrator or the plan participant.

Only part of the solution
PRPPs could play an important role as part of an improved Canadian retirement income system, but they are at best a partial solution. It’s difficult to imagine how PRPPs could achieve the low-cost administrative and investment management fees, the investment return and the security of the CPP.

Studies show that it’s middle-income Canadian who are most at risk of not having enough funds to retire, so improvements should target that group. With PRPPs, this means that participation should be voluntary and the question needs to be asked, will people voluntarily save more with these vehicles?

A special purpose federal-provincial agency or task force—with a mandate to provide policy input on both public and private sector retirement programs and initiatives—would be helpful in moving towards an improved system.

Barbara Austin is an adjunct professor at Osgoode Hall Law School.