The Government of British Columbia tabled legislation for their provincial version of the PRPP this week. I won’t post too many links here as you won’t have trouble finding reading material on it by simply googling “prpp bc”. With that said, the folks over at Ampersand Advisory does have a pretty exceptional list of links should you want to check it out here.
If you are an employer in BC, here are some highlights you may want to know about:
- It is not mandatory for you to offer a PRPP.
- If you choose to offer a PRPP, it is not mandatory that you contribute to the PRPP either. It is acceptable to set up a plan where only employee contributions are made.
There has not been any product announcements for the PRPP from the banks and life insurance companies yet. As soon as the announcements are released, we will post more information about them.
There has been quite a bit of press coverage on PRPPs. Here are a few worth reading:
- Financial Post – Pooled pensions struggle for footing. My favourite quote here is: “The PRPP is like Frankenstein’s monster awaiting a bolt of lightning to come down the kite string to animate it”
- The President of the ACPM published a piece in Financial Post as well: Enable PRPPs.
- The Ontario PCs published a white paper called Paths to Prosperity: Sustainable Retirement Security.
Happy reading and have a great weekend!
The Department of Finance has published a REGULATORY IMPACT ANALYSIS STATEMENT that is written more or less in plain English. It covers key provisions of the Federal PRPP including:
- Licensing (for PRPP Administrators like banks and insurance companies)
- Permitted Investments
- Investment Choices
- Permitted Inducements
- Low Cost
- Contribution Rate of 0%
- Rights to Information
Of these provisions, the ones most relevant to small businesses are the provisions around investments, inducement, cost, contribution rate and rights to information. Let’s look at investments first.
- The default investment option may be a balanced fund or a life-cycle fund
- No more than 10% of a member’s assets may be invested in one entity
- No more than six investment options will be made available to a PRPP member
For #1, if you don’t remember what a default investment option is, check out this post.
#2 is put into place to limit the PRPP member’s concentration risk. In plain English, it avoids putting all of the member’s eggs in one basket – it helps diversify the member’s investments.
#3 is the most interesting of the three clauses highlighted here. I wish I could have been there to listen to the discussions that took place when the magic number 6 was born. The idea here is that number of investment options must be large enough to give the PRPP member the flexibility to invest in assets that meet their risk appetite and investment goals. On the flip side, the number of investment options cannot be too large for a couple of reasons. For one, there is actually research out there that suggests that when a person is faced with too many options, they may end up choosing something sub-optimal or not end up not choosing at all. (For those who are really interested in this topic, read this and this.) Keeping in mind that most members are not investment professionals, it actually makes a lot of sense to keep the number of investment options to a manageable size. The other reason to limit the number of options is cost. The fewer options there are, the less overhead there is to maintain for the many parties (administrator, custodian, investment managers) that manage the different aspects of a PRPP – which should result in lower fees for the members.
This covers off the main rules that a small business owners should at least be aware of. Up to this point, this post has been more or less a summary. There is however one question that has gotten me thinking, and I haven’t quite figured out yet: if you were a PRPP Administrator, which 6 funds would you offer and what default option would you choose? I’m going to spend some more time thinking about this and write about it again on the next post. In the mean time, I invite to share your thoughts!
PRPP Canada has taken a bit of a hiatus due to personal circumstances. However, you can expect to see more regular and frequent posts from here on.
We will spend the next few posts catching up on PRPP developments from the last few months.
For today’s post please a find a link to the Department of Justice’s Pooled Registered Pension Plan’s Regulations. A list of some of the key provisions of the Federal version of the PRPP can be found there.
We will cover some of these provisions and walk through their implications on small businesses over the next few posts!
Industrial Alliance announced on March 21st, 2012 that they are targeting to have a VRSP product ready for January 1, 2013. Subsequent to the announcment, they published a brief PRPP/VRSP Timeline. You can check it out here.
The Ontario budget came out on March 27th, and it had a few critical things to say about the PRPP. If you missed it, check out our previous post. What this blog did not mention was that the Quebec budget actually came out a week before that. Within it contained a number of announcements regarding the implementation of the Voluntary Retirement Savings Plan (VRSP), their version of the PRPP. Here are some of the notable highlights:
- The VRSP is effective January 1st, 2013.
- Employers with five or more employees must offer the VRSP unless they already offer a retirement savings plan to their employees.
- Employers have two years (until January 1, 2015) to comply.
If you are interested to find out more, you can check out the bulletin
from McCarthy Tétrault.
One of the reasons Quebec is able to move so quickly with their version of the PRPP is that they don’t have to (or have chose not to) work with the other provinces to harmonize the rules that govern PRPPs. There’s still no announcement from any of the other provinces on when PRPPs will become effective. However, Tom Reid who heads up the Group Retirement business at Sun Life was quoted by the press saying that he didn’t expect other provinces to have a plan by ready by 2013 like Quebec, but may have PRPPs in place by 2014.
The Ontario budget last week attracted a lot of media attention. If you search for the keywords like “Ontario budget, pension, PRPP”, you will find articles from numerous newspapers, bulletins from law firms, and press releases different associations and lobby groups to name a few.
In short, there was actually very little mention of PRPP. The 332 page Ontario Budget had 2 pages on PRPPs. Instead of combing through all the press and reading the “interpreted” version, I’d recommend that you flip to page 275 and 276 of the actual report and read the real thing.
Automatic enrollment was already covered in an earlier post, but I do want to follow up with an encore to bring your attention to an article from Maclean’s titled How the government wants to trick us into saving more.
In addition to explaining how auto-enrollment works, it brings up two very valid points that the last post here did not cover.
- If you are going to automatically enroll your employees and make deductions from their paycheck on their behalf, the deductions must be directed into an investment (usually a fund). The pension industry calls this the default investment. The Maclean’s article brings up a very relevant point that it is impossible to have a “one fund fits all” approach. Your employees will each have their own unique financial circumstances, and there is a good chance that auto-enrollment will enroll them with a default investment that does not fit their financial circumstance.
- If there is high employee turnover in your business, you may end up having a lot of orphaned accounts with very small PRPP account balances under your plan. This will have a negative effect on the Administrators’ (banks, insurance companies etc) administration costs. We will have to wait and see how the industry will handle this issue when the PRPP products are rolled out.
Update (3/27): A reader has pointed out that point 1 above only applies to the employees that don’t fill out their enrollment forms after they are automatically enrolled. If they do, then they could choose their investments and their money would not be invested in the default investment.
Malcolm Hamilton, one of the most respected actuaries in Canada, wrote a piece on PRPPs that is very readable for even non pension experts. It touches on some of the features of the PRPP such as auto-enrollment. However, where the article shines is his explanation of how contributing to the PRPP can be detrimental for low income earners. He uses a very simple example to illustrate his point. I won’t go too much into it. Read it here for yourself!
There hasn’t been any official word on whether or not your neighbourhood bank will be offering Pooled Registered Pension Plans (PRPP) to small businesses. However, there have been two public announcements, one by the Canadian Bankers Association (CBA) and one by the government that suggest so.
The CBA presented to the House of Commons Standing Committee on Finanace on their views of Bill C-25, the Pooled Registered Pension Plans Act.
“Banks are well-placed to deliver a low-cost pension savings vehicle to Canadians. Banks are able to leverage their relationships with over one million SMEs across the country to provide them with information about PRPPs and how they work. This broad reach ensures that the federal government’s target market for PRPPs is developed quickly and cost-effectively. Moreover, the banks can rely on the skills, resources and the experience of their broader financial group to effectively deliver PRPPs.”
Another source: If you want to listen to all of the presentations as a podcast, check out this post
from Ampersand Advisory.
On a more recent note, Ted Menzies, Minister of State for Finance stated during an interview with Bloomberg News that banks, credit unions and pension funds will be able to qualify to managed Pooled Registered Pension Plans. He also added that PRPP Administrators will be required to operate as taxable corporations.
More industry participants mean that there will be more competition. Hopefully, this will also mean lower fees for PRPP participants!