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.
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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:
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.
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.” Source: CBC
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! “Employer participation in a PRPP is voluntary. Employers who choose to participate in a PRPP will be responsible for selecting a particular plan for their employees and enrolling their employees in the plan. Employees will be automatically enrolled in the plan chosen by a participating employer, but will have the option to opt out of the PRPP within 60 days.” Source: BACKGROUNDER: KEY FEATURES OF POOLED REGISTERED PENSION PLANS, Department of Finance Canada This passage pretty much sums up what automatic enrollment is. The question is why is this feature being introduced to the design of the Pooled Registered Pension Plan? Libertarian Paternalism
I first came across the term “libertarian paternalism” when I read Richard Thaler’s Nudge. In his book, Thaler speaks of the concept of humans and econs. The human side of our brain is impulsive and tends to drive us to make decisions that bring immediate gratification, often at the expense of our long term well being. The econ side does the opposite. It would take its time to weigh the pros and cons to slowly come to rational decision.
In the realm of personal finance, we know that the prudent thing to do is to spend less than what we earn and set aside money for a rainy day and retirement. So if we can all think and behave like econs, then debt counselling companies should be extinct and everyone should have lots of money set aside for retirement! The theory here is that in most cases, it is a good decision to sign up for a PRPP because it will help you save money for a comfortable retirement. So the government should automatically enroll everyone. This is where the paternalism comes in. However, people should have the freedom to make the decision to enroll or not enroll in a PRPP. So if you marry the best of both worlds by automatically enrolling everyone but give them a chance to opt out, you have libertarian paternalism. The Likely Result
The group of people that are typically less diligent about their financial planning will likely end up staying in the PRPP because they are also likely to be less diligent about filling out the paperwork to opt out of the PRPP after they have been automatically enrolled. The group that would have signed up with automatic enrollment would obviously remain in the PRPP. The last group that are diligent about their finances and choose not to participate in the PRPP can still opt out within the 60 day window. The end result is that by introducing the automatic enrollment feature into the PRPP, the government will likely succeed in nudging more Canadians to participate in PRPP a somewhat big brother-ish kind of way, but still give individual Canadians the liberty to choose to opt out.
We got a mention for our work at Fair Pensions for All. Bill Tufts is a well known author and expert on pension matters. Check out their site for a different perspective on Pooled Registered Pension Plans. The Candian Medical Association (CMA) and the Financial Planning Standards Council (FPSC) have recently submitted a response to the recent Bill C-25 and the proposed amendment to the Income Tax Act to establish Pooled Registered Pension Plans (PRPP). The CMA’s key concerns are:
The FPSC’s concerns are a bit different:
The CMA represents doctors, so it makes sense that they are lobbying for a higher contribution room. The part about lobbying for DB plans and TB plans puzzles me though. As far as I can understand, the CMA, with over 76,000 members should have the scale and the means to set up a DB and TB plan… The FPSC is lobbying on behalf of Certified Financial Planners. They want employers to automatically enroll employees into PRPPs. They also want employers to offer matching or top-up contributions to the employees’ PRPP accounts to give the employees incentive to sign up. Lastly, they want the government to make it mandatory for employers and PRPP administrators to make advice available to employees. I’m not going to comment on the motivations of the two lobbies as I’ll leave that for you to do. However, there are some pretty important concepts introduced by these two groups:
Each of these points is worth a post of their own. Stay tuned! Read the original submissions from the CMA and FPSC. The government, the press, and many pension experts have cited the Pooled Registerd Pension Plan as a low-cost option. So how low is low and what is the cost that they are talking about? To the small business that offers PRPP to their employees, there will likely be no direct cost that they must pay to the product provider (banks, insurance companies, etc.). The employer may choose to make cash contributions to their employees’ PRPP accounts, but I won’t call that a cost. That is because the employer is voluntarily choosing to pay their employee with a PRPP contribution instead of additional salary. Although a small business does not have to pay the product provider to offer the PRPP. There is additional administrative “cost” for an employer to consider when offering PRPP. For example, payroll is going to be a little more complicated now. If you have this part of your business outsourced, your bookkeeper may charge you a little more. If you don’t, well, you will have to invest a little more time for each pay period to calculate the PRPP deduction for each employee’s paycheque and remit that cash to the PRPP product provider. Your tax reporting is also going to have extra line items in it too. Now, all of the above is preamble as the low-cost that the government has been emphasizing relates to the investment cost. Investment cost is a very general term, and I think most people have a limited understanding of what that cost is comprised of. So I’m going to spend a little time here to break it down. In short, here are the people/parties that get paid when you invest in a mutual fund:
This list isn’t exhaustive. There is also for instance, the auditor that audits the financial statements of the funds. However the three parties named above make up the lion’s share of the fees. In Canada the median expense ratio of an equity mutual fund was a whopping 2.31% in 2011 according to Morningstar. That means that if you invested $10,000 into an equity mutual fund, $231 will be deducted from your account every year regardless of how your fund performed.
The PRPP’s cost structure will likely be similar to that of a mutual fund. The government’s argument is that if a lot of people pool their money together to invest in a small number of funds, then the few fund managers that get to manage this money can charge a smaller % (fees) and still be profitable. While this rationale has some merit to party #2 and party #3, the industry itself is dominated by only a handful of players. The situation is reminiscence of the mobile phone service in Canada… well, you know as well as I do how much we all pay for cellphone service… One more point I want to highlight is that party #1′s cost will actually be higher for PRPP than the typical pension plan offered today. This is because it is much easier to help a large company with 10,000 employees set up a pension than to do the same for 1,000 companies with 10 employees. Remember that the PRPP is designed for small businesses! With that said, I am hopeful that the fund managers and custodians will actually pass on the cost savings to the consumers and that the distributors will find a way to effectively and efficiently help Canadian small businesses set up their PRPPs. |
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Automatic Enrollment for Pooled Registered Pension Plans: A Follow up
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.
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.