Canadians may soon have yet another private retirement savings vehicle to supplement their workplace pension plans, group and individual RRSPs, and tax-free savings accounts.

At a meeting in Alberta held this past December, the federal and provincial finance ministers came up with what federal Finance Minister Jim Flaherty describes as “a new kind of pension plan” — to be known as the pooled registered pension plan — “[that will be] a major breakthrough for the Canadian pension market. They will make well-regulated, low-cost, private-sector plans accessible to millions of Canadians who have, up to now, not had access to such plans.”

However, some pension-industry observers are concerned about how PRPPs will be regulated and whether there will be enough oversight of those firms that administer the new pension plans.

PRPPs are the government’s answer to the problem of pension reform. Flaherty — and most of the provincial finance ministers — had originally favoured an expansion of the Canada Pension Plan to address the problem relating to low coverage of private-sector pension plans as well as the failure of most individuals without a pension plan to save for their retirement. That idea has now been shelved in favour of a private-sector solution in which employers will be able to offer defined-contribution pension plans run by financial services institutions, such as insurance companies.

The PRPPs will not be mandatory, nor will employers be required to contribute to them. But according to the federal Department of Finance: “PRPPs will make it more attractive for employers, particularly [small and medium enterprises], to offer pension plans to their employees because a third-party administrator [the financial services institution or insurance company] will take on most of the responsibilities that employers bear in existing pension plans.”

The feds say there will be two classes of members eligible to participate in PRPPs: “employed” members will include employees of an employer that offers a PRPP; “individual” members will include the self-employed and employees of an employer that does not offer a PRPP. There will be certain administrative and regulatory differences between the two classes.

Background documentation from the Department of Finance also implies that pooling contributions will enable financial services institutions to offer plans at lower management costs than existing products. It would appear that lower costs are intended to make the plans attractive to investors. More than 11 million Canadian workers — two-thirds of all employees — have no workplace pension. Just how many Canadians will sign up to the new plan remains to be seen.

Details are still being worked out and some observers were reluctant to comment on the proposals, which they described as “speculative.” But financial advisors may want to watch for certain features of the proposals so they can give appropriate advice to their clients as the details are being worked out.

Key questions remain. Will the proposed PRPPs offer better and less costly benefits to individuals wanting to save for retirement than the current system of RRSPs, group RRSPs and TFSAs? And will the proposed PRPPs be sufficiently attractive to persuade individuals to invest?

Jamie Golombek, managing director of tax and estate planning with Toronto-based Canadian Imperial Bank of Commerce’s private wealth-management division, says the theory behind PRPPs is that by offering a simple plan with limited investment choices at a low cost, people will be persuaded to save for their retirement.

Costs will be a key issue, says Idan Shlesinger, partner with benefits consulting firm Morneau Shepell Inc. in Toronto. He describes the situation as a difference between the retail market and the group market. For instance, investors in the retail market — who buy individual RRSPs — are paying anywhere from 150 basis points to 250 bps of their investment in fees. “That’s a pretty heavy tax on your accumulation,” he says, “especially when returns are as low as they are in the marketplace today.”

The PRPP proposal, he says, “…is very much an attempt to come up with a lower-cost solution than [that found in] the retail environment.” The real question, he adds, “is whether [PRPP investors] will be able to get to dramatically lower fees.”

Expert panels in Alberta and British Columbia that had looked at PRPP-type plans have suggested a fee target of only 50 bps for a single government-approved plan run by a single third-party rather than a financial services institution to make the plans attractive, Shlesinger says. “The question,” he adds, “is whether that is even achievable.”

However, Golombek suggests that when thousands of participants are enrolled in a large, pooled plan, the costs will be far lower than when individuals are trying to save on their own through existing products such as RRSPs.@page_break@Other questions about PRPPs remain to be resolved. For example, pension plans are regulated by provinces; although some observers would have preferred to see PRPPs fall under federal regulation, it appears provinces will be allowed to set their own rules — as they do with existing pension plans. For example, a province could decide to make PRPPs mandatory for employers under its jurisdiction; thus, any employer without a workplace pension plan would be required to offer a PRPP, with automatic enrolment for its employees, who might be allowed to opt out voluntarily.

Golombek doubts PRPPs will be made mandatory — although, he says, a province might set a threshold. For example, employers with fewer than 100 employees might be exempt from participating. Golombek sees no problem with having different rules for PRPPs from one province to another because, as he points out: “We already have different locking-in rules from one province to another.”

However, Shlesinger says, if provinces leave it completely voluntary, the proposal “will be quite ineffective.” What could happen, he suggests, is that offering PRPPs could be made mandatory for employers without a workplace pension plan but employer contributions would not be. Mandatory employer contributions, he suggests, could trigger “a huge backlash.”

As for the incentives that may exist for employers to offer PRPPs, Shlesinger says, “If it’s not mandatory to enrol, the only difference between this product and what’s currently in the marketplace is a lower fiduciary obligation on the employer.”

However, he notes, employees will have to balance the fact that although PRPPs may have lower fees, the funds are likely to be locked in until retirement. However, some jurisdictions may choose to ease locking-in rules, as they do now with other registered pension plans.

In addition, employees will have fewer options, Shlesinger points out: “There will be restrictions on the investments they can make; there will be restrictions on their choice of provider.”

As well, the background paper issued by the Dept. of Finance notes that contributions to a PRPP by self-employed persons and other employees will have to be made within the individual’s RRSP contribution limit.

However, Shlesinger notes, “People are quite apathetic about their retirement savings.” (Research shows that few choose to opt out of a plan in which there is automatic enrolment with a choice to opt out.)

Employers that choose to offer a PRPP will be responsible for selecting a particular plan for their employees and enrolling their employees in that plan, but the majority of administrative tasks will be performed by the administrator — a trust or insurance company, or another financial services institutions with a trust subsidiary.

“Insurers currently dominate the group [pension] market,” says Shlesinger, “and they’re the ones that have been lobbying — successfully — for the PRPP model for a least a couple of years now.”

However, he says, there is an inherent conflict of interest in the way the model is described. Although an employer will select a provider for its employees, the employer is divested of any responsibility.

“Unlike the current group [pension] environment,” Shlesinger says, “the employer will not be monitoring the provider.”

The PRPP providers will apparently be monitoring themselves, he adds: “The insurance company will be not only the recordkeeper and the provider but also the investment manager, by and large. It will be providing its own investments to these programs, and nobody will really be monitoring [the insurer]. It defies logic.”

Meanwhile, the Dept. of Finance says, “A high level of regulatory harmonization across the federal and provincial governments will be instrumental in increasing the scale of these plans and achieving low costs.”

In addition, tax rules will have to be changed to accommodate PRPPs. Federal, provincial and territorial officials apparently are now working out details of how PRPPs will work.

But all of this will take time. Golombek says implementation of the new plans is “at least a year away” — and he emphasizes that any changes will do nothing to help the baby boomers now on the verge of retirement.

“Once you’re within 10 years of retirement,” he says, “there’s not a lot more you can do.” IE