The Canadian Bankers Association¹ (CBA) appreciates the opportunity to participate in the government’s consultation on creating a framework for Pooled Registered Pension Plans (PRPP) in Ontario, and we are pleased that Ontario is moving forward in implementing the PRPP model that was agreed to by federal, provincial and territorial finance Ministers in 2010. Ontario’s commitment in this area is vital for creating a truly national solution that meets the needs of many Canadians who are not accumulating retirement savings.

Over the last several years, the CBA has contributed to discussions on the adequacy of Canadians’ retirement savings in order to provide the banking industry’s perspective as experienced and trusted financial advisors to millions of Canadians. The banking industry supported the development of the federal Pooled Registered Pension Plans Act and associated regulations, as we believe that PRPPs provide a unique opportunity to enhance retirement savings particularly among employees of small and medium-sized businesses and self-employed individuals. These groups have typically faced barriers to private pension schemes given that the current options are too costly, administratively complex, and contain some risks that smaller employers are simply not prepared to take.

Banks are well-placed to deliver a low-cost savings vehicle to the self-employed and employees of businesses without pension plans. Banks are able to leverage their relationships with over one million smalland medium-sized enterprises (SMEs) across Canada to help with a variety of banking, business and wealth management demands. In particular, the PRPP can complement the array of business accounts, financing options, payment and payroll services, and SME tools and resources that banks offer and which help support the success of SMEs. Banks’ relationship with SMEs also provides the necessary reach to cover the target market for PRPPs, moving us closer to the goal of making PRPPs a low-cost pension plan.

Overall, we believe that the success of the PRPP in Ontario and across Canada is best achieved by measures that encourage participation so that the benefits of scale are fully realized. Second, the regulatory regime must not impose costs in excess of what is required to meet the needs of employees and protect their financial interests. This means that, to the extent possible, PRPP legislation should be harmonized on a national basis to reduce the costs and complexity of compliance. The comments that follow elaborate on these points and offer our perspective on a number of the questions set out in the consultation paper.

Eligibility

The 2010 Framework for PRPPs that was negotiated by federal, provincial and territorial Finance Ministers outlined the goal of improving the range of retirement saving options for several target groups, including individuals who currently may not participate in a pension plan, such as the self‑employed and employees of companies that do not offer a pension plan. Another important goal set out in the Framework, however, was to enable more people to benefit from the lower investment management costs that result from membership in a large, pooled pension plan.

In our view, the PRPP can and should be designed to appeal to all individuals who are seeking a low-cost and accessible vehicle to save for their retirement, whether they are employed or unemployed. Since these plans will involve large pooled funds, plan members will benefit from the lower investment management costs associated with the scale of these funds. Moreover, given their structure as a defined contribution plan, PRPPs would promote automatic retirement savings, which creates a better incentive for individuals to accumulate savings than other tax-assisted private savings vehicles that make up the third-pillar of Canada’s retirement income system.

Employer and Employee Participation

Reaching sufficient scale is absolutely essential in the design of the PRPP in order to achieve efficiencies and limit administrative and asset management costs, which means maximizing the number of participants (both employers and individuals) and the total assets under management. An obvious way of achieving the desired level of participation is to require mandatory participation by employers who do not now offer a pension plan or group RRSP – that is for government to decide. In any event, though, we recommend that the government undertake a widespread communications campaign to promote the use of PRPPs among employers and employees. Early, widespread and sustained take-up of the new product will contribute substantially to keeping costs low as well as to achieving a reasonable return on participants’ investments.

With respect to employee participation, we support Ontario harmonizing its rules with the federal framework and the framework in Quebec by requiring automatic enrolment of employees and giving employees the option to opt-out of membership in the plan within 60 days. Both federal and Quebec rules provide employees the possibility of discontinuing contributions to the plan and/or setting the contribution rate to zero, thus ensuring employees remain in the plan but have flexibility when their financial needs change. We believe this strikes a fair balance while emphasizing and encouraging employee participation in their company’s defined contribution pension plan. Other models that allow employees to easily terminate their membership at any time or transfer their assets at will to another administrator have the potential to cause significant disruption for employers and administrators. For this reason, we recommend that the transfer options available to PRPP members or survivors should be identical to those offered to members of other federally-registered pension plans, which is the same model on which portability rights in the federal PRPP is based.

Employee and Employer Contributions

In keeping with the objective of simplifying administration and reducing complexity for plan sponsors, members and administrators, our view is that contribution rates should be set by the administrator who then must inform members of the contribution rates and of any increases (subject to a member’s ability to set the contribution rate to zero). Allowing each plan member to determine his or her own rate of contribution to the plan may require a corresponding change to the level at which the employer contributes, and would also require employees to monitor contributions to make sure they do not exceed the annual amount they are allowed to contribute to a registered plan. Contributions in excess of this amount are generally subject to a 1% tax per month, thereby penalizing employees who are not diligent in ensuring contributions do not exceed annual contribution limits.

Low Cost

As previously noted, a determining factor in achieving and maintaining a low-cost structure will be the economies of scale that emerge as the volume of participants increases. Given that the PRPP falls outside the normal parameters for an institutional offering, however, it is important for the government to be aware that costs will not be the same for all organizations and all large DC pension plans. In contrast to large pension plans, the cost of delivering the PRPP to small and medium-sized businesses will be much greater when taking into account the additional administrative complexities and record-keeping obligations. To help further illustrate, consider the work that will need to be carried out to process enrolment documentation, receive employer and employee contributions, report to employers and employees and respond to their enquiries, oversee fund accounting, process benefit and claims payments, and complete regulatory filings. This is on top of other costs incurred for actuarial services, asset allocation/investment management, auditing, custody, legal services, and sales and marketing.

While we fully expect that PRPPs will have a cost structure more in line with wholesale rather than retail products, we are opposed to setting a maximum fee, especially given the likelihood that such a fee would not take into account the cost associated with active fund management for clients who prefer this type of service or personalized financial advice. Some banks offset advisory costs from the total of the fees charged on the investments, which is always clearly disclosed to the client. Actively managed investments provide the opportunity to lower market risk and potentially lead to greater growth in savings.

Consistent with the federal PRPP model, we believe a default investment option provides convenience to members who are looking for a simple and economical investment choice, which would provide a mix of investments that take into account the individual’s proximity to retirement based on the life-cycle model. The default option would avoid the need for frequent intervention in deciding how to allocate contributions, thereby helping to fulfill the objective of a simple and low-cost plan.

Disclosure is a major feature of administration. Our view is that there should be a standard and simple approach to the disclosure of costs, particularly for the default investment option. Rather than going into extensive detail in prescribing the different fees that must be disclosed, we believe a more principles-based approach should be followed so that administrators provide disclosure of any variety of costs that impacts the net investment return including administrative, asset management and advice costs. In addition to providing a clear breakdown of the charges to the fund, the information would include a straightforward report on the fund’s activity over the year, and any changes in the structure of the plan.

Locking In

The CBA supports the principle that funds saved inside a pension plan should only be available for retirement income purposes, subject to limited exceptions. One of the motivations behind the proposal to establish PRPPs is the low and declining prevalence of existing employer pension plans that lock in contributions (although they can be unlocked in certain circumstances). Alternative savings options exist for those who are actively engaged in their retirement planning, and for them, the safety feature of a locking in mechanism may not be needed. These are the kinds of individuals who may opt-out of the PRPP because they have other, preferred saving options. For other individuals, automatic saving for retirement overcomes the reluctance to actively engage in financial planning and so the assurance of locked-in contributions can be an important safety mechanism.

Locking-in contributions not only meets the overarching policy objective of helping improve retirement security for individuals, but also creates a strong incentive for employers to offer PRPPs and contribute to their employees’ plans. If Ontario decides to allow employees to withdraw their contributions under certain circumstances, we strongly recommend that employer contributions be locked in on a more permanent basis.

Disclosure Requirements

For banks that will administer PRPPs, it is critical that there be a standard and simple approach to the disclosure of information about investment returns and costs, thus ensuring consistency with other types of investment products that are available in the marketplace.

As noted above, the disclosure requirements should avoid being overly prescriptive in order to help reduce the costs and complexity of compliance. We believe it is prudent for Ontario to harmonize with the federal framework so that plan members receive key information related to the plan’s performance; costs that impact the net investment return including administrative, asset management and advice costs; and details of any changes in the structure of the plan – all of which should be provided to members in clear and simple language.

Administration

Canada’s banks have well-developed relationships with almost 1.6 million small and medium sized businesses as well as significant experience in financial and risk management, making them particularly well placed to design, administer and offer PRPPs and help encourage employer awareness and participation. We therefore agree that Ontario should follow the federal model by allowing corporations such as banks to be PRPP administrators, as banks have the financial resources, operational capability, and risk management procedures necessary to administer a PRPP.

Section 22 of the federal Pooled Registered Pension Plans Act requires that the administrator operate the plan and its assets as a trustee for the members. The CBA is supportive of the need to make appropriate trust arrangements for PRPP funds with the necessary oversight by trustees. The funds would be structured separately from a bank’s balance sheet most likely through a trust agreement with a trust subsidiary or a trust company with which the bank may enter into a trust relationship. This trust arrangement imposes a fiduciary duty on administrators to avoid self-dealing or conflicts of interests such as the scenarios that are described in the consultation paper. Furthermore, all funds would be managed in keeping with the prudent person standard when determining risk and allocation of funds. These standards of care and conduct generally place the interests of the plan member ahead of the interests of the financial institution and therefore limit the potential for any abuses.

Regulation and Supervision of PRPPs

Administrators will need a harmonized, consistent and straightforward pension regulatory regime applicable across the country if they are to keep costs down while delivering and managing an effective plan. This would apply in areas such as unlocking and the handling of all third party demands against a member’s account, pension splitting on marital breakdown, conversion of lump-sum pension balances, time periods before pensions vest, differing small-benefit commutation rules, retirement income options, permitted investments, and employee bankruptcy. These are not major differences in and of themselves but taken together they can become a costly administrative burden.

Supervision and oversight is also split amongst jurisdictions, as the existing regime for pension regulation allocates regulatory responsibility according to the jurisdiction with oversight over the employer. The degree of harmonization that appears to have been achieved through efforts by federal and provincial regulators in the Canadian Association of Pension Supervisory Authorities (CAPSA) to develop coordinated guidelines across jurisdictions is worth noting and commending. CAPSA’s Agreement Respecting Multi-Jurisdictional Pension Plans that has been signed by Ontario and Quebec is a particular example of what has been done to establish an efficient and transparent regulatory environment for such plans and to allow a single pension supervisory authority to oversee compliance. The CBA encourages greater cooperation amongst provinces and additional reciprocal arrangements to streamline supervision and reduce resources that go towards regulatory reporting.

Conclusion

There are a number of key factors that will contribute to the success of PRPPs but success will ultimately depend on a practical alignment of public policy objectives and private sector implementation. With appropriate policies regarding employer participation, auto-enrolment, locking in and streamlined rules regarding administration, disclosure and licensing/oversight, we believe the PRPP will fill the gap in Canada’s retirement income system and improve the range of retirement saving options for millions of Canadians who have lacked the appropriate incentives and support to grow their retirement savings.

¹ The Canadian Bankers Association works on behalf of 57 domestic banks, foreign bank subsidiaries and foreign bank branches operating in Canada and their 275,000 employees to advocate for efficient and effective public policies governing banks and to promote an understanding of the banking industry and its importance to Canadians and the Canadian economy.