In the Chamber -- Grant Mitchell's Blog

Pooled Retirement Pension Plans

Posted 6/14/2012 by Grant Mitchell

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Bill C-25 will create a new investment vehicle called the Pooled Retirement Pension Plan (PRPP), which will provide another means of saving for retirement.

Many Canadians wrestle with the serious problem of how to save adequately for a comfortable and dignified retirement in the absence of having an adequate structured pension plan through their work, or any such pension plan at all. Bill C-25 will likely not set back or do damage to the possibilities for Canadians to meet this challenge. On the other hand, there are serious questions about how much, or whether at all, this bill will add anything to help solve the problem of Canadians who do not have structured pensions.

 Consider the parameters of that challenge:

1. About 70% of Canadians have no pension plan at all through their work. Apart from CPP, which many Canadians do not have, or OAS and the guaranteed income supplement (GIS), this 70% have to rely on personal savings for their retirement.

2. Even if you had $1,000,000 today in the bank earning current interest rates, that would provide about $35,000 a year in retirement. Well, how many people can save $1,000,000 by retirement age?

 In that context, I am not convinced that these PRPPs will do anything that group RRSPs and personal RRSPs don't already do, and certainly not if they are not mandatory.

 Group RRSPs are really just personal RRSPs that are set up for you by your employer. The employer deposits some amount each year into it on your behalf and you can top that up to the maximum limit of your RRSP room. It is a group RRSP only because you are part of an employment group. But your account is yours personally. And this sounds pretty much like a PRPP, meaning that the PRPP may well really offer nothing new.

 Now, PRPPs might be relatively more appealing if they gave you more investment choice, lower fees, better investment performance or better service than your RRSP or group RRSP offer now. But will they? Or, more to the point how would they?

 Why would the returns on average be any better than any mutual fund, private/corporate pension fund, etc. anyway? They all invest in the same markets.

 To be sure, the returns on average would be relatively better than those of current RRSP investments if fees are lower. But, the Conservatives cannot say that fees will be lower.  They say that they will hold hearings with the industry on fees as they develop the regulations; that the volume of money invested in these funds will bring economies of scale; and that there will  be competition which will lower fees.

 Well, the Australian experience with funds similar to the proposed PRPPs has not seen this happen. Since in Australia participation is mandatory, the pooled funds there are huge and there are a lot of them suggesting lots of competition.  But fees have not been particularly low.

 In Canada, there are also huge mutual funds, insurance investment funds, and other RRSP/group RRSP investment funds and plenty of competition. So why would PRPPs experience any fee reducing benefits from economies of scale and competition that are not evident now? And, how big will these funds get anyway particularly if participation by employers and employees is not mandatory?  And, the government's plan in C -5 will not require that participation be mandatory because this provision would be very controversial. 

 The huge Ontario teachers' pension fund, OMERS, has suggested that it could administer these PRPPs and, with its non-taxed status, could keep fees lower.  However, the banks and the insurance companies have argued that OMERS' tax-exempt status is unfair competition.  The Conservatives  have acquiesced to that view and have stated that they will level the playing field with some kind of tax so groups like OMERS will not have an unfair advantage; ie, so that this potential vehicle for reducing fees will not be available.

 The Conservatives say that the plan administrators and the investment managers will have a fiduciary responsibility. So what? All mutual funds, banks, bankers, stock brokers, accountants, investment advisors, investment managers, lawyers, real estate brokers and anyone else who touches someone else's money have that now. And these people can get in all kinds of trouble for abusing or not fulfilling their fiduciary responsibility. What would be the difference in the application of the fiduciary responsibility principle with PRPPs? There does not appear to be any.  I think the Conservatives do not really understand this and are dangerously close to misleading people that somehow fiduciary responsibility with PRPPs will, in and of itself, result in better returns.   Not so.

 As for improved choice, how would that work? Right now, there are all kinds of investment choices in the RRSP and group RRSP markets. And, in fact, the investment choices that will be available in PRPPs will be pretty much exactly the same as the banks, insurance companies and any other RRSP providers are providing now, and pretty much with the same investment managers. How would it be otherwise?

 I guess you would go into a PRPP if that were the only way to get your employer’s matching contribution to your contribution in a PRPP.  But employers are going to be hard - pressed not to give that money to you anyway for your personal RRSP if you opt out of the PRPP given that they will be giving it to your co-workers  who opt in. And, they can do that now. It happens all the time either directly into your personal RRSP or into your group RRSP.

 Speaking of group RRSPs, however you slice it that is really what a PRPP is. In fact, I cannot really see any difference. The Conservatives will say that the PRPP fees will be lower than group RRSP fees. However, I called a major bank recently to test this and was told that they charge no administrative fees to set up and administer their group RRSPs. Zero. They make their money on group RRSPs (pretty much the same as with RRSPs) by charging fees on some of the investments that people can choose. But,  there is no fee on bonds or GICs (just spreads and it is hard to see how they will not go away in PRPPs), and some of the bank's mutual funds have management fees as low as 1% or even lower, which will be hard to beat.

 Making the PRPPs mandatory at least would mean that people would be forced to save, which is the case with CPP, of course.  That might be the one way to realize some broad based social benefit out of these PRPPs. However, what government is going to have the "guts" to make them mandatory and how paternalistic would it be for governments to do that? But being mandatory does not guarantee better returns by any stretch and certainly returns are a big part of today's pension plan problems. I believe that one of the problems in Australia is poor returns - consistent with most other pension and investment funds over the past decade. And, the Conservatives are not making them mandatory anyway.

 There is also the issue of whether there might be a single administrator which would perhaps reduce what is seen as a confusion of overlapping regulatory authorities in the pension and investment fields now.  Not much chance of that probably, if the experience with the single national securities administrator is any indication.

 The PRPP program will not come with increased RRSP room so anything you might put into one of these simply replaces what you would have put into your personal RRSP or Group RRSP if you have one.

 Moreover, your investments in a PRPP will be locked-in, like a pension fund. But they are really not a pension funds in the way people think of guaranteed benefit (payout) pensions; they are just like a RRSP. You will not have any kind of guaranteed payout when you retire; not like a government pension, a good corporate pension or CPP pension. You will simply get what the funds that you have accumulated in it can pay you; just like a RRSP. So, why put up with your money being locked in until you are 55? You don't have to with your RRSP.  If you get sick at 45 and know you are going to die, you will not have access to it, for example.

If there is a prevalent theme in the Conservatives' policy- making agendas, it is all too often that spin and emotion trump substance.

 These PRPPs are really only group RRSPs by another name. If the scale, competition, fiduciary responsibility, etc. of current RRSPs and group RRSPs  have not already  achieved the benefits that the Conservatives say that PRPPs are supposed to achieve,  then there is precious little reason to believe that  PRPPs will in fact achieve them either.

 Here are some background docs which are interesting. They are the CD Howe 2010 report on PRPPs, an article from Bloomberg interviewing Menzies, and a report on the Australian experience.

 http://www.cdhowe.org/pdf/ebrief_128.pdf

 http://utpjournals.metapress.com/content/m1qx850g74082104/fulltext.pdf

 http://www.businessweek.com/news/2012-02-22/canada-invites-competition-with-banks-on-private-pension-plans.html

 

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