PRPPs defeated by compliance costs

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Appeared in the Financial Post

The federal government's recent introduction of legislation to enable Pooled Registered Pension Plans (PRPPs) drew the expected responses from interested parties. The financial industry expressed support, while labour union executives described the new retirement savings plans as a mistake on the basis that it is wrong to earn a profit for providing a service.

Introducing a new registered retirement savings option, especially one targeted at small businesses that cannot afford to offer such plans, is a positive development as long as it is not mandatory for workers. However, the regulatory mindset behind this legislation regrettably means PRPPs will not be attractive or affordable for the desired clientele.

Employers already have options for offering defined-contribution plans to their staff. Examples include registered pension plans and group RRSPs. What these plans have in common is that the employer sponsors the plan, although it is common practice to delegate the plan's administration to a service provider such as a bank, life insurer or investment dealer. For instance, my employer's group RRSP is administered by a life insurance company.

PRPPs are different from existing defined-contribution plans in that the plan's sponsor is not the employer but the financial institution that will provide the plan. This will allow the same product to be offered to a number of employers rather than just one. Policymakers hope that this will allow PRPPs to achieve economies of scale, and will result in cost savings that make the product attractive to relatively small businesses that do not currently offer a plan because of the associated costs.

However, without major changes to the legislation, PRPPs will not meet this costsavings objective. The problem is the legislation fails to take into account the existing regulatory structures through which service providers currently provide relatively lower-cost workplace savings plans, such as group RRSPs. For instance, mutual fund and investment dealers offer group RRSPs under securities legislation, while insurance companies do the same under insurance legislation. The different regulatory frameworks are complemented by a common regulatory guideline that outlines the responsibilities of plan sponsors.

Rather than take into account the existing regulatory environment under which financial institutions now operate, the new legislation creates a whole new regulatory regime for this one product. For instance, a mutual fund company that already offers group plans under securities legislation would also need to be licensed and supervised under the new regime to offer PRPPs. But the provisions in the PRPP regime largely duplicate the regulatory objectives intended by existing securities legislation. The unnecessary compliance costs associated with the new regime will make it difficult for PRPPs to be offered to employers at a lower cost than existing types of group plans. This completely defeats the purpose behind the creation of PRPPs.

A backgrounder released by the Department of Finance noted how provinces will need to introduce enabling legislation and flagged the importance of harmonization across the provinces to facilitate lower administrative costs. However, by introducing a whole new regulatory regime with similarities to existing pension legislation, differences will likely emerge that will add to the administrative costs. For instance, there are provisions for lock-in requirements, which would restrict PRPP members from accessing their funds prior to reaching a specified age. Individual provinces currently have different rules regarding lock-in requirements in their existing pension legislation, such as rules governing when members can make early withdrawals. The provinces that introduce legislation for PRPPs will be inclined to apply their existing lock-in rules rather than agree to a harmonized standard.

Ottawa's objective of expanding workplace retirement savings coverage is laudable and PRPPs deserve a fighting chance. But this will only happen though building on the existing regulatory frameworks under which financial institutions operate, rather than creating a whole new regulatory regime.

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