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Studies and analyses from pension experts, academics and research institutes indicate that, while the retirement income system is working reasonably well for today’s retirees, future retirees may not be saving sufficiently for retirement.1 Several trends in recent years have led to future retirement incomes being at risk, including Canada’s aging population, increasing life expectancy and declining coverage of traditional workplace pension plans.
The retirement savings challenge is a complex issue, which requires a long-term multi-faceted approach, to ensure that Ontarians save adequately for retirement. The Ontario government will continue to take a leadership role in strengthening the retirement income system and supporting pension innovation as an essential element in any strategy to enhance retirement savings.
In the fall of 2010, the Minister of Finance released a consultation paper, “Securing Our Retirement Future: Consulting with Ontarians on Canada’s Retirement Income System.”2 The paper presented a comprehensive strategy to enhance retirement incomes in Canada and Ontario, which included the development of new and innovative ways for Ontarians to save for retirement, such as pooled registered pension plans (PRPPs) and target benefit plans.
Following the enactment of the federal Pooled Registered Pension Plans Act in December 2012, the 2013 Ontario Budget announced that the government would consult on a framework for PRPPs before introducing legislation.
The 2013 Ontario Economic Outlook and Fiscal Review introduced a bold new three-pronged strategy to address the retirement savings challenge. This strategy is a comprehensive, long-term approach that includes a range of tools to assist all Ontarians, including those without workplace pension plans, those with self-directed retirement savings, and those with defined benefit (DB) pension plans. A key element of this strategy is the important role PRPPs would play in providing greater retirement income security for the people of Ontario.
This paper builds on the results of the 2010 consultation process, the 2013 Budget announcement and the 2013 Economic Outlook and Fiscal Review by consulting on a framework for PRPPs in Ontario. The Ministry of Finance is seeking feedback from all interested parties on how a PRPP framework would be best implemented in Ontario.
To guide the conversation on Ontario’s PRPP policy, this paper provides background information on the federal model and sets out discussion questions on specific parameters of a possible PRPP framework for Ontario. Information received through the consultation process will help inform the development of Ontario’s legislative framework for PRPPs.
Feedback on any or all of these questions, as well as comments on the PRPP initiative more generally, can be submitted to firstname.lastname@example.org or mailed to:
Framework for Pooled Registered Pension Plans
Strategic Pension Reform Secretariat
Ministry of Finance
7 Queen’s Park Crescent
5th Floor, Frost Building South
Toronto, ON M7A 1Y7
Submissions must be received by January 20, 2014.
Long‐term savings and investment are critical to ensuring Ontarians prepare financially for their retirement. Many Ontarians today are having difficulty putting aside sufficient savings for retirement and are worried about their future financial security.
As announced in the 2013 Economic Outlook and Fiscal Review, the province has launched a new strategy to enhance retirement income in Ontario.
The government is committed to helping Ontarians save for a strong and secure retirement so they are able to enjoy their retirement years. It will assist working Ontarians in planning for their retirement, whether they rely on retirement income provided through the Canada Pension Plan (CPP), are accumulating retirement savings independently, and/or have access to a workplace pension plan. This commitment will ease the financial pressure on the people of Ontario, their children and their grandchildren.
The CPP forms the foundation of the nation’s retirement income system. An enhancement to the CPP is critical to ensuring that Ontarians, particularly middle‐income earners, have greater financial security in retirement. The government is leading the way by working to secure an agreement among provinces and the federal government on enhancing the CPP. If an agreement cannot be reached, Ontario will move forward with a “made in Ontario” solution.
The government will also implement innovative retirement savings models such as PRPPs to promote increased retirement savings in the province. Before introducing legislation, the government is releasing this consultation paper on PRPPs in order to ensure that an Ontario PRPP framework provides employees, particularly those working in small and medium‐sized businesses, with a simplified, low‐cost retirement savings vehicle.
For Ontarians with self‐directed retirement savings, such as registered retirement savings plans (RRSPs), Ontario will work to reduce the cost of investing and provide individuals with the help they need to make informed decisions about financial savings. The government will examine recommendations by the Ontario Securities Commission, which is looking at the structure of mutual fund fees, and consider more tailored regulation of financial advisers and planners.
Recognizing recent funding challenges, the government will also help those with DB pension plans by implementing new and revised rules to ensure Ontario’s private‐sector DB plans remain financially sound and public‐sector DB plans remain affordable and sustainable.
PRPPs are a new type of tax-assisted individual retirement savings plan. These plans are intended to make it easier to save for retirement by offering employees and self-employed persons with an additional savings tool that is low cost, professionally managed and portable from one workplace to another.
After two years of federal-provincial-territorial collaboration in the development and design of PRPPs, the federal government implemented PRPPs for sectors under federal jurisdiction, such as employees in the banking, interprovincial transportation and communications sectors. The federal legislation also applies to persons employed in Yukon, the Northwest Territories and Nunavut. Provincial legislation is required to implement PRPPs for all other areas of employment. As a result, PRPPs will not be available to the majority of Canadians until legislation is passed by provinces and the associated regulations to implement a provincial PRPP framework are approved.
To date, Alberta and Saskatchewan have passed legislation establishing PRPP frameworks that largely mirror the federal government’s model. British Columbia introduced legislation that also paralleled the federal model; however, the legislation did not pass before its legislature was dissolved in March 2013. Quebec has introduced legislation to implement its proposed Voluntary Retirement Savings Plan (VRSP) that, while similar to the federal PRPP framework, differs in a few significant areas (see Appendix).
The federal Pooled Registered Pension Plans Act (PRPP Act) and associated regulations came into force on December 14, 2012. The PRPP Act enables third-party administrators such as banks and insurance companies to offer PRPPs and sets out rules for establishing, administering and governing PRPPs.
Key characteristics of the federal PRPP framework include:
PRPPs are savings plans designed to provide retirement income for individuals who pay into them. Similar to other tax-assisted savings vehicles, such as RRSPs, individuals would not pay income tax on their PRPP contributions (and investment returns) until they withdraw their funds.
PRPPs differ from RRSPs in a number of important respects:
With respect to other registered pension plans, PRPPs are designed in the following ways:
Employers who choose to offer PRPPs to their employees would be responsible for selecting and entering into a contract with a third-party PRPP administrator, such as a bank or insurance company. The administrator would then be responsible for managing PRPP investments and for communicating with plan members on matters relating to their PRPP.
If an employer chooses to offer a PRPP, an employee would be automatically enrolled in it unless the employee chose to opt out. Employee contributions to the PRPP would be made through automatic paycheque deductions; the employer would be required to deduct and remit their employees’ contributions to the administrator.
Individuals who do not participate in a workplace PRPP, such as self-employed individuals, would be able to enrol themselves into a PRPP of their choice. In this case, an individual would contact a PRPP administrator to join a plan and would make contributions through an automatic payment plan with their financial institution.
Under the federal framework, unemployed individuals would not be able to join a PRPP.
Each administrator would be responsible for designing its PRPP(s). A plan administrator could choose to offer one or multiple PRPPs, depending on its marketing strategy and whether it sought to tailor its PRPP for specific employers.
Administrators would have the option of including different investment options to reflect the varying risk preferences of the members. PRPP members would have a maximum of six investment options.
A default option would be applied to members who did not make a choice on an investment option within a specified timeframe. An example of a default option under the federal framework would be a “balanced fund,” which is geared toward investors looking for a combination of safety, income and modest capital appreciation.
In order to administer a PRPP, a corporation would be first required to obtain a licence to operate as a PRPP administrator from the supervisory authority. To do so, the corporation would need to demonstrate that it has the capacity and resources available to successfully offer PRPPs at a low cost. The licensed administrator would then be required to register its PRPP(s) with the supervisory authority and with the Canada Revenue Agency. In the federal PRPP framework, the supervisory authority is the Superintendent of Financial Institutions.
Further information on the federal PRPP framework can be found at http://www.fin.gc.ca/n11/11-119-eng.asp. Additional information on the content and status of provincial legislation in other provinces can be found in the Appendix.
Under the federal framework, PRPPs would not be available to unemployed individuals.
Would it be beneficial to broaden eligibility to allow anyone in Ontario with unused RRSP room to participate, regardless of their employment status?
The federal framework does not require employers to offer a PRPP. Quebec has proposed a different approach in its Voluntary Retirement Savings Plans Act — its version of PRPPs — under which employers that employ at least five individuals and do not offer other retirement savings arrangements would be required to offer a PRPP.
Should Ontario’s PRPP framework require employers to participate? If yes, should there be any exceptions?
The federal PRPP framework requires participating employers to automatically enrol their employees into a PRPP, and provides a 60-day period during which employees may opt out. A challenge with this model is that employees may not realize that they need to actively opt out of a PRPP if they decide against joining a plan.
It is important to note that lower-wage workers can usually meet or exceed their pre-retirement earnings through the existing benefits provided by the current CPP, Old Age Security (OAS), the Guaranteed Income Supplement (GIS) and the Guaranteed Annual Income System (GAINS). This suggests that an additional savings tool such as PRPPs may not be necessary for lower-wage workers.
Under the federal framework, plan members who enrol individually, such as self-employed individuals, have the option of terminating their membership in their PRPP or transferring to a different PRPP administrator at any time. In contrast, members who are enrolled in a PRPP by their employers are unable to terminate their membership in the PRPP after the 60-day opt-out period unless they leave their job.
The federal framework provides for plan members’ contribution rates to be set by the administrator. It also allows the administrator to increase plan members’ contribution rates automatically from time to time. For example, a PRPP administrator could set a contribution rate of three per cent for the first year and increase this rate by half a percentage point each year until the member reaches a maximum rate.
Quebec has proposed a different approach to contribution rates in its Voluntary Retirement Savings Plan (VRSP) framework. Plan members would be able to determine their own contribution rates.
Under the federal framework, participating employers are not required to contribute to a PRPP. This is different from the requirement in the CPP legislation or the general requirement in Ontario that employers who choose to offer a registered pension plan must also contribute to the plan.
The PRPP Act requires administrators to provide PRPPs at a “low cost” to members. The associated regulations state “costs are to be at or below the costs incurred by the members of defined contribution pension plans that provide investment options to groups of 500 or more members” and “costs are to be the same for all members of a PRPP.” This definition is intended to ensure that PRPP members benefit from the group pricing that large DC pension plans are offered.
The federal framework requires both employer and employee contributions to be “locked in” until the retirement age.
In contrast, Quebec’s proposed VRSP framework provides that contributions made by employees or individual members would not be locked in. This means that individuals would be able to withdraw their funds at any time; however, upon withdrawal, they would be required to pay the income tax that was previously deferred (employer contributions would continue to be locked in). For example, an individual may choose to withdraw his or her contributions to a PRPP in order to aid in the purchase of a house. As a result, it is possible that PRPP funds could be used for purposes other than providing an individual with income during retirement.
Allowing greater flexibility in withdrawing funds may benefit certain plan members but could also lead to increased administration fees for all PRPP members.
The federal PRPP Act allows any corporation that is in possession of a valid licence issued by the Superintendent of Financial Institutions to offer PRPPs. Eligibility would be based on an assessment of the prospective administrator’s ability to offer PRPPs consistent with a series of principles designed to encourage low costs and ensure that PRPPs are offered by regulated entities with appropriate experience (see licensing, regulation and supervision below).
PRPP administrators could include financial institutions such as banks, credit unions and insurance companies as well as DB pension plan administrators.
Should there be restrictions on which types of corporations can be administrators of PRPPs? If so, what kind?
Similar to Ontario’s Pension Benefits Act (PBA), the federal PRPP Act requires a PRPP administrator to “exercise the degree of care that a reasonably prudent person would exercise in dealing with the property of another person and the diligence and skill that it possesses, or ought to possess, taking into account the administrator’s business.”
PRPPs would likely be offered by institutions where the obligation to maximize profits could potentially conflict with the duty to act in the best interests of PRPP members. For example, institutions may be incented to choose higher fee investments to maximize profits, which may not be in the best interest of plan members with respect to their investment strategy. At the same time, they would be constrained by the legislative requirement that plans be offered at a low cost.
Are there more specific requirements or limitations required to mitigate against potential conflicts of interest?
The federal framework requires PRPP administrators to be licensed by the federal Superintendent of Financial Institutions, who is also responsible for overseeing federally regulated registered pension plans. Once issued, a licence would not expire and would not be revocable. Administrators must also register each PRPP they intend to offer with the Superintendent and Canada Revenue Agency before they can market the product.
In addition, the Superintendent is responsible for the ongoing supervision of PRPPs under federal jurisdiction, such as ensuring that PRPPs are offered at low cost and that plan members are adequately informed. If it is found that an administrator does not fully comply with the PRPP Act and associated regulations, the Superintendent has the authority to issue sanctions against the administrator. This authority includes the ability to revoke the registration of the plan in question (the administrator would, however, remain licensed), and prohibit the administrator from entering into any new contracts with employers or accepting new members.
In Ontario, pension plans are registered with the Financial Services Commission of Ontario (FSCO) and are regulated by FSCO to ensure compliance with the PBA. As the pensions regulator, FSCO could also be responsible for the regulation of PRPPs in Ontario, including the licensing of administrators, the registration of PRPPs and the ongoing supervision of the regime. As discussed further below, harmonization of the regulation and supervision of PRPP frameworks across the country may be an important consideration.
The federal framework allows the federal supervisory authority to enter into bilateral and multilateral agreements with the provinces to develop an efficient method of supervising PRPPs across the country, particularly where a PRPP has members in more than one jurisdiction. A coordinated approach to the licensing and supervision of PRPP administrators would result in fewer resources required for both administrators and regulators and would likely help to keep costs low. A coordinated approach to supervision, however, would require generally harmonized PRPP frameworks across the country.
Feedback on any or all of these questions, as well as comments on the PRPP framework more generally, are welcome.
Please provide all comments by January 20, 2014.
Four provinces have introduced PRPP legislation:
1 Kevin D. Moore, William Robson, and Alexandre Laurin, “Canada’s Looming Retirement Challenge: Will Future Retirees Be Able To Maintain Their Living Standards Upon Retirement?,” C.D. Howe Institute Commentary, no. 317 (December 2010), http://www.cdhowe.org/pdf/Commentary_317.pdf;
Michael C. Wolfson, “Projecting the Adequacy of Canadians’ Retirement Incomes: Current Prospects and Possible Reform Options,” Institute for Research on Public Policy, no. 17 (April 2011), http://www.irpp.org/assets/research/faces-of-aging/projecting-the-adequacy-of-canadians-retirement-incomes/IRPP-Study-no17.pdf;
Benjamin Tal and Avery Shenfeld, "Canadians' Retirement Future: Mind the Gap," CIBC World Markets Inc., In Focus, (February 20, 2013), http://research.cibcwm.com/economic_public/download/if_2013-0220.pdf