Pooled registered pension plans represent one of Ottawa’s proposed solutions to this country’s much publicized pension shortfall. PRPPs raise questions about whether they will be effective savings tools for employees and whether they will create opportunities for financial advisors.
PRPPs are defined-contribution pension plans designed for small and medium-sized businesses. These plans would cost less to implement than group RRSPs because employers would not be required to administer the plans. Nor would they be required to match employee contributions.
The employer’s responsibilities would include appointing a financial services institution to administer the PRPP and to make the appropriate payroll deductions for the PRPP’s contributions.
Enrolment in PRPPs would be automatic, but employees would be able to opt out. They would have control over how their contributions are invested and would be able to transfer their PRPP to a new employer.
PRPPs could present business opportunities for advisors who have clients who own small or medium-sized businesses, says Ronald Sanderson, director of policyholder taxation and pensions with Toronto-based Canadian Life and Health Insurance Association Inc. Many business-owner clients, he says, have no pension plans in place.
“A PRPP can be set up in a company with almost no cost to the employer,” Sanderson says. “And as a result, advisors will gain access to a group of employees, which are a potential new pool of prospects.”
Industry Canada statistics cited in Toronto-based Manulife Financial Corp.’s Small Business Research Report, released in March 2011, suggest the market is ripe for PRPPs. About 6.8 million Canadians — 64% of the private-sector labour force — work for small or medium-sized businesses.
Of that population, more than 90% do not have access to a company pension plan, says Sue Reibel, senior vice president of group retirement solutions with Manulife. “Small businesses can really benefit,” she says, “from having an advisor point out this pension gap and illustrating a PRPP as a pension solution.”
The survey for the Manulife report found that while 48% of small and medium-sized businesses have contemplated instituting a pension plan, fewer than one in five have. Cost and the administrative burden were cited as the main barriers.
Advisors can add value, Sanderson says, by helping business-owner clients select the PRPP’s administrator. “Advisors in the group space,” he says, “have already been helping clients discuss investment options. Selecting an administrator is an extension of that.”
PRPPs are not without their skeptics. Until Ottawa releases the financial framework outlining what PRPPs will look like and how they will invest, expected later this year, it’s unclear how profitable PRPPs will be for advisors in the long run.
“The challenge of PRPPs is that there is no requirement for employers to match contributions,” says Dan Richards, CEO of Client Insights in Toronto. “For advi-sors in the group space, small asset amounts have been a tough slog — the effort of organizing these plans outweighs the return.”
In addition, says George Hartman, president and CEO of Toronto-based Market Logics Inc., clients already have trouble maxing out the contribution room in their RRSPs: “It’s hard to say whether PRPPs will solve the pension shortfall.”
But, says Tom Reid, senior vice president, group retirement services, with Toronto-based Sun Life Financial Inc.: “In countries where enrolment into a pension plan has been automatic, research has shown the opt-out rate has been less than 15%.”
Canada’s federal government hopes the private sector will provide small businesses with PRPPs. But the regulatory cap on management fees may stunt the product’s profitability, says Michael Hill, president of Thornhill, Ont.-based IPP Online Canada.
“If an administrator such as a life insurer or fund company can only charge a management fee of 1%,” he says, “it may not be worth the headache of taking on the risk, when they can charge higher fees on other group business.” IE