Inside the Multi-Billion Dollar Battle Between Canada's Banks and Insurance Companies and Our Public Pension Plans

In its recently passed budget, the Ontario Liberal government promised to table legislation enabling private sector sponsored Pooled Retirement Pension Plans (PRPP's) in the fall of 2014. With its new majority government, PRPP legislation could very well be passed by end of this year. This would be disastrous for the future of pensions in Canada. This article explains why.

The PRPP is a new, private sector retirement savings vehicle that will replicate many of the weaknesses of existing bank and insurance retirement savings products (such as RRSP's) and will serve no useful public policy objective. Perhaps even more ominously, the fact that PRPP's will be in place in Ontario long before the proposed - and far superior - Ontario Retirement Pension Plan (ORPP), could result in the much touted ORPP being dropped from the Liberal government agenda altogether.

While it may not be the current intention of the Ontario Liberal government, the rapidly intensifying political opposition to the mandatory ORPP proposal from employer groups and powerful private financial interests could result in the government eventually abandoning its ORPP proposal and instead, tweaking the fatally flawed PRPP legislation to cover its political retreat. For this reason, it is of crucial that intense pressure be put on the Ontario Liberal government not to introduce PRPP legislation this fall and to give up on PRPP's for once and for all.

What are Pooled Retirement Pension Plans (PRPP’s) and why are they the wrong retirement savings option for Canadians?

The attraction of PRPP's to employers is that relative to single employer pension plans, they pool risks (amongst employers) and reduce administrative costs. However, the reason they serve no legitimate public policy objective is that the Canada Pension Plan and existing, large, public pension plans can be expanded to achieve these very same objectives with much lower administrative costs. And while the devil is in the details, it is very likely that any Ontario PRPP enabling legislation will give Canada's big banks and insurance companies close to a monopoly to offer PRPPs.

Again, the big problem with private sector retirement savings options such as PRPP’s are the outrageous management fees. Canadians pay 2% or more for the administration of their RRSPs whereas the large public pension funds such as CPP and OMERS pay less than 1% for fund administration. High fees erode returns and estimates suggest that the higher administrative fees of PRPP's relative to a large-scale public plan could result in a 30% lower return at retirement. PRPPs are proposed to be very large funds designed to keep fees low but it is not clear that legislation will impose an administrative fee cap. The long-term potential business for the bank and insurance company administrators of the new PRPP’s is in the billions!

Other major problems with the PRPP’s as proposed by the life insurance industry and as embodied in the federal PRPP legislation are:

There is no employer obligation to contribute to PRPP’s. Workers are pretty much on their own in terms of contributions;

There is no “defined” or even “target” benefit with PRPP’s. Workers end up with whatever the market returns are on their cumulative contributions when they retire;

Employee enrollment is strictly voluntary;

Canadians now contribute about $40 billion annually to their RRSPs but that still leaves an estimated $80 billion in RRSP “tax-deferral room” that has not been taken up. All PRPP models contemplate tax rule changes to include contributions to the new PRPPs in the category of deductible pension contributions.

How PRPP's got to the top of the policy agenda

Four years of steady prodding by labour and seniors’ groups and seven federal-provincial finance ministers’ meetings got Canada’s senior governments to agree that Canadians were not saving enough for their retirement and those without workplace pensions – two-thirds of working Canadians – needed a safe, affordable and reliable retirement savings vehicle.

At their December, 2012 meeting, federal and provincial finance ministers agreed to consider a “modest” CPP enhancement to complement the private sector PRPP’s they had already endorsed at a previous meeting. In 2012, the federal government passed PRPP legislation – the legislation is pretty much based on the model put forward by the life insurance industry.

In December, 2013, the Harper government made it clear that it would not be proceeding with any sort of enhancement to the CPP. However, because 85% of workers are provincially regulated and the fact that most federally regulated workers already have workplace pensions, the life insurance industry, banks, CFIB and the Chamber of Commerce are all strongly lobbying for Ontario provincial PRPP legislation that pretty much copies the federal legislation. Put bluntly, without Ontario provincial PRPP legislation, PRPP's are unlikely to get off the ground and the banks and insurance companies will lose billions of dollars in potential administrative fees.

What has Changed in Ontario - PRPP Legislation to be Tabled in the Fall of 2014

For a number of years, the position of the Ontario Liberal government was that they would only proceed with provincial PRPP legislation if there was a federal-provincial agreement to also enhance the CPP. However, the Wynne government position is now that they will proceed with the PRPP legislation in the fall of 2014 even though the current federal government has made it clear that they will not proceed with a CPP enhancement. The public rationale of the Wynne government for this de-linking is that they now also support the implementation of a mandatory - albeit with many exemptions - provincial public pension plan called the Ontario Retirement Pension Plan (ORPP).

While it's early days on this proposal, the ORPP as outlined in the Liberal's 2014 budget appears to be a solid proposal. But this simply begs the question: if a public pension plan that will be mandatory for most Ontarians that currently lack a workplace plan is imminent, why are PRPP's needed at all and why the rush to table the PRPP enabling legislation long before the implementation of the far superior ORPP?

Why the intense opposition to the establishment of an Ontario Retirement Pension Plan from employer and private financial institutions

Why Employers Oppose a new public pension plan

All major employer groups in Ontario have formally come out against an Ontario Retirement Pension Plan as proposed in the 2014 Ontario budget.

The two biggest objections of employers are that: 1) other than classes of employers who are specifically exempted (which include federally regulated employees and the 35% of employees who already have adequate existing workplace plans), all Ontario employees will be automatically enrolled in the plan; and 2) employers with enrolled employees will have to contribute 1.9% of payroll up to $90,000. The lower end of the threshold has not been established and the 1.9% would be phased-in over two years.

Why the big banks and insurance companies oppose a new, public pension plan

Banks and insurance companies oppose a new Ontario public pension plan because once it is implemented, there will be absolutely no need for PRPP's and the concept won't be viable. And without viable PRPP's, in hte long-term hundreds of millions of dollars (if not billions) in administrative fees will not be collected by banks and insurance companies.

It is a little known fact that the majority of fees paid by Defined Contribution and sponsored RRSP members go to the record-keeper (usually a financial institution) and to financial advisors. When you add these fees to the asset management fees, you get some idea of the fees involved for banks and insurance companies sponsoring PRPP’s.

Alternatives to PRPP’s - Public Pensions

The truth of the matter is that a modest enhancement of the existing CPP complemented by a second, public, defined-benefit plan aimed at those who don’t presently have a workplace pension plan, makes much more sense than PRPP’s. The second public plan would have obligatory, matching employer contributions, low administrative fees, and automatic enrolment of plan members. This could be done either nationally as a second tier of the CPP or on a provincial basis with the large public, pension plans acting as benefit administrators and/or asset managers.

Again, the Ontario Liberal government's proposed Ontario Retirement Pension Plan (ORPP) is an example of such a plan. Similar proposals have been put forward by the Ontario New Democratic Party, CARP, and a number of legal and academic pension experts. However, the recently passed Liberal budget is clear that the ORPP won’t be operational until 2017. This gives Canada’s banks, insurance companies and powerful employer lobbies plenty of time to kill it off.