Monday, December 20, 2010

Ministers Agree to PRPP ... now the hard part

The UK NEST Plan .3% Management Fees

It appears that Canada the country is on track to solving the pension predicament. 

The Finance Ministers from all provinces have agreed to go ahead with the plan introduced last week by Flaherty, the federal finance minister. He calls the plan the Pooled Registered Pension Plan. The PRPP focused on those Canadians most in need of pension triage. 

The PRPP is being introduced as an alternative to enhancing the CPP plan. An enhancement that the provinces and labour groups across Canada have advocated for. A CPP boost would have the impact of eliminating the billion dollar pension shortfalls that exist in public sector pensions. Most of the pension shortfalls are in provincially administered pension plans so the provinces would have benefited greatly from a CPP enhancement as well. 

Urgent Action Required
This pension reform was needed to help those who are in danger of falling through the gaps in the current system. 

Insurance companies in Canada support the new plan. They administer most of the pension assets in Canada and were at risk of losing substantial assets to the CPP plan if it is boosted. The insurance companies are now on board, selling the benefits of the plan. Sun Life Financial welcomes milestone
 PRPPs will benefit Canadians by making pension coverage more broadly available:
  • Benefit from economies of scale. 
  • A plan that is easy to administer for the employer 
  • The advantages of a pooled plan and the management that it can offer 
  • Automatic enrollment to promote higher participation rates 
  • Linked to salary to provided increased contributions over time. 
Rubber to the Road
Now that the insurance companies are glowing from the introduction of the PRPP, they will have to make good on their promises. 

Part of the promise is to provide pooled investments with reasonable investment fees. If this does not happen the PRPP program will not work. At the same time it will mean billions of dollars coming from the pockets of  the financial services industry in Canada.

Here is an excellent podcast that is an interview with Katherine Strutt the head of Saskatchewan Pension Plan i is from Sheryl Smolkin. It does an excellent job of describing the benefits of the PRPP concept. The interview points out that the cost of management fees in retirement plans are around 2.5% to3%. The Saskatchewan Plan is able to manage the pool for well under 1%. Sheryl has a series of excellent interviews on her website.   

Is this small pension plan Canada’s best kept secret?

The Secound Pension Problem
The trip to Kananaskis primarily focused on one of two major problems affecting our pension system in Canada. This first problem is the low enrollment for working Canadian in pension plans. The secound problem is the serious erosion of value in  retirement plans from MER's or the expenses charged by financial services institutions to manage these funds. 

Please note: I make a portion of my personal income from consulting on these plans for Canadian businesses. The sales and marketing expenses of these plans is a large cost for the Canadian insurance companies.

The Canadian Labour congress did put out some analysis tools to show the effect of high MER's on retirement savings in Canada. Straight Talk on RRSP and mutual fund management fees

In the UK they have introduced a PRPP plan and have called it the NEST program.The only difference from the Canadian plan is that employer contributions will be mandatory in the UK. In Canada, at this time they are voluntary. 

Neil T. Craig, Senior Pension Consultant from Stevenson and Hunt pointed out to me the NEST has a up front management fees of 1.8% on new contributions into the plan. After that however, the plan is managed with only .3% or 30bps in fees. The illustration at the top of the blog includes this up front fee in the calculations of long term pension values. It comes from an article in the Daily. The charges that wipe out your hard-earned pension pot

The Wealthy Boomer had an overview of comments from some of Canada's top pension experts. The most direct comment came from Keith Ambtachtsheer who pointed out the three things needed to make the PRPP fly: 
1.) Auto-enrolment of all workers without a RPP into a PRPP (with an opt-out clause).
2.) A standard default option with a prescribed contribution rate and investment policy.
3.) Oversight of all PRPPs by an independent fiduciary body to ensure cost-effective delivery.
The government has given the insurance companies what they want. Now it is time for the insurance companies to give Canadians what they need. 

Bill Tufts 
Fair Pensions For All  

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