Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 22  - Evidence - June 19, 2012

OTTAWA, Tuesday, June 19, 2012

The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-25, An Act relating to pooled registered pension plans and making related amendments to other Acts, met this day at 2 p.m. to give consideration to the bill.

Senator Irving Gerstein (Chair) in the chair.


The Chair: Honourable senators, last Thursday the Senate referred Bill C-25, the pooled registered pension plans act, to this committee for consideration. This afternoon, we will begin our study of the bill.

In the first hour, we are pleased to welcome, as we always are, the Honourable Ted Menzies, Minister of State (Finance). The minister is accompanied by officials from the Department of Finance Canada. We are pleased to welcome Jeremy Rudin, Assistant Deputy Minister, Financial Sector Policy Branch; Leah Anderson, Director, Financial Sector Division; and Lynn Hemmings, Senior Chief, Payments, Financial Sector Division.

Colleagues, we have 45 minutes for this session. Minister Menzies, the floor is yours.

Hon. Ted Menzies, P.C., M.P., Minister of State (Finance): Thank you. I do apologize, but I have to be covering house duty at three o'clock, so I will make sure that my learned officials stay behind to answer any technical questions while I go and do my duty.

We have Yasir Syed with us from the Department of Finance as well.

I appreciate this opportunity to discuss with you Bill C-25, the proposed pooled registered pension plans act. I am not sure what I will do when it actually clears the Senate because I have been working on it for so long. I am sure I will find something else to do. It has been a great challenge, and I look forward to its passage.

This act will help make Canada's retirement income system more responsive to the needs of many Canadians. However, let me start by emphasizing that Canada's retirement income system has served us very well and is serving us well. We are recognized internationally as having among the strongest of such systems in the world.

Overall, the system is based, as we all know, on the strength of three pillars. First, it consists of social security programs such as OAS and GIS. These programs provide a basic minimum income guarantee for seniors and are funded primarily through taxes on working Canadians. Our government has a responsibility to ensure that these programs are available for the next generation of Canadians. As we all know, Canadians are living longer and living healthier, and OAS and GIS must change to reflect these demographic realities. Only by making the changes today will OAS be available for Canadians tomorrow, for our children and our grandchildren.

The second pillar is the CPP and in Quebec the QPP. These are mandatory public target-benefit pension plans that provide a basic level of income to Canadian workers when they retire. I am proud to say that CPP is fully funded, actuarially sound and sustainable for the long term.

The third pillar is composed of tax-assisted private savings opportunities to help encourage Canadians to accumulate additional savings for their retirement. This includes the RPP, registered pension plan, and the RRSP as well.

While Canada's retirement income system has proven itself effective and well balanced, in an ever-changing world we must continue to look for ways to improve it and to assure its long-term strength and sustainability. Since the retirement income system is crucial to Canadians' financial future, it is essential that governments make the right choices.

For example, although all Canadians have access to the publicly funded pillars of the retirement income system, it is estimated that more than 60 per cent of Canadians do not have access to a workplace pension plan at this time. While participation in retirement savings vehicles like pension plans and registered retirement savings plans is reasonably high for middle-and higher-income earners, some Canadians may not be taking and are not taking full advantage of these personal retirement savings options.

In particular, research conducted in 2009 indicated that a portion of modest-and middle-income households may be at risk of under-saving for their retirement and that a gap exists on the voluntary side of Canada's retirement income system. More recently, the OECD's pension outlook for 2012 remarked that in order to close this pension gap a growing role for private pensions will be essential. We cannot help but agree.

I firmly believe that the PRPP is the right solution at the right time to help these Canadians better save for their retirement.

Let us talk about what a PRPP actually is. Pooled registered pension plans will be large-scale, broad-based pension arrangements available to employees with or without a participating employer, as well as available to the self-employed. They will be low cost. By pooling pension savings, the cost of administering the pension funds will be spread over a larger group of people. This will allow plan members to benefit from lower investment management costs; in effect, Canadians will be buying in bulk. The result: more money in the pockets of Canadians.

In addition, the introduction of PRPPs will mark a significant advancement in supporting the retirement needs of small-and medium-sized businesses and their employees who, until now, have not had access to large-scale, low-cost private pension options. Under a PRPP, most of the administrative and legal burdens associated with a pension plan will be borne by a qualified, licensed third-party administrator. This is of particular importance as these burdens have prevented many employers from offering a pension plan to their employees. It should also be noted that these administrators will be subject to a fiduciary standard of care, which will ensure that the funds are invested in the best interests of the plan members. The design of these plans will be very straightforward. They are intended to be largely harmonized between provinces and territories, which will only encourage lower administrative costs.

Finally, PRPPs will complement and support our government's overarching objective of creating jobs, economic growth and long-term prosperity.

Some proposals to improve Canada's retirement income system would have significantly raised mandatory costs for employers and employees. One such proposal was to expand the CPP benefits. In order to expand the CPP benefit, contribution rates would of course have to have been increased. This would mean higher premiums for workers, as well as the self-employed. It would also mean higher payroll costs for small-and medium-sized businesses.

Simply put, the current economic situation in Europe still unresolved, our government does not believe now is the time to jeopardize Canada's fragile economic recovery by imposing a higher payroll tax on job creators. I think that the CFIB has summed up best:

. . . the PRPP will be a better and more effective option than mandatory CPP expansion by allowing more employers, employees, and the self-employed to participate in a retirement savings plan.

Honourable senators, it would seem that many agree with this assessment. At the 2010 meeting of financial ministers, many of the provinces raised strong objections to idea of raising the CPP benefits. However, despite their objectives to expanding the CPP there was unanimous agreement to pursue a framework for the pooled registered pension plan. By passing this legislation, our government will be filling a gap in that voluntary side of our retirement income system and will provide millions of Canadians with access to a low-cost pension arrangement for the very first time.

I think that the Canadian Chamber of Commerce said it best:

PRPPs can give many businesses, individuals and the self-employed additional retirement options and many millions of Canadians who currently lack adequate retirement savings will benefit.

Once the federal legislation has passed through Parliament, the provinces will need to pass their own legislation before the PRPP framework can become fully operational across this country. On June 12 this year, the Government of Quebec introduced legislation to implement their version of the PRPP. Theirs is called the voluntary retirement savings plan. This is encouraging and an excellent example of what can happen when governments work together and deliver results for Canadians.

I thank you for your time and I am happy to take some questions. If they are really tough, I will pass them off to my officials.

The Chair: Minister, you talked about the three pillars that we have in Canada. I would like to refer particularly to the third pillar: tax-assisted private savings opportunities. Perhaps you could help clarify for us the difference between the PRPPs, RRSPs and TFSAs. That would be helpful, I am sure, to more than myself on the committee.

Mr. Menzies: I think that is a very good question. Believe or not, I have answered that a few times in different forums than this, not only in the House of Commons but to many businesses as well and to many individuals who have said, -Is this not just another RRSP?'' It is frankly not just an RRSP. There are many advantages, the first, to me, being the lower cost, the cost of administration.

As I have said before, the most important outcome to this is providing a low-cost option that more Canadians can participate in at a low cost. Canada has been criticized by the OECD for our high management expense ratios, and the financial sector would say that it depends on the service provided. This is low cost, broad-based, easily accessible, and the pooling effect is what will keep the cost down.

Many businesses have also said to me, -Finally we have an option available where I do not have to carry the fiduciary responsibility and I can pass that on to my employees.'' Many have said, -I could offer them a group RRSP, could have done that, but the responsibility is on me as a plan administrator.'' It will provide a locking-in provision, so you cannot take that money and go buy a boat with it; there is a locking-in provision that protects it and the standard of care of the financial institution will help protect those savings.

The Chair: Thank you very much, minister.


Senator Hervieux-Payette: Welcome. I am struck by the number of times you have repeated the words -at low cost''. There are dozens and dozens of pooled funds in Canada with different investors. These funds are run by private companies and are considered to be very expensive, if we compare them not only to the European ones, but also to those in the United States.

How will this fund be administered so as to keep its costs down? What are the main reasons to believe that it will be a low-cost fund? Even if you repeat the words -low cost'' 100 times, this will not make it a low-cost fund if we do not have any guarantees that costs will be low. What factors will make this a -low-cost'' fund?


Mr. Menzies: There will be in the regulations a requirement for low cost.

I have spoken with many of the financial institutions that are interested and no decisions have been made as to who will be chosen to provide these. They have said to me that this is so much simpler than what they presently offer to individual Canadians, whether it is for RRSPs or individual pension plans. The simplicity is that they are large pooled accounts that through the pooling process reduce their administration costs. It will be harmonized from province to province. It will be portable from province to province, which is not necessarily to do with the low cost, but that is the benefit to plan members.

The simplicity of it will keep the costs down. We have had suggested numbers — I will not repeat them here — and management expense ratios that are quite low because it is simple. They know it will not be a high-profit product; it will be a volume product that many of them are looking at utilizing, as this is in addition to many of their existing customers.


Senator Hervieux-Payette: Does that mean that the department is going to set a ceiling, and ensure that the government is not constantly beset with requests to raise that ceiling, because people will be claiming that salaries are higher, there are more workers, et cetera? Your answer is that this will be ensured through regulation; but on what basis?

Currently if we think of the Canada pension fund, it is an immense fund, what I would call a pool, and represents a joint endeavour by many workers who for all intents and purposes give mandates to various investment groups.

You might say that they manage the fund managers. Their performance is certainly adequate. The risk is certainly contained, since this is a pension for all Canadians. So how would the pooled funds compare to the Canada pension fund, which has performed well, even during difficult years, and is managed by a federally mandated organization? We were told that it is not too costly, precisely because it is not administered by the government. It is administered by specialized, independent entities.

In this case, there will not be a single product, however; there are going to be several products in this pool. What is the magic formula that will make this last?


The Chair: Senator, I think I have heard three questions. Can we let the minister respond?

Senator Hervieux-Payette: It is only one question.

Mr. Menzies: Thank you, senator. Three questions, one simple answer: competition. This will be a very competitive market.

We had looked at placing a ceiling, putting a cap on the management expense ratio. I am not good at picking those kinds of numbers. The number I chose would be the number that every fund would go to. Every administrator would go to that number, so I probably picked too high of a number. Let competition decide what the management expense ratio should be.

We have many interested parties. They may not all qualify. I will put that disclaimer in there. They will have to prove their track record to ensure that their interests are the interests of the plan members, but through competition, we will keep the costs low for those individuals.

The Canada Pension Plan has certainly been well managed. The CPP Investment Board, CPPIB, has done a great job of investing. We have had many discussions with them about whether they could adapt, whether this could work for them. They said they could do it, but they are not set up to deal with individual plans and individual accounts like this. They could do it, but their management expense ratio would go up because of the extra administration.

Senator Hervieux-Payette: Would the private sector not have the same expense for individuals?

Mr. Menzies: The Canada Pension Plan is set up as one fund, so their expenses would go up by who knows how much. We do not know, but they said their costs would have to go up in the present format.

Senator Tkachuk: Welcome, minister. What kind of institutions would offer this plan? Who would actually offer the pension plan?

Mr. Menzies: As I say, there will be requirements they will need to meet. Financial institutions are very interested in this. Some of the existing pension funds — one that you would be interested in is the Saskatchewan Pension Plan — have expressed an interest in seeing if they qualify for this. Pension funds already have the expertise, so they are very interested in enlarging their pools to keep their costs down.

Senator Tkachuk: Is it like the OMERS?

Mr. Menzies: The OMERS may very well qualify. I would be surprised if they did not put their name in the hat.

Senator Tkachuk: As well as insurance companies?

Mr. Menzies: Yes, but those companies are under a different tax regime currently, so it is not unfair to the financial institutions to make it a level playing field. The pension funds would have to set up a corporation so that tax requirements for them are the same as for a financial institution. It is fair and even competition for all of them.

Senator Tkachuk: With respect to opting into the plan, how would individuals opt in versus small companies that have maybe 200 or 300 people working for them? Would the OMERS offer one pension plan and everybody would subscribe to the plan offered out in the marketplace? Is that the way it would work?

Mr. Menzies: Each one of these chosen administrators would offer different options that an employer can choose from, as well as the self-employed. Someone who is 25 years old may pick a different fund than someone who is my age. There will be options within the presentation of each one.

Senator Tkachuk: If the person has their own RRSP and pension plan and say their limit is $18,000 or $15,000, whatever it is, will their deductions be the gross total of both, or will they enjoy an extra benefit?

Mr. Menzies: The sum total of both will only be the maximum RRSP deduction. We are not taking away from the RRSP. To simply increase the maximum amount for an RRSP would actually provide an option for those people with higher incomes. They are not who we are concerned about; we are concerned about people with middle income, the people who are not now contributing the maximum to their Registered Retirement Savings Plans.

Senator Tkachuk: In terms of the accumulated effect of deposits, even cash deposits for short-term investments within the pension plans, I know that you get a heck of a lot less for a $1,000 deposit at the Royal Bank than if it was half a million or a million dollars.

Mr. Menzies: Only you would know the top number.

Senator Tkachuk: Mr. Syed, I would think that the returns of pooled pension funds would be greater by a substantial amount. Maybe you could help us out with the numbers. Despite what Mr. Menzies implies, it is not something I know from experience but only from reading about people like the person sitting opposite from me right here.

Yasir Syed, Senior Project Leader, Payments and Pensions, Department of Finance Canada: Ultimately, I think the returns will depend on the whims of the market. Obviously, when they are able to pool more funds from various sources, from a larger base, that would hopefully lead to lower costs, which is one of the policy objectives here. They would use the expertise that we know many of the potential administrators will have. They will obviously need to demonstrate that they meet certain criteria before they are able to obtain a licence, one of them being expertise in managing these pension funds. We hope they would lever that expertise in the way they manage those funds.

In many cases, they are already in the business, so it is just a matter of using either their existing pension systems or their existing funds. In many cases, they could be using the funds they are currently offering to other members as a means to pool this new cohort they will get.

Ultimately, I think it will depend on the way they manage those funds. That will be up to each individual administrator.

Senator Tkachuk: I just wanted it on the record.

Mr. Menzies: One addition that I should have mentioned is a number of the credit unions have expressed interest in this. That is an option that helps spread it all across the country, if they qualify.

Senator Tkachuk: I think small businesses all across Canada will take this as a real opportunity. I think this is a great thing.

Senator Moore: Thank you, minister, and your colleagues for being here today. It seems to me this is another variation of something we recommended, is it not?

The Chair: I think that will be in his concluding remarks.

Senator Moore: There you go.

Minister, last November when you appeared on the CTV show, you made the point that Canadians simply are not saving enough. You said that in Canada since 1991 there is an accumulated $600 billion of unused tax room in RRSPs and only 8 per cent of Canadians topped up their RRSPs in 2009.

Those are huge numbers and present huge savings opportunities. At the same time, I think half of Canadians who file tax returns make $30,000 or less. Has your department looked at what could happen here in terms of the potential? There is not a lot of money left at the end of a month if someone is grossing $30,000 a year. Do you have any feeling for what could happen in terms of getting Canadians to participate and save, regardless of what their income level is? That would, to me, answer part of your question urging Canadians to save more for their retirement years.

Mr. Menzies: That is a question that troubles us all: How do you get low-income earners to save?

One of the policies we are putting forward is actually financial literacy and getting to young people early on to make some wise choices to start putting a little bit away. We have all seen the numbers of very little each month, even if you are a low-income earner. It is amazing how much you have by the time you reach retirement. That is part of it, and we are looking forward. We put money aside in last year's budget or the one before.

Jeremy Rudin, Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance Canada: The government has set aside money in two budgets.

Mr. Menzies: Two budgets for a financial literacy leader and it will be in the Financial Consumer Agency of Canada to see how we can help people think about this earlier on. I do not know about you, but I did not start saving early enough.

Senator Moore: Too busy paying off student loans. How do you get the message out there?

Mr. Menzies: It is tough. It is interesting, because I spoke to a professor at Purdue University. They have been working on this. I asked if they had done some analysis at what stage in a young person's life we should be inserting financial literacy. He said you start at 4 years old, and if you have not got them thinking about it by the time they are 12, you have lost them. It was a scary number to me, but if you watch a young person using a debit card they have no idea; someone has to pay for swiping that card to get a chocolate bar.

We did some very in-depth analysis which showed that with $30,000 a year income and less, when they retire, through OAS and GIS, they will have somewhere in the neighbourhood of 90 per cent of their pre-retirement income from those two programs. The higher-income people, like Senator Tkachuk and some of the other guys, have probably saved in another way. It is the middle ones — the $30,000, to $100,000, to $110,000 — who perhaps have not. This is another tool. This is not taking away from your tax-free savings account. It is not taking away from RRSPs. It is another tool, and it is auto enrolment. As an employee, if your employer enrols you, you have 60 days to overcome the inertia of being in. You must say, -I do not want to save.''


Senator Maltais: Welcome, Mr. Minister; I have a few quick questions. They concern Quebec, in particular. We know that the Régie des rentes, the Quebec Pension Board, is already in place. Will this new system be considered a complementary system, or one that will be integrated into the basic QPP system?


Mr. Menzies: Yes, it absolutely is. I have worked with Raymond Bachand and have met with him on many occasions. I do not want to pick winners and losers, but he saw the benefits to this. I believe in the previous budget they spoke of it, in the most recent budget they had actually financially enabled it, and they are going to put it in place on the June 12. They put forward legislation; positive there. He and their cabinet see it as the right direction to go.


Senator Maltais: Let us take the case of public servants in Quebec who retire between 55 and 60. When they start to draw the QPP, there is an adjustment that is made between their pension and the QPP. There is a small decrease, a readjustment, especially if, in addition, they are eligible for the CPP. There is an adjustment that is made so that a certain maximum is not exceeded, a certain ceiling; is this going to be affected, or will it remain largely the same?


Mr. Menzies: It is a technical question, but I do not see it — and Mr. Rudin can maybe help me out on this — being an impact. This is about individual savings. It would be treated just like a registered retirement savings plan and there would be a -decumulation'' phase, whether you put it in a life income fund or whatever you roll it into. Perhaps Mr. Rudin can explain it better than I can.

Mr. Rudin: No, minister. You explained it very well.


The integration you are referring to is relevant in the case of the QPP and also as regards defined benefit pension plans. But in the case of the registered pension plans, we are talking about defined contribution plans. So there is no need to align these two types of plans. It is more comparable to an RRSP than a pension plan, such as the plan for Quebec public servants.

Senator Maltais: One last brief question, Minister. Who is going to monitor all of this to prevent more cases like Nortel, where workers lost their pension fund? Who is going to oversee this to ensure that workers and those with small savings — we are talking about low-income earners — will not lose what they have invested?


Mr. Menzies: It is a very good question. There are provincial pension administrators that may provide the oversight to this, but each province has the option of saying to OSFI, -We would like you to be the oversight body.'' Some will do that because of the cost of actually setting up their own pension oversight board. These are treated differently than RRSPs. They are treated more like a pension plan, so they are actually overseen by the Pension Benefits Standards Act in Canada.

That is a very good question. That is the fundamental reason for this: Protecting those funds that people save for their retirement.

Senator Massicotte: Thank you for being with us today, minister. I know you are surrounded by some very bright people, but I have to admit they read our report very well. I see you emphasize the professional management choice, low fees. You have automatic opt-in and have even added a fiduciary level of care, which is something we pushed hard for. Thank you very much for reading the report.

Mr. Menzies: You guys and gals do good work.

Senator Massicotte: Having said that, let us talk about low fees. Senator Hervieux-Payette raised the issue. We all agree this whole thing will work on two conditions: professional management, which is fundamentally important and hard to judge, but also low fees. Low is a relative term. Your answer was competition. I agree that is where the solution should lie. Will the minister do something special?

We live in, roughly, a small country. If you look at the mutual fund industry, we have what you would call competition. However, many reports are written out there that our fees are relatively high compared to the competitors. They argue that we provide more service for those fees, but, irrespective of that, people come back and say we are paying a lot of fees for management advice.

How do we get there? I am concerned that if you just let the market and competition dictate it, we may end up with the same thing as mutual funds. They argue it is low, but it is not very low. Will you coordinate public bids where people have a right to bid to offer their services, or will you simply allow every company to choose whoever is out there? I would be concerned that if we did that, we might not get where we want to go.

Mr. Menzies: The regulations will require low cost. I keep going back to this. If I had picked a number, I probably would have picked a number too high. I want to see competition. I am a free marketer; I want to see competition to keep the cost down.

However, it will be very simple to administer the program and very simple for the employer. He just chooses a fund and offers it to his or her employees. Keeping it low cost is important.

Harmonizing is the one challenge we have. I continue to talk to the provinces on an ongoing basis to ensure that we get this as harmonized as we can, not only so that it is portable from province to province but to keep the costs low. Harmonization will keep the costs low.

Competition will be there, but if we can keep it simplistic — a very narrow number of options to provide to these individuals. There are no frills.

Regarding the mutual fund industry and many of the RRSPs, there is a lot of financial advice that goes with them and it all comes at a cost. This is very simple. There is not likely to be a fan-out of individuals going out there, pitching the benefits of this particular fund. It will be very simple: broad based and pooled assets. We should see some large pooled funds.

The one thing we have not talked about is the benefit of having more of these large pooled funds for investments in Canada.

Senator Massicotte: I hope you are right. The RRSPs and the mutual funds will argue that it is very simple. An investment syndicate was here about a year ago. It is very simple. They think their fees are relatively fair. As you know, many independent people have said —

Mr. Menzies: The OECD does not think so.

Senator Massicotte: Exactly.

I hope you get there, but I suggest you may have to coordinate. In Canada, we are not known for a highly competitive environment, and I hope the government will do something to induce competition.

Let me go on to my next question. You have decided to impose a fiduciary level of care, which I think is very good. To a lot of people, that does not say much. However, it basically says that the counsellor or the investor — the one giving advice — must behave in the best interests of the investor at all times. Meanwhile, in Canada, the regime for investment counsellors has no fiduciary level of care; it is a reasonable level of care. Often their loyalty is to their employer, which means higher fees, higher commissions, and so on.

Would you consider applying that standard, as other countries have, to maybe all investment advisers, including outside this pension program? Why not mutual funds? Why not investment counsellors?

Mr. Menzies: It is an interesting question. Perhaps we should pass that one on to Minister Flaherty and see what his thoughts are. It is an observation, because we have been criticized by outside third-party organizations.

Senator Massicotte: Many other countries have gotten there, such as the Netherlands.

Mr. Menzies: Unless one of my officials wants to comment on that, I think that would be something that a Senate committee might recommend to Finance.

Senator Massicotte: We have. You have not read that report.

You basically said the employer will be choosing the investment manager or counsellor. If that is the case, does the legislation provide that it is totally an independent choice, or will it be like the pharmaceutical industry or the investment counsellors industry where there are trailer fees where the employer could benefit financially from choosing a certain counsellor and not another, therefore resulting in a distorted marketplace?

Mr. Menzies: They are all honest. We know that. We were concerned about that, as well, and we have actually put in the regulations that there will be no enticements allowed.

Senator Massicotte: No free trips.

Mr. Menzies: No. We were even concerned about a business person having had previous business with this financial institution that you thought actually had the best plan to offer. We need to ensure there is a barrier between that, and we put that in the regulations to make sure that does not happen.

You have good questions. You have thought of it all, too.

Senator Stewart Olsen: Thank you for being here, minister. My question is fairly simple. I am confused as to how each province passes enabling legislation if they are in agreement with this. Do you have a framework that they have to abide by if they are to come in under this big umbrella? Can they all be different names? I am concerned that perhaps people will not understand. As they go province to province, everyone has a different name for this pooled pension. How will you manage, province by province, so it does not become a piecemeal approach and that it gives each individual the benefits that we want to give them — the portability, et cetera?

Mr. Menzies: Thank you, senator, for that question. That certainly was a concern, and we always face challenges when we are dealing with the provinces. We cannot dictate to them. As I say, Quebec has a voluntary registered savings plan. It is a PRPP. They wanted to give it a different moniker. Obviously, we cannot stop that.

Some of the other provinces may do the same thing. As I say, Saskatchewan has their SPP, which is similarly modelled, or maybe we modelled ours after SPP. You can go back and tell your premier that.

Harmonization is the critical point. Our enabling legislation is actually quite broad, to allow provinces to be able to use it as a template. They can adopt it 100 per cent if they choose. They can make it more definitive if they choose.

The pooled registered pension plan must follow the same criteria and be harmonized — so it is portable from province to province to province. Those are the fundamental requirements that we are asking. We are encouraging, as I say, all the provinces to move forward with this, because we would like to get it going. However, until it is all across the country, we cannot do that.

Senator Harb: Thank you very much for your presentation. When we were having hearings on this matter, a number of witnesses who appeared before the committee told us that one of the big problems for low-income people is the fact that you put your money in RRSPs when you are at a low tax rate. Then, when the time comes to pull it out, you take it out at the high rate. Not only that, you find yourself being penalized with your Old Age Security.

How does this differ from, say, someone who is making a contribution to an RRSP when it comes to the time of taking out the money?

Mr. Menzies: It does not because it fits within the same saving room as the RRSP. There are lots of options for the -decumulation'' phase of that, but it will face the same taxes as anything else.

You can use a tax-free savings account. If you think your tax rate is lower now than it will be when you retire, you can put your money in a tax-free savings account. That option is still there.

Senator Harb: In terms of a ceiling, it does not change anything. You are not increasing the pie.

Mr. Menzies: No. Do not forget that people are not using the whole pie.

Senator Harb: For example, I am a low-income income person and I want to take my money out when I am retiring.

Mr. Menzies: Is that a statement?

Senator Harb: No, it is a hypothesis. Without any tinkering, you will allow me to withdraw my money at the same rate that I contributed in terms of the tax benefit. What makes you believe this will work?

Mr. Menzies: It is a simple process that people have. It is another option. As I say, we are not trying to take anything away from RRSPs. We are just trying to provide an option. CPP works well because the deduction comes at source. This comes at source. You will quite quickly, I think, get accustomed to the fact that there is a little less on that paycheque, especially when you can see you have a fund building up.

In a large pooled fund, that will actually return you more in the end. Mr. Rudin can give you the number for what it costs the fisc each year for RRSPs. It is a lot of money. If we are going to provide more room for you, you have deferred your taxes all along by putting it in an RRSP or PRPP, then for us to increase the tax exemption at the end, it is costing the government an awful lot of money.

Senator Harb: Senator Moore wanted to know if this will be reviewed after a period of time to assess whether or not it is working. I believe it will be reviewed to find out whether it is working or not.

Mr. Menzies: I think it would be. I have not talked to Mr. Rudin about it, but I think it would be wise.

Mr. Rudin: We think it is a very good idea, and indeed, I think it would be useful, after a number of provinces have implemented it, to look at it together, as we have worked together to develop the framework.

Senator Harb: Dealing with the locking in, presently, with the RRSP scenario, people cannot plan to withdraw money based on their circumstances. I know that you are saying here that you want to lock it in except if some of the jurisdictions choose to unlock their contribution under certain circumstances. I think it would be very important to provide flexibility when it comes to regulations. If I am putting my money in and for whatever reason my situation has changed and I wanted to take the money out, it is my money, and after a second attempt I will be able to take it. In other words, it would allow the person who is making the contribution to be the king at the end, because we are dealing with his or her money.

Mr. Menzies: We have put in a clause for critical illness, or critical disability.

Senator Harb: Thank you.

The Chair: We have five minutes for Senator Ringuette's question, and then the minister has to leave.

Senator Ringuette: I will go directly to the most important question then. Clauses 78, 80 and 81, as a process, deal with the Bankruptcy and Insolvency Act and provide for these pooled plans to have secured status in case of bankruptcy.

Mr. Menzies: Where were you reading from?

Senator Ringuette: It is clauses 79, 80, 81 and 82 in regard to the Bankruptcy Act. This provides for the pooled registered pension plans to be protected re unfunded portions from the employer and that employer goes through a bankruptcy. Why are you moving to securitize these pension plans through bankruptcy and not all the other pension plans that we have in the different corporations in Canada, i.e., Nortel?

Mr. Menzies: This is going forward with the pooled registered pension plan. We wanted to ensure that it was protected. We are certainly concerned with an employer contribution, and we want to ensure that the employer cannot take that contribution back if he or she gets into trouble. We felt it was appropriate.

Senator Ringuette: Am I to believe that your government now will move toward that protection?

Mr. Menzies: Probably no faster than your government did.

Senator Ringuette: I think that the Nortel issue was certainly a highlighter —

Mr. Menzies: A provincial issue, by the way.

Senator Ringuette: — for many people, especially the government.

Mr. Menzies: For a long time, yes, it was.

Senator Ringuette: As a follow-up, I have practical question. You said earlier that the amount would be deducted directly from the paycheque of the employee. Will that amount be provided directly to the plan via the employer or via the plan administrator? Those are two different issues.

Mr. Menzies: It goes directly to the administrator.

Senator Ringuette: It is not the employer that retains the amount and then gives it to the administrator? That could be a little tricky again.

Mr. Rudin: This is the issue that we were just discussing. In the event that an employer, for example, enters into bankruptcy without having completed the transfer of the employees' funds to the administrator, those are protected in the bankruptcy. There is this issue that the funds may be with the employer for a short period of time, and that needs to be protected.

The Chair: I am going to interject. The minister has to excuse himself. The members of the Finance Department will remain for another 10 minutes so we can continue with the discussion.

Minister, on behalf of all of us, thank you very much for your attendance.

Mr. Rudin, would you like to continue with your answer to Senator Ringuette's question?

Senator Ringuette: This is very important, and I hope you understand. We do not want a situation happening where the employer has retained funds from an employee's paycheques and not made the contribution to the plan. We do not want that situation.

For instance, is there a number of days that the employers will be allowed from the time they retain the employee contribution to it being deposited to the plan? This is very important. Right now, we might not see those details. When you come into a bankruptcy situation, this is pretty important.

Mr. Rudin: I agree, Senator Ringuette, that it is very important to protect the employee contributions and to ensure that they get to the administrator. You need to do that both on an ongoing basis and in the context of bankruptcy. The issue of bankruptcy is dealt with in the legislation because that requires an amendment to the bankruptcy statutes, and the supervision and enforcement of remittances outside of the context of bankruptcy will be dealt with in the regulations.

Senator Massicotte: Let me repeat this. My understanding of the existing law, never mind your legislation, is that when an employer takes money that belongs to the employee by way of a deduction off his salary, legally, that is trust funds. That is not his money and it cannot be on his balance sheet. In fact, if that money is not delivered to the administrator, the board of directors is personally held liable for that, for the insurance. Therefore, it is not their money. I do not see a concern about that issue of a deduction that is not remitted. It could be, but there is heavy responsibility for the board if any company is in a bit of trouble. If you have ever sat on a board, they get a report every month that says that money has been remitted, because they are personally held liable.

I think the question is about employer portion. Employers in this program, as I understand, have a right to say they will contribute or not contribute. Let us say they decide to contribute. It could happen that there is a bankruptcy and they are in arrears relative to the contribution. When I read the clauses that Senator Ringuette was referring to, it is not clear. It basically says that that obligation is guaranteed by the assets of the company, but is it in priority to the secured lenders? Where is it in the creditor status? I presume it is subsequent to the secured creditors and before the general creditors. Am I correct?

Mr. Rudin: I will try to answer this question. If I get it wrong or give only a partial answer, my colleagues will intervene.

I believe this will depend on the status of the employer's decision to contribute. If the employer decides, essentially unilaterally, to make a contribution, and it is not part of a collective agreement with the employees or part of the employees' contract, then the employer can cease to make those contributions at their own discretion. If, however, they are contractually obligated to do that, then it would be regulated in that way.

Senator Massicotte: The proposed legislation is not clear. Where does it rank as a creditor?

The Chair: We have had a lengthy supplementary and I have to give it back to Senator Ringuette.

Senator Massicotte: I am trying to get the answer.

Senator Ringuette: You say it is going to be in the regulations. This needs to be extremely clear. There must be a period established that the employer takes the contribution that he directly deducted from the employee's pay, because those are earnings. There must be a limit on the period of time that he takes these contributions and puts it into the plan. Will the regulation address this very serious concern?

Mr. Rudin: Yes.

Senator Ringuette: A person who has an RRSP, can they take their current RRSP and transfer it to this PRPP plan?

Mr. Rudin: We are looking at that in the context of regulation. I think the question will be whether that is an option from the administrator's point of view or whether administrators would view that as a requirement. We will see where the regulations go, but we are looking at making that possible.

Senator Moore: I think the questions and the caution that Senator Ringuette raises are very important. Listening to this, I am wondering who designs the plan. Is it the administrator or the employer? Does that design set out the time period when the monies from the employees or from the employer must be handed over to the administrator so there is not a drag? What is the role of the administrator? Does the administrator call up every month? How do you see this happening? How do you see the program working? That is a very important point that Senator Ringuette raises.

Mr. Rudin: The plans will be designed by the administrator and the administrator will handle most of the operations of the plan but, as we are discussing, cannot invest money that has not yet been remitted to them. The process of remittance and monitoring that the remittances come in will be an important part.

Senator Moore: Is the additional duty on the administrator to oversee that and not just rely on the employer? I think that is very critical, Mr. Rudin.

Mr. Rudin: I understand that. If I am not mistaken these are issues we are looking at in the development of the regulations and we are noting the input we are receiving today.

Senator Ringuette: Can the committee have some input into the regulations that you put together so our concerns are addressed?

The Chair: State it. Go ahead. Is there something you want to indicate to him?

Senator Ringuette: The disbursement of retained fund contribution to the plan is very important. You need to clarify also this bankruptcy issue, if it is the employee retained contribution only that is being protected through the bankruptcy process, and/or the employee and the employer's contribution to the bankruptcy process. It is not clear at all in this legislation we have before us. Either we clarify the legislation or it should be well identified in the follow-up regulation that you will be doing.

Senator Massicotte: I understood her question was when the employer contribution is not funded, where does it rank in the bankruptcy? That is what she is asking. Does it rank after the secured creditors, before the general creditors, or we do not know?

Mr. Rudin: I believe it will depend on the nature of the employer's obligation, but I would be happy to come back to the committee with a more detailed answer.

Senator Massicotte: If you could.

Nowadays, as you know, employees roll off and they change jobs often and their average term of employment is 7 years, compared to 30 or 40 years. Is this plan organized so there is mobility so they can take their savings portion along with their employee contributions and move the plan with their new employer?

Mr. Rudin: Yes, portability is a very important part of the framework.

The Chair: Thank you kindly.

Mr. Rudin, Ms. Anderson, Ms. Hemmings and Mr. Syed, we thank you very much on behalf the committee.

Honourable senators, in this second session we will hear from three organizations. We are very pleased to welcome again Mr. Frank Swedlove — he is becoming a regular here at our committee — President of the Canadian Life and Health Insurance Association Inc.; Marion Wrobel, Vice-President, Policy and Operations with the Canadian Bankers Association; and Susanna Cluff-Clyburne, Director, Parliamentary Affairs, the Canadian Chamber of Commerce.

Colleagues, again we have one hour for this session. Mr. Swedlove, we will hear from you first, and then Mr. Wrobel followed by Ms. Cluff-Clyburne.

Frank Swedlove, President, Canadian Life and Health Insurance Association Inc.: It is always a pleasure to appear before the Standing Senate Committee on Banking, Trade and Commerce.


Mr. Chair, I am very pleased to have the opportunity to be here today on behalf of the Canada Life and Health Insurance Association, and to share our views as the Senate Standing Committee on Banking, Trade and Commerce considers Bill C-25, the Pooled Registered Pension Plans Act.


The CLHIA is a voluntary association whose member companies account for 99 per cent of Canada's life and health insurance business. The industry provides a wide range of financial security products, such as life insurance, annuities and supplementary health insurance, to about 26 million Canadians. Also, over two thirds of Canada's pension plans, primarily defined contribution plans for small-and medium-sized businesses, are administered by Canada's life and health insurers.

We commend the government for introducing Bill C-25. It targets the gap in Canada's retirement savings system that was identified in Jack Mintz's 2009 research for the joint working group of finance ministers that modest and middle-income Canadian households may not be saving enough for retirement. It builds on the consensus among all federal, provincial and territorial finance ministers. It does so by seeking to strengthen the third element of our three-pillar retirement saving system, namely private-sector savings.


The goal of the first two pillars — the public part, through OAS/GIS and CPP/QPP — is to provide a minimum income to meet basic needs, and Canada is recognized internationally as doing a very good job of that. It is the third pillar — private sector savings through workplace plans and individual savings — that is intended to provide income beyond the basic needs. And this is where the shortfall exists, particularly with those who do not have access to a workplace retirement plan.


We believe that PRPPs can be a vehicle to make a fundamental difference to the retirement saving landscape for Canadians. The keys to their success will be their low cost; pooling, which will help to enhance scale and efficiencies; simple designs, which will help keep costs down; professional administrators, who will relieve small-and medium-sized businesses from the administrative and legal burden that prevent many businesses from offering retirement plans; harmonization across the country, which will be important for gaining the scales and efficiencies so important for low costs; and automatic features that will provide behavioural nudges to encourage people to start savings, with appropriate opt-out provisions, of course.

We are hearing that small businesses are keenly interested in PRPPs. We commissioned a survey of over 800 small-and medium-sized businesses a few months ago, and I would like to highlight some of the findings.

First, and hardly surprising, the smaller the company the less likely they are to have a workplace retirement plan. Second, two thirds of respondents said they would be interested in offering PRPPs. Third, over 70 per cent of that group said they would be interested in contributing to the PRPPs, even though they would not be required to. Finally, over 70 per cent of all respondents thought all employees should have access to some form of retirement savings plan at the workplace.


Clearly, there is still work to be done. C-25 sets out the framework, but much of the details will be spelled out in the regulations. We look forward to providing input once the draft regulations are released.


As well, to ensure that PRPPs can be effective national plans, we will need provincial legislation as well. We were very pleased to see Quebec introduce Bill 80 last week, which provides a framework for their version of PRPPs. We would draw your attention to one initiative that Quebec has taken that differs from Bill C-25. The Quebec legislation makes it mandatory for employers with five or more full-time employees to offer some form of workplace retirement plan. In our view, this is an important provision. We believe that all Canadians should have access to some form of retirement plan at their work place, where it is easiest to save. We hope other provinces will adopt the Quebec lead.

Thank you again, Mr. Chair, for the chance to appear before the committee. I would be pleased to provide any further input and answer any questions you may have.

The Chair: Thank you, Mr. Swedlove.

Marion Wrobel, Vice-President, Policy and Operations, Canadian Bankers Association: Good afternoon. I would like to thank the committee for this opportunity to provide the banking industry's perspective on pooled registered pension plans. The Canadian Bankers Association represents 54 banks operating in Canada, banks which are well managed and well capitalized and which operate in a competitive market with a strong prudential oversight.

A strong and healthy banking system is the cornerstone of a strong economy. It is an essential component in helping small businesses grow and thrive and in helping Canadians buy homes and save for education and retirement. We believe banks and other financial institutions can also make a significant contribution to closing the gap in pension plan coverage for several million Canadians, and that is what I want to speak to you about today.

It is our view that, designed properly and subject to an appropriate regulatory regime, PRPPs have the capacity to achieve the government's objectives of substantially increasing both the number of Canadians who participate in a pension plan and the number of employers who provide such plans. This will be achieved by making available a low-cost pension savings product that is attractive to both employers and employees as well as self-employed Canadians.

The PRPP offers opportunities and incentives to save while ultimately letting individuals decide how they do so. Canadians, particularly employees of small-and medium-sized businesses and self-employed individuals, will have the ability to participate in structured pension plans, meaning that the contributions will be locked in for retirement, an option that many currently do not have.

For those who tend to avoid making active decisions about their retirement investments, PRPPs will have a default option. With the default option, financial institutions also have the flexibility to tailor a mix of investments based on the age/life-cycle of the plan members or the characteristics of the group of employees as a whole. For those who wish to take greater control of their investments, PRPPs will offer advice and more sophisticated investment options.

For employers, the PRPP allows SMEs to provide a pension plan to their employees. While many employers recognize that pension plans can be an important part of their total employee compensation package, the options available under the current regime are costly, administratively complex and contain some risks that smaller employers are simply not prepared to take. Group RRSPs go part way to addressing these challenges, but PRPPs take that one step further.

As currently drafted, employers would have a limited set of obligations and responsibilities under the PRPP and thus would bear few risks. Those risks and responsibilities would be borne by plan administrators, that is, financial institutions. Banks are well placed to deliver a low-cost pension savings vehicle to Canadians. Banks are able to leverage their relationships with over 1 million SMEs across the country to provide them with information about PRPPs and how they work. This broad reach ensures that the federal government's target market for PRPPs is developed quickly and cost effectively. Moreover, the banks can rely on the skills, resources and experience of their broader financial group to effectively deliver PRPPs.

Let me address four key factors that will be crucial in ensuring the success of the PRPP and the achievement of the government's objectives, particularly that of keeping costs low.

First, there will be need for a regulatory regime that does not impose costs in excess of that needed to provide the employee protection, appropriate for the nature of the product. This is especially true for the default investment option.

Second, there must be a sufficient number of participants so that a minimum efficient scale can be achieved. This requires that the PRPP be appealing to SMEs and individual workers, and that requires that there be few obligations and risks to SME employers.

Third, there must be a high degree of regulatory harmonization across federal and provincial jurisdictions and a simplifying and streamlining of the supervisory requirements, again with a view to federal and provincial harmonization. The degree of harmonization that appears to have been achieved to date, as outlined in the December 2010 framework, along with more recent efforts is commendable.

Fourth, to make the PRPP successful, provincial governments need to adopt companion legislation to enable the PRPP to be provided to provincially regulated businesses. The CBA has had discussions with several provinces about the importance of having provincial frameworks in place and we have heard some positive feedback in our discussions. There continues to be debate in some provinces about the best way to address the retirement savings needs of Canadians.

We believe it is important to move the PRPP file forward. PRPPs do have the capacity to substantially increase both the number of Canadians who participate in a pension plan and the number of employers who provide such plans. For this reason, we will continue our outreach to provincial governments on PRPPs and we ask committee members to bring this issue to the attention of provincial legislators to ensure that employers and employees in all parts of Canada have access to this savings tool.

I look forward to your questions.

The Chair: Thank you, Mr. Wrobel.

Susanna Cluff-Clyburne, Director, Parliamentary Affairs, The Canadian Chamber of Commerce: Good afternoon and thank you for your invitation to be here today.

The Canadian Chamber of Commerce is pleased to provide the perspectives of our members regarding PRPPs. The Canadian Chamber of Commerce has long supported PRPPs as an option that provides Canadian businesses with the flexibility to choose retirement savings solutions that fit their sizes and resources. This is particularly true for small-and medium-sized businesses, many of which have limited or no resources to offer retirement savings plans. At the same time, individual Canadians' retirement savings and income needs vary significantly. We believe that PRPPs would give many individuals who do not have a workplace pension and additional retirement savings option.

The following comments received from members of the Canadian Chamber's SME Committee indicate how PRPPs could benefit smaller employers:

As an SME that does not presently have any retirement pension plan options for its employees, but is definitely interested in an opportunity to do so, in a manner that would be effective and efficient, the PRPP is a great option.

PRPPs would be a great option to attract new talent to our business. A pension plan draws a lot of the skilled people that we need to larger corporations and this would be a nice edge to add to a great business.

With federal PRPP-enabling legislation nearing completion, we hope that all levels of government will follow suit quickly. Doing so has the potential to benefit the millions of Canadians who have either no, or insufficient, retirement savings.

It is our view that once federal PRPP legislation is passed, the federal government needs to redouble its efforts on working with the provinces to enact their own PRPP legislation, commit to timetables for doing so, and establish nationally harmonized regulations for PRPPs.

All governments need to ensure the introduction of PRPPs is supported by effective communications and administrative support programs, for employers and their employees, to maximize awareness and enrolment.

With regard to the features of PRPPs, in our submissions to the federal government we have said that PRPPs must be designed to ensure that the cost and burden to employers is low and that they are easy for employers to participate in and administer. It should also be easy for employers to move their plans between financial institutions. This will help keep costs low and plans competitive.

PRPPs should be designed to ensure that employees have investment choices sufficiently varied to accommodate their diverse retirement savings needs.

Harmonization of PRPPs across federal, provincial and territorial jurisdictions is essential. Employers operating in multiple jurisdictions should be able to offer one plan with one set of rules. Costs will be lower if there is a harmonized framework, as administration costs will be lower and scales will be larger. Harmonization will also facilitate competition and ensure that all Canadians have access to multiple plans on the same terms. Employers should not be required to offer PRPPs. Those employers who do decide to offer a PRPP should not be required to make contributions to them. Employers offering PRPPs should be allowed to automatically enrol their employees to encourage participation. However, employees should be given the option to opt out and/or in as they wish.

A maximum PRPP contribution rate should be set by law. Employers and employees should be given the option to change their own rate of contribution.

Employees leaving their employer should be given the opportunity to transfer their PRPP to their new employer. Employers should not have any responsibilities related to former employees.

All entities permitted to offer PRPPs should have comparable responsibilities and obligations. PRPPs should be offered to all employers on similar terms, although there may need to be different terms and conditions to accommodate individuals participating without an employer.

Disclosure of costs to employers and employees should be clear and simple. Employers should be able to easily compare plan features and costs. The duties and responsibilities of the employer should also be clear.

PRPPs should operate in the interests of plan members and employers and minimize their risk. Employees should be given sufficient information so that they can understand the plan features, the investment choices, and the costs and benefits, in order to make informed decisions about whether to participate and how to invest.

The Canadian Chamber of Commerce is very pleased that the federal government has fulfilled the commitment made at the December 2010 finance ministers' meeting to pursue a PRPP framework. We urge the other governments to do the same.

The Chair: Thank you, Ms. Cluff-Clyburne. I will move directly to our list of questioners.


Senator Hervieux-Payette: I will begin with Mr. Swedlove. In French, on page 2, you refer to automatic features that provide behavioral nudges to encourage people to start saving, with appropriate opt-out provisions, of course. Are you talking about the possibility of opting out of a plan when it is implemented, and not later, once a worker has begun to contribute to the plan?


Mr. Swedlove: We think that the requirement that there be an opting-in arrangement is important to get the volume, and we are pleased that the government accepted that concept. We found that in the United States, when opting in was made available, it made an enormous difference in terms of the participation rate. Rates went from generally around 30 per cent to 80 per cent in many cases.

At the same time, we recognize the legitimacy of people to choose their own path if they choose to opt out of an arrangement. They will be given that choice at the beginning, but our understanding is that they will be given the opportunity to opt out any time during their employment with the company.


Senator Hervieux-Payette: So they may go to a second company, one that does not have a plan, and leave their contributions in the first plan, but they can no longer contribute to the plan once they are with that second employer. But what they have already contributed will be reimbursed to them when they retire, both their portion and that of the employer?

Mr. Swedlove: It will be up to the employee. If the employee wants to keep his contributions in the same plan, he can do so, otherwise he may transfer them to another plan. The choice remains with the individual. As for the contribution made by the companies, this always remains in the plan.

Senator Hervieux-Payette: That is fine, Mr. Wrobel. We have some concerns and we want to clarify things regarding the Bankruptcy Act. What we felt was most worrisome in the case of Nortel was that both the federal and provincial governments paid themselves first when the bankruptcy occurred, and next in line were the banks.

In your case, if you are the administrator and if your business goes bankrupt and has a pension fund, what will your priority be? Will it be to protect the employees who contributed to the fund, or will it be to collect to cover loans that you made to your company? In your opinion, in a bankruptcy, should the contributions to a pension fund have precedence over all of the other creditors?


Mr. Wrobel: I am happy to say that is a very hypothetical question. To the point about the asset in a PRPP, they would not sit on the balance sheet of the bank. They would be a separate account in a trust outside of the bank, so that the failure of the bank would not affect the assets in the PRPP.

Senator Hervieux-Payette: I am talking about the bankruptcy of the company providing that some of the money has not been transferred already to the fund. That is what we were worried about, that they are keeping in trust some of the money, their contribution and the contribution of their employees. If there is a gap, how will this money be protected in the case of a bankruptcy of the company, the small company, not the bank?

Mr. Wrobel: I actually could not answer that question right now. I would have to get back to you. I do not understand that kind of nuance of the Bankruptcy and Insolvency Act. Let me take that under advisement and I will answer the question.

Senator Hervieux-Payette: Just one word for the Chamber of Commerce. We have a Chamber of Commerce in every province. Obviously, the Chamber of Commerce of Canada is also in Quebec. We receive briefs in both languages, but we did not receive yours in French. Is there a problem with translation at the Chamber of Commerce of Canada?

Ms. Cluff-Clyburne: No, there is not. I just wrote it this morning. I apologize. It has been a very busy week for us. We have been appearing at a lot of committees.

Senator Tkachuk: You do not need to apologize.

Senator Hervieux-Payette: I am sorry, Senator Tkachuk. We are dealing with a national institution to which the people of Quebec belong.

The Chair: Thank you very much. The point has been made.


Senator Maltais: Welcome once again. You are the two biggest administrators of pension funds here, of RRSPs, of registered retirement plans involving insurance companies, of RRSPs involving banks and also insurance companies. You are asking that all the provinces adopt this law as quickly as possible. I agree with you entirely. If the other provinces follow Quebec and Saskatchewan's lead, that is to say if they manage workers' retirement funds themselves, what would your interest be in that? What would be left for you?


Mr. Wrobel: There are a number of private sector employers who do not offer pension plans to their employees. We see the PRPP as a mechanism. As Mr. Swedlove said, a lot of small employers would like to offer pension plans to their employees but right now find it administratively complex. The PRPP would allow them to do that.


Senator Maltais: I can point to Quebec as an example, and the other provinces probably thought of it as well; all of the governments are hungry for money. They issue savings bonds because they need money. Other provincial governments may create boards, and again I would point to Quebec as an example, as there they have the Quebec Pension Board; it could offer to manage the RRSPs of a five-employee business tomorrow morning. But what are you going to do in all of that? If all of the residents of Quebec, those of Saskatchewan or the other provinces and territories create pension boards and collect the money from small businesses of five workers or more, there will not be much left for you to do.


Mr. Wrobel: The minister was here. He was asked that question and he said -as long as there is a level playing field.'' We recognize there is a desire to having competition and we are fine with that, as long as there is a level playing field and as long as private sector administrators can compete with those.


Senator Maltais: Quebec could, for instance, adopt a law that would make the Quebec Pension Board responsible for this in that province. And if I understood the minister previously, the same thing could conceivably happen in Saskatchewan and in the other provinces, were they to pass such a law; you know, pension funds will capitalize anybody: a bank, an insurance company, but also a government, because they provide immediate money that will only have to be disbursed in a given number of years. So this allows a fund to provide capital to a government. That is how the Quebec Pension Board was conceived in Quebec, and this led to the creation of the Quebec Deposit and Investment Fund, and the Quebec Industrial Development Corporation. It is a pool of money that will come back to each of the provinces. And I wonder whether it would not in fact be in the best interest of the governments to administer these funds themselves. I am simply wondering about this. What do you think?


Mr. Swedlove: It is an interesting issue about the extent to which the public sector would participate as an administrator in PRPPs. There is, for example, the Saskatchewan plan, which operates I think significantly at arm's length in terms of its structure and has actually been operating somewhat with a PRPP structure today. I do not see that as particularly problematic.

I guess the issue you are getting at, senator, is that if a provincial government chose to establish themselves as the preeminent supplier of the PRPP service in their province. Where I would see the difficulty with that is that, first, is there a presumption, because government is providing it, that this is a plan that will be guaranteed in some fashion by that government? One could say this is a defined contribution plan, because PRPPs are, at the end of the day, a defined contribution plan. There are no guarantees. If there is a plan that is very much connected to the government and perceived to be connected to the government, there will be that concern that there is an implied guarantee that exists and that if the returns are not what was anticipated, a government may be there to support it.

I think it would be difficult for the private sector to compete with that situation. In terms of costs, because we administer plans, they are close to the cost of administering plans in the public sector and we can compete in terms of costs. However, I wonder about the broad-based perception by Canadians of what they are actually purchasing.


Senator Maltais: But for all of the governments, including the federal government, the defined benefit pension plans will no longer exist soon, because they require too much capital. Today, there are too many fluctuations; the interest rates paid by the banks are too low. This makes it difficult for anyone to have defined benefit pension plans.

Again I will point to the example of the Quebec Pension Board, and I do not see why tomorrow morning, it could not scoop all of this up; they already have all of the staff on board.

All of the employees in Quebec contribute to the QPP. It would not be a stretch to add $10, $15 or $20 at the end of the month to the pooled RPP or to one's own RRSP, since the minister said earlier that this was a complementary system. As it is a complementary system, people can add a small sum of $20 or $30 a month, depending on their salaries.

Let us take the case of a server in a restaurant. If it is a small snack bar with three employees, she cannot do that; but with the Quebec Pension Board, she can. She can because she is contributing to the QPP, and so her employer has to provide her with a small slot for her pooled RPP.


Senator Massicotte: Thank you for being with us. As you know, this whole thing makes a lot of sense. You have three or four principles that everyone repeats. It is solid, professional management; low fees — we repeat low fees; and the answer of the proposed law of the government is basically to let competition dictate and we will get there. There have been other examples in Canada whereby one could argue we have competition whereby the fees are not as low as we would like as many other countries. I know the providers are saying no, they are very good and competitive. I am talking about the mutual fund industry, I guess. Morningstar and other experts have said it is not low enough.

How do we ensure that this one will be low enough? I presume a key presumption everyone is making is volume; size. These huge pension funds you have in Canada are efficiently managed because it involves billions of dollars. However, I suspect that when this thing comes out, every bank, many life companies and maybe some pension funds will be offering their services. The employer is making a choice. He has no clue and no vested interest. Maybe he will choose the bank he deals with or someone he feels comfortable with or some friend. How do we ensure that we get low fees at the end?

Mr. Wrobel: A couple of things are important. You mentioned the volume and the ability to achieve economies of scale. That is important. Also remember that these are going to be relatively simple plans. If you look at the mutual funds that are out there right now, we have a wide range, from very complex mutual funds, with relatively high management expense ratios; to ones that are much simpler and have low very low management expense ratios. These, in general, will be defined as more plain vanilla than the kind of thing you see now. The default option will be an important part of this and will probably constitute a large part of the plans. These are not going to be delivered at the retail level the way mutual funds typically are.

In the banking industry, we have a relationship, as I said, with over a million small businesses. We anticipate the ability to lever off of that and to be delivering PRPPs to employers with 50 employees, 100 employees or 200 employees who now do not have pension plans. Therefore it would be more on a wholesale basis than on the retail basis. I think that is an important driver of this. It is economies of scale and I think competition is important, that kind of simplicity, and levering off of the kinds of relationships financial institutions have today.

Senator Massicotte: Competition is critical; I agree.

Mr. Swedlove: I will add to Mr. Wrobel's comments that we know we can operate these at low cost because we already do in the wholesale space of providing pension plans. As was reported in the government study that was led by Jack Mintz, we operate larger plans at 60 basis points and 70 basis points. Comparing it to the MERs of mutual funds is not something that we quite fully understand if this is structured appropriately, which we think it will be.

Senator Massicotte: Sixty is very good, but you realize the employer makes that choice. He has very limited vested interest. He does not gain or lose, so he may choose something that is 80 basis points or 100 basis points and I suspect the banks have an existing relationship. You certainly have a huge advantage compared to those significant pension plans today. How do we make sure that volume gets there and in five years from now we could have someone managing $20 million, $30 million or $100 million?

Mr. Wrobel: As I said in the opening remarks, it has to be appealing to the small business, to the employer. It has to be appealing to the employee as well. Individuals have a wide range of options for savings. They can put money in RRSPs, happily build it and put money into PRPPs. They can save outside of that framework. They can invest in their homes. They have all kinds of other calls on their money. Within that context, this has to be an appealing choice to them and I think they will take into account rate of return and cost.

Senator Massicotte: Given your experience, what do you think the level of fees will be from your own past experience?

Mr. Wrobel: I have no past experience. I am not a banker. I work for a trade association so I could not say on that basis. I think what Mr. Swedlove was suggesting, from a wholesale level, was that financial institutions would be able to deliver this product very competitively with government agencies, something like the Canada Pension Plan.

Senator Harb: If I am to sum up what I heard from all three of you — and correct me if I am wrong — you want the program to be low cost, with few obligations, so it can be accessible, but also you stress the importance of the fact that you want to have streamlined supervisory requirement. Am I correct in saying that? Do all three of you agree on that?

Mr. Wrobel: Yes.

Mr. Swedlove: I would make the comment that I think it is appropriate that we have appropriate regulation to protect the investor, and I think we can rely a great deal on the existing pension plan regulatory structure. There is something called the CAP guidelines, which ensure that investors are protected. We think the PRPP should follow along the CAP guidelines.

Ms. Cluff-Clyburne: From an employer perspective, we would certainly advocate that the administrators be very well and rigidly regulated. We were speaking from an employer perspective that it really should not be the employer's job to oversee the plan.

Mr. Wrobel: On that point, to make it appealing to the small business the obligation on the employer should be minimal. It should be borne by the administrator.

Senator Harb: That takes me to my second question. You are all very experienced in the field. I do not know whether I am in dreamland here or what. Given the fact that we have the public pension fund being administered by semi-government type agencies, is it conceivable for the banks and the insurance companies to set up in conjunction with the Chamber of Commerce? Is that some sort of alliance, like a Star Alliance, oneworld or the like, where you have people on the board and if you sell more then you make more and you administrate jointly, what we call the private sector end of the fund that is jointly administered by you people? Is that possible?

Mr. Swedlove: From a Competition Act perspective I am not quite sure it is, to be honest. The second aspect I would note is that, again going back to the study that was done by Jack Mintz, there is a point where you get the full advantages of economies of scale. If we have a national PRPP structure, we think that amongst the banks, the insurance companies and other providers, that those plans will get to reasonable economies of scale so you will get the cheapest prices possible. I would say that in having one group that would be providing it you may be moving into the world of diseconomies of scale to do that.

Senator Harb: Does Mr. Wrobel have something to add?

Mr. Wrobel: I do not think we feel we have to replicate something of the size of the CPPIB.

Senator Harb: Obviously it will become law. This committee has recommended it and the government seems to be moving in the right direction. Ms. Cluff-Clyburne raised an important point in terms of the obligation on the employers. Have you started thinking about a template that you would make available, for example, to all of the employers you have on your registries when an employer has two or three employees? It is cumbersome for the employer to set up the paperwork. There is a cost implication involved. If I am an employer of three or four employees, frankly I am not in the mood of doing all the paperwork. Will you be willing to look at a template that you would provide in conjunction with the Chamber of Commerce?

Ms. Cluff-Clyburne: We could sure help with that in terms of running it by Canadian businesses.

Senator Harb: Will you talk with the Chamber of Commerce and develop something?

Ms. Cluff-Clyburne: They are members of ours, so we would be delighted to speak with them.

Senator Harb: Can you pledge that to us here and now?

Mr. Wrobel: I would remind members of the committee that this will be a business product that will be delivered by individual institutions in a competitive framework. In terms of even templates it is something that, from a competition point of view, I am not so sure that we should be doing. Our job as an association is to work with governments to develop a legislative framework to work with provincial governments to encourage them to put in place a legislative framework to ensure that regulation is appropriate for the risks associated with the product. Having done that, it should be left up to individual institutions to compete in the marketplace, to design the products the way they think is most appropriate, and they can sell to small businesses.

Senator Harb: Ms. Cluff-Clyburne is complaining about the fact that if we have bits and pieces, without harmonization, without a proper standard type of system, that many people will say, -Forget it. It is too complicated for me.''

The Chair: Senators, that completes our questions for the day. To our witness panel, on behalf of all of the committee members, I would like to express our great appreciation for your appearance today.

(The committee adjourned.)