Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 22 - Evidence - June 20, 2012
OTTAWA, Wednesday, June 20, 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 4:15 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 proposed pooled registered pension plans act, to this
committee for its consideration.
Yesterday, we began our consideration of the bill, hearing from the
Minister of State, as well as interested stakeholders. This afternoon, we
will conclude our hearings on the bill. In the first hour, we are pleased to
welcome Dan Kelly, President and Chief Executive Officer of the Canadian
Federation of Independent Business; Bernard Dussault, the former Chief
Actuary of the Canada Pension Plan; and Randy VanDerStarren, Executive Vice
President of Open Access, accompanied by Charles Laing, Head of Research and
Development. Colleagues, we have one hour for this session.
Mr. Kelly, we would be delighted to hear from you first, followed by Mr.
Dussault and then Mr. VanDerStarren. After that, we will have some
Dan Kelly, President and Chief Executive Officer, Canadian Federation
of Independent Business: Thank you, senators. I should let you know that
this is my very first parliamentary or Senate hearing since I became
President and CEO of CFIB. I replaced Catherine Swift, our president for
The Chair: We were always delighted to have her. We welcome you,
and I suspect that this will be the first of many appearances before us.
Mr. Kelly: I have done this a few times, but Catherine has been
the lead. She is still the chair of CFIB's board and will serve us for many
years to come.
We are very pleased to be here today to support this legislation. It is
very welcome news to small businesses that are concerned not only about
their own retirement but also the retirements of their employees. Many of
our members are interested, as I will explain in a moment, in the PRPP
model. We are very pleased to see that Quebec is the first province to enact
this legislation and to follow up. We have a few questions about how they
have done that, but overall we are very supportive of what Quebec has done
in terms of being the lead province on that.
We are very disappointed with the Province of Ontario for deciding to
take a pass at this stage. We are hoping that decision will change very
Of the 2.3 million businesses in Canada, half have no employees at all,
98 per cent are small-and medium-sized, and very few have access to any
real pension tool to offer their employees. Most do not have anything
themselves, as you will see. Retirement ages for those who are self-employed
are significantly higher than for those who work in the private sector and
dramatically higher than for those working in the public sector. Most of our
members have told us that they will retire after age 65. That is the largest
chunk of small-and medium-sized businesses. You should note that we have
some support from our membership for some of the OAS changes recently
When we ask the entrepreneurs themselves what is important for their own
retirement, they are telling us that the $750,000 lifetime capital gains
exemption is key. The proceeds from the sale of their business are often the
retirement savings plan for the entrepreneur. RRSPs and other savings and
assets are also very high on that list.
We do feel that the PRPP will add an additional tool to that retirement
arsenal for small-and medium-sized firms and, importantly, give them a tool
for their employees.
We have to keep in mind that small businesses like this tool because they
find that they do not actually have enough disposable income to properly
save for their own retirement. Over half of our members told us that they do
not presently have enough income to put into the retirement tools that are
available to them now.
The second most significant reason that they cited was the complicated
nature of many of the retirement tools on the market today, particularly on
the pension side. Pensions — certainly defined benefit pension plans but
even defined contribution pension plans — are very complicated and a huge
administrative burden for many of our members. We are hopeful and confident
that the new PRPP tool will start to address that.
When we ask our members whether they have any form of retirement savings
plan for themselves or their employees, 78 per cent say no. The vast
majority of employees who work in small businesses have no retirement
savings plan whatsoever beyond the contributions made to the Canada Pension
For those very few — the quarter of your members — who do have some form
of retirement savings plan available to them through the business or for
their employees, the vast majority of those have it in RRSPs.
One of the things that very few people know about RRSPs is that although
they are a very good retirement tool for many small businesses and their
employees if they are able to offer them, if an employer contributes to an
employee's RRSP — a so-called group RRSP — they have to pay payroll taxes on
top of the contributions. They have to pay EI, CPP, and Workers'
Compensation premiums on the amount they are putting into the RRSP on behalf
of their employees. Depending on the Workers' Compensation category you are
in, that can add an additional 20 per cent to the cost of putting a dollar
into an employee's retirement savings.
One of the chief benefits that our members see with the new PRPP model is
that, like pensions, they will be payroll tax exempt. The government has
made it very clear in the legislation that the income tax rules will follow
the pension rules rather than the RRSP rules, which we feel is a very strong
point in favour of the new PRPP model.
Our members favour the PRPP approach dramatically more than any increase
in Canada Pension Plan contributions. Small businesses are very concerned
about any proposal to increase mandatory Canada Pension Plan contributions.
I will say that there is support among our members for the Liberal Party's
previous discussion about a voluntary add-on to the CPP. They like that
idea, but that voluntary piece is what is most important. A voluntary CPP
add-on or a voluntary PRPP is the most important element of this.
When we asked our members what the impact of a mandatory CPP increase
would be, 40 per cent told us they would have to freeze or cut salaries for
their employees, and 35 per cent said that they would reduce the investments
in their own business if they were forced to put more money into the Canada
We feel that the PRPPs are a really good option for small-and
medium-sized firms. You are the first group that we are sharing the
following with; we have not shared it with the Department of Finance yet. In
a survey that we did in May of this year, with over 9,000 respondents from
small-and medium-sized firms — this is near the back of the deck that I
provided to you — over a third of our members said that they would consider
putting in place a PRPP for themselves and/or their employees. That is
terrific. It is not going to be a panacea. Not every small business will
take advantage of this tool, and the chief reason is that they cannot afford
to put more money into the overall compensation packet for their employees.
However, one third of them said they would. If the real objective is to help
those Canadians in the middle income bracket that we are so worried about in
terms of having sufficient funds for their own retirement, we feel that the
PRPP will be an excellent tool to encourage more Canadian employers to get
into the game.
With the growing shortage of labour that we are experiencing across
Canada, there is a greater appetite among small-and medium-sized firms to
compete. They are having to do more to attract and retain workers. It is
very clear that employees want additional retirement savings tools, and the
PRPP can help to provide that.
My final point is with respect to the features of the PRPP model that our
members find most attractive. Number one is its voluntary nature. It does
give the employer a choice. They are not mandated, whether they can afford
it or not, to put money into that vehicle. Number two is the hope and
confidence that administrative costs will be kept low. That is very key, and
we are pushing the financial services sector to make that happen. We have
said that the legislation is good, but banks and financial services players
could screw this up. If they use the same fee model that they have
traditionally used with RRSPs, this will not provide the features that we
are hoping for. We are reasonably confident, from our first discussions with
the financial services sector, that the message that they need to make this
tool work has been received. We will be pushing them to make that happen.
CFIB itself is looking at adopting a PRPP for our membership and offering
it as a value-added service. We have 109,000 small businesses as members. If
we can make this a simple tool, we think that many people will be attracted
to it. We will start with Quebec.
Bernard Dussault, as an individual: Good afternoon. Thank you for
giving me a chance to express my views on PRPPs. I am pleased that Mr. Kelly
spoke first because he addressed the advantages of PRPPs very well. They are
more than just RRSPs, but the main drawbacks of RRSPs would still be present
in the PRPP. The main one is in respect to the first letter of the acronym —
P for pool. What would be pooled is not exactly what needs to be pooled.
With an RRSP, the problem is that when an individual withdraws his funds, if
the market values are not too good at the time, then there is no pooling.
You get what is in the fund.
Still, I cannot say that PRPPs are not desirable. They are an
improvement. It will be a good tool for advertising savings, as an
information broker for the incentive to save. Maybe Mr. Kelly already knows
that I am a strong supporter of the Canada Pension Plan. Unfortunately, it
is probably because of all the discussion that took place on expanding the
CPP that the PRPPs were implemented because, as far as I understand it, the
Minister of Finance really wanted to have a CPP expansion. However, he had
no control over provinces that would not want to adopt this approach,
namely, Alberta and Quebec. PRPPs are much better than nothing to fill the
gap and coverage for pensions.
As Mr. Kelly said, one of the advantages that PRPPs could have is that
banks could charge lower fees than they do on RRSPs. I understood him to say
that we are not sure that this will happen. This is a possible drawback,
although not necessarily one.
In passing, on the fact that a program is mandatory or not, I understand
Mr. Kelly's constraints about mandatory plans, and I agree with him, though
we have to be realistic to the fact that if a savings program is not
mandatory, the gap we want to fill in savings will not necessarily be filled
that much. The approach for PRPPs of something like automatic enrollment is
a very good thing, but we should not dream in colour. After five or ten
years, a certain proportion of employees will discontinue their
contributions. We do not know how many, but it will happen. Still, PRPPs are
much better than nothing.
Those are basically the main points I had to make about the PRPPs. I just
want to repeat my regrets that the CPP expansion is not taking place at this
time, but I dream and hope that eventually some type of expansion will come,
while understanding the concerns expressed by Mr. Kelly that anything that
is mandatory is not very welcome in private business. That is a natural
Randy VanDerStarren, Executive Vice President, Open Access Limited:
Good afternoon. I offer a very sincere thank you for allowing us to present
here today. This is our first time appearing here, so forgive us if we do
not follow protocol exactly the way it is meant to be. I do have a question:
Do we get to keep the pencils?
Turning to our opening comments, Open Access was established in 1997. We
are a Canadian group retirement firm with a citizen-centric bias. As
Canada's only defined contribution fiduciary manager, we currently provide
the highest quality and purity of investment management to 148 Canadian
employers and their 14,686 employees.
At $215 million in assets under management, a number that will triple by
summer's end, we are a practical think tank with a proven model that
illustrates our reality-focused research both in the retirement space and,
in more general terms, relative investor behaviour.
That model has been shared with all levels of government. That model has
been flagged by labour. That model serves as a viable alternative in what
will prove to be what Mr. Menzies referred to yesterday before this
committee as a highly competitive marketplace. Most importantly, that model
is designed with what we call a new bias, one that puts the needs of average
working Canadians first, an evaluative bias we suggest be applied to every
aspect of PRPP design.
One simple question is worth asking and repeating at each stage of the
PRPP adoptive process: Are we — as a government, a country and a private
enterprise —designing a PRPP that serves the best interests of each and
every Canadian without a workplace pension?
At our core, we believe that all working Canadians deserve to retire
well. Discretionary investment management, administered by a structured
fiduciary — that is, investment decisions made on behalf of our plan members
versus having them choose the investments for themselves — is the surest
means of helping those same Canadians get the decent retirement they
deserve. Each of us does deserve access to the same retirement standard
enjoyed by defined benefit plan members, valued by those wealthy enough to
afford a discretionary manager and aptly applied as a foundation by the
Canada Pension Plan and of course the Quebec Pension Plan. We continue to
witness great inequality, until now.
Pooled registered pension plans are a significant step toward a more
level playing field and a better retirement for all working Canadians. As
Mr. Flaherty stated early on in the process:
PRPPs will be a major breakthrough for the Canadian pension market.
They will make well-regulated, low-cost, private-sector pension plans
accessible to millions of Canadians who have up to now not had access to
What constitutes "a major breakthrough''? How do we in this room ensure
that the PRPP Mr. Flaherty envisions lives up to that lofty ambition? Before
we can answer those questions, some context might prove helpful.
The C.D. Howe Institute, in their December 2010 paper, Canada's
Looming Retirement Challenge: Will Future Retirees Be Able to Maintain Their
Living Standards Upon Retirement, states:
The level of retirement preparedness of a large number of working
Canadians, particularly in the younger generations, exposes them to a
significant risk of lower living standards in retirement. Policymakers
and private pension providers alike should direct their attention to
reforms that can mitigate this risk.
Clearly, we are not saving enough.
The receptivity to the PRPP has received mixed reviews, which indicates
that there is more work to be done. The scope of cynicism is pervasive.
In a December Financial Post article entitled "Canadian Pensions
Still Treading Water,'' Susan Eng of the Canadian Association of Retired
Persons, CARP, states that as much as large pooled pension funds provide
better returns than individuals can generate on their own, she remains
skeptical that "banks and insurance companies will keep fees as low as they
suggest or that they will truly do what is best for clients.''
In that same article, pension consultant Keith Ambachtsheer comments
The biggest drawback is PRPPs are voluntary for both employers and
employees. Both empirical evidence and common sense tell us the purely
voluntary uptake of these PRPPS will be minimal.
Ken Giorgetti, President of the Canadian Labour Congress, in a December
16 article in The Globe and Mail called "Showdown over pension
reform pits Ottawa against the provinces,'' bluntly adds to Mr.
Ambachtsheer's view, saying:
Voluntary systems don't work. I guess a couple of lunches with the
insurance and the banking industry have more effect on this government
than Canadians' public opinion.
Clearly the unprecedented opportunity to initiate lasting reform has
perceptual and experiential hurdles to overcome. However, it is this
submission's assertion that those hurdles can be traversed not with rhetoric
but with a structure of trust. That structure must be sound. It must be
welcoming, pragmatic, clearly understood, enforceable and, most importantly,
designed to protect the best interests of the very people who need it most,
the 11 million working Canadians with no pension plan whatsoever and
therefore no practical means of achieving a respectable and decent
retirement, the same retirement currently enjoyed by those relatively few
fortunate enough to be part of a defined benefit plan or even a conventional
PRPPs can be better. As Keith Ambachtsheer states in an October 2010
The key is to begin to create pension institutions that truly work
In that light, then, the following PRPP structural proposal builds on
what is viewed as a good beginning.
Number one: Plan administrators must serve as full fiduciaries. Only with
no conflicts of interest, with only the needs of the plan member driving the
investment decisions, will a structure be realized that Canadians can
believe in and therefore invest in.
Number two: Recognize that the need for an unbiased, professional
management option is critical to success. One of the great strengths of the
CPP or the majority of defined benefit plans is that investment decisions
are made on behalf of plan members by qualified investment managers.
However, in any conventional DC model, the plan member must make the
decision as to which investments to make. This do-it-yourself approach is
the fundamental flaw of any solution put forward, a flaw readily fixed with
the implementation of discretionary asset management.
Common sense tells us that despite the implementation of the recent
findings of the government's task force on financial literacy, no amount of
investment education, even from grade school forward, will prepare average
Canadians to make objective, informed financial decisions. Teaching
Canadians about the merits of long-term saving is important in engaging
them; teaching them on how to best invest those long-term savings is beyond
their reach. As Jack Mintz concludes in his January 13, 2011, Financial
Even with all the financial education in the world, literacy can only
go so far. Even the best and brightest who are busy with their own
professions will not have the time to become financial experts. I want
my doctor to know something about medicines, not which investments to
Number three: Ensure that the level of that unbiased, professional
management mirrors that of the CPP. Professional, unbiased money management,
combined with the highest level of qualification, can only increase the odds
that retiring well happens. It works for the CPP. There is no reason why it
should not work for PRPPs. Managing money for an individual is akin to a
licensed driver chauffeuring a passenger. Managing money for hundreds if not
thousands of plan members is akin to a specially licensed driver
chauffeuring a school bus filled with children. Both provide transport, but
the risk involved and therefore the qualification required is significantly
different. Virtually all banks, insurance companies and mutual providers are
licensed as investment counsellor/portfolio managers — IC/PMs — or, more
simply, portfolio managers. This submission recognizes the need for
practicality and therefore recommends that the PM status, given its
prevalence in the industry, be recognized as the qualification needed by any
PRPP administrator providing a discretionary option.
Point four: Allow for transfers from current DC plans, group and RSPs to
increase the size of the pool to ensure low costs are achieved. Assuming
equal fund performance, a 1 per cent reduction in fees makes all the
difference in the world over the long-term. Currently, a retail mutual fund,
the basis for most RSPs averages, around 2.25. A PRPP at 1.25, discretionary
or self-directed, is clearly in the best interests of the average working
Number five: Equal the playing field for all PRPP administrators. Allow
average working Canadians and their employers to choose based on harmonized
standards and fully disclosed and transparent pricing comparisons,
essentially apples to apples.
In conclusion, we return to our opening question: What defines "a major
breakthrough''? The answer is simple: Do not listen to Open Access. Do not
listen to any entity that has its own bias, either hidden or exposed. Do
listen to the voice of average working Canadians. Hear their needs first. Do
not worry — commerce will be right behind them.
As an industry, we have a responsibility to all Canadians. Cynicism,
abundant in the marketplace, reflects our sometimes-faltering adherence to
that responsibility. PRPPs are a telling moment, a substantial opportunity
to prove that we as a private sector are worthy of the opportunity, worthy
of the trust of all working Canadians. At Open Access, we intend to live up
to that responsibility. Thank you.
The Chair: I must say, Mr. VanDerStarren, I would not believe you
had not been before our committee before. That was a very good maiden speech
to a Senate committee, I must say.
We have a number of questions, and I will turn first to the deputy chair
of the committee, Senator Hervieux-Payette.
Senator Hervieux-Payette: Welcome. I will start with you, Mr.
VanDerStarren, because there is much we can draw from your brief and of
course your concerns are likely the same as ours: the administration costs.
As you are aware, a study on this whole issue was already conducted,
before the bill was put together, and this bill is the outcome of that
process. Would you say that 1.25 per cent is a reasonable industry standard
as far as costs go?
Mr. VanDerStarren: With regard to the 1.25 per cent, you noticed
yesterday in your meeting, and I have heard it mentioned a number of
different times, that there has been no definition of low cost. Mr. Menzies
has stayed away from that intentionally.
There is an article in the package that we left for you that just came
out in this June's CFA publication called The Analyst. We attempted
to look at what is available out there right now from a pricing standpoint.
It is a huge discussion, obviously. One of the key attributes for us is
making sure that there is that level playing field so that you are truly
comparing apples to apples.
The 1.25 per cent is a number that we looked at and said that it has to
be somewhere in that area. There are some practical sides to this equation.
With a start-up plan, if you have a million people starting a PRPP with zero
assets, what will that do to any of the administrators providing these
plans? There are a number of other objectives and elements that enter into
that equation. It is a starting point.
We have had a number of conversations with people in the industry who
have said that it should be much lower than that at some time. It all
depends on assets per life, which is really the driving factor in all of
this. Most people talk about how big the pool is. The pool is important, no
question, but there is another aspect to this: the actual assets per life.
If you have a million Canadians with $500 each in their plans, it will be
very difficult to administer that versus a large pool. The intention is
There is no question that having a large pool is a contributing factor to
success in this area, but there are some other factors as well. The 1.25 per
cent is a mark that we have identified just to illustrate the point that
most people are paying 2.25 per cent or 2.5 per cent or higher for most
retail-priced mutual funds, and look at the average holdings in RRSP
accounts. With that PRPP, putting that new bias hat on, why would you not
allow people to move that money over? If you could get it for 125 basis
points, automatically there is a cost savings involved. Forget the fact that
you would have a choice of a discretionary model where for that same 125
basis points someone would make that investment decision on your behalf. It
is a better model even at that price point.
Senator Hervieux-Payette: In order for it to be profitable, the
size of the pool certainly does matter. But as you just pointed out, whether
you have 1 million people with $500 each in their plans or 100,000 people
with $5,000 each has an effect on the cost. Is there some sort of optimal
formula that would achieve the right balance in terms of paperwork and
For all intents and purposes, it would be better to have a number of
pools — in French, we talk about "pools'' as well — since you do need a
critical mass, an optimal number that takes into account the dollar amounts
and the number of participants. So could you say that 1.25 per cent would be
the maximum fee? When my colleagues and I discuss this, what concerns us the
most when it comes to reasonable costs and simplicity are all the add-ons,
the bells and whistles or frills, I guess you could say.
We are envisioning this program without those; we are envisioning
something simple. You collect money, you invest it, you have someone who
enrols on your end with a number and for whom a regular contribution is
made. Since you have started a business, do your administration costs
reflect some sort of optimal pool and an optimal fee?
Mr. VanDerStarren: I am not convinced that there is a magic number
that says it should be $3 billion, $30 billion or whatever. You can look at
a host of very large funds and at the dynamics and economics at play and
find, no question, that there are efficiencies. However, you reach a point.
When you start talking about institutional pricing, it is not like they are
going to reduce it by 50 per cent. If you are dealing with institutional
pricing versus retail pricing, any size pool, there will be significant
efficiencies based on that. To go within that institutional realm and argue
that you can drop it another 30 basis points or so, I do not think will
Charles Laing, Head of Research & Development, Open Access Limited:
I can talk directly about how much we pay for investment managers. We are
fully transparent. We buy. We do not have internal investment managers; they
are all external. It starts at around 29 basis points and goes up to about
48 basis points for nine model portfolios. It is a mix of fixed income and
equity and is managed by Zev Frishman, who used to manage $17 billion for
the Ontario Teachers Pension Plan. He is our chief investment officer and
our chief fiduciary. On top of that are the administrative costs. That goes
back to Mr. VanDerStarren's point about assets per life. If you have $500
per life and your operational costs are targeted at $150 per account, you
are not going to make it at $500 per account.
We use a number asset of $14,500 per life as sort of a range. That is the
threshold with 1.25 basis points. The average Canadian has over $20,000 in
RRSPs, so we believe that average per life account can be exceeded. Once you
start growing there and in growing with the number of lives that exceed
$14,000 per life, then your overall MER will come down in such a scenario.
In the CFA article we gave some points on approximate ranges for things.
I will read them here. From Statistics Canada, we used a number for DB plans
from CEM Benchmarking at 42 basis points. An example for the PRPP, which is
the Saskatchewan Pension Plan, a proposed PRPP number, is about 120 basis
points. A number from a presentation by a senior representative from
Great-West Life -Power Corporation listed large DC plans or group RRSPs at
125 basis points. The average mutual fund is running at 237 basis points out
of Morningstar. The average segregated fund is running at 293 basis points
out of Morningstar.
As you can see, when you incorporate assets per life and targeting, and
the administrator has to target that because you do not want to be stuck
with $500 for life or you may not be a going concern, then these numbers can
come down even further. As a business planning exercise that we are going
through, on the long term we are looking to go below 100 basis points as our
Senator Maltais: Thank you for your documents, gentlemen. You have
done your research, and I commend you.
I have a question that concerns Senator Massicotte and myself. If you
ever find a bank that offers 2.25 per cent, call us to invest our current
Mr. Kelly, you said that you might be interested in establishing a pooled
pension fund for your members. That represents about half of small
businesses. Are you aware that the CCQ, Quebec's construction industry
commission, set up its own pension plan in the 1970s — in 1975, I believe —
because those workers did not have a pension, no retirement fund or
security. Today they have security. It is undeniable that that goes out the
window when you start talking about a defined pension plan. It no longer
enters into play. Market fluctuations are too variable, as they say.
I would like to know how you could apply this to half of your membership?
You can start with businesses that have 1 to 4 employees, then 5 to 19
employees, followed by 20 to 49 employees up to those with 50 to 499
employees and 500 plus employees. How could such a thing be managed without
having the administrative burden exceed the interest rates, in order to make
Mr. Kelly: We would not be the party that would offer the PRPP. We
would provide a partnership and then there would be another company that
would offer the PRPP on our behalf. Right now we are looking to do just that
in Quebec. We are taking offers from a variety of potential partners who
would offer the fund.
You are asking a very important question, and this has been under debate
with respect to the PRPP model. One of the things that worries us about how
the provinces may put this legislation into place is will they mandate, as
Quebec has done, mandatory participation in the PRPP; that is, registration
in the PRPP and making mandatory offering of the PRPP to employees?
There are two sides to that equation and both are important. One, the
industry has told us that for them to keep costs low, you need to ensure
that we push people into the plan and have large numbers participating. If
you do not do that, then the costs of having one employee here and two
employees there become very large. On the other hand, if an employer does
not have any money to put into the plan, this does not work very well and it
becomes an additional red tape burden for the employer.
Basically, the conversation goes like this: "Thank you very much,
Ghislain, for taking the job here at manufacturer X. Here are your forms to
register for our pension plan. By the way, we do not contribute any money to
it.'' You can imagine, as an employer, that that will create a negative
right away when you are hired into that environment. This is one of the
things that must be ironed out, and it will be the provinces that will make
The Quebec government has decided on something that is reasonable, where
they are exempting the mandatory participation, the mandatory offering of
the plans to those employers, I believe, that are five and fewer employees,
and they are making mandatory registration to those that are above that.
They are still not mandating — and this is very important — that the
employers have to put any money into it. What they are mandating is that the
employer must participate and offer it to their employees. If the employee
then wants to participate, that is a good thing.
I want to build on one other important point. Even if the only thing that
happens with PRPPs is shifting existing money in RRSPs to PRPPs, we think
that that will be an improvement. There are two ways that more money will be
put into retirement savings for the employee, namely, first, lower potential
management fees; and, second, exemption from payroll taxes. Those two
things, we think, will be an improvement over the existing scenario with
Senator Maltais: Your graph shows that 25.6 per cent of businesses
have 1 to 4 employees. In Quebec, they decided to start it at 5 employees.
What will happen to that 25 per cent of the population when they hit 67
years of age? Will they be marginalized by society? Why should they not have
the opportunity to participate? Obviously, they are not big savers. They are
not people who pull down $100,000 plus, but rather less than $30,000,
somewhere between $18,000 and $30,000, close to the poverty line. If they
live until retirement, they are just as entitled to a decent pension as
Might the Canadian Federation of Independent Business focus specifically
on that 25 per cent of people, who represent close to 2.5 million Canadians?
Mr. Kelly: It is a huge concern. What will happen for those very
small employers is an interesting question. The good news is that they are
still eligible to apply for and participate in PRPPs. The owner may do that
for the self-employed, and they may offer that to their employees.
Remember, though, for those that are very low paid, if you are in some of
the sectors where the wages are more modest, those employees are probably
not going to be particularly bad off in their retirement anyway in that
government supports for those that are at low income levels traditionally
will mean that they are not making a lot of money now, so it will not change
very much when they move into retirement.
The group that I think most of us are concerned about is the middle
income bracket. The wealthy can take care of themselves. For those in more
modest income brackets, obviously government supports are much more
meaningful to them. It is the middle income bracket that is important. There
are huge numbers of small employers that are in that category. Right now,
they do not have access to a great number of tools that are low cost and
administratively flexible. This will add a new one to them.
I want to be very clear, senator, because you are asking an important
question: This is not a panacea. You see our results. A third of our members
are interested in this, but not every employer in town will be rushing into
a PRPP. We still think it is an important additional tool to the arsenal.
Senator Maltais: Your federation no doubt includes self-employed
workers like farmers and fishermen. Their retirement money often comes from
selling their operation, when they are able to sell first of all, and second
of all, when they receive payment. Retirement is a risk for these people.
Those who operate small fishing boats come to mind; those people do not have
a pension. They belong to your organization and are neglected by society.
Could a federation like yours do anything for them?
Mr. Kelly: Actually, you are raising something that is also very
important. It speaks of the benefit of the PRPP model as opposed to the
mandatory CPP hike. Remember that if you are self-employed, you pay both
sides of the Canada Pension Plan. You pay the employee and the employer
side. If there is an increase in the Canada Pension Plan, you, as a
self-employed person, are paying double that amount. It may not be possible
for you to cover that off, and so a mandatory increase for the self-employed
is deathly. That is why we are so afraid of any mandated CPP hike. We do
need to ensure that there are protections for the self-employed. There is
great interest in this vehicle specifically because it is a pension tool
that they would have access to for those in that category. Again, it is not
a panacea. If you have no extra money in your business, a PRPP will not be
particularly helpful for you, either.
Senator Eggleton: Let me pick up with a couple of things, Mr.
Kelly. You said that a third of your members would consider it, but you also
said that a number of them say that it would be quite a squeeze and that
they might, in fact, have to reduce other payments or benefits to the
employees. Is that how this third might well end up implementing it? That
is, there will be some cuts in some other areas so that there is no net
benefit to the employee?
Mr. Kelly: That is not our expectation. I want to be clear that
the data that I was sharing about the impact was with respect to a mandatory
CPP hike. That is, what would happen if the Canada Pension Plan
contributions were mandated to increase? Then they would look at reducing
salaries and benefits.
As this is completely voluntary, it would provide an additional vehicle
for those businesses that feel like they can afford this, or those who feel,
"My business is important right now and it is growing. I cannot find the
quality people that I need, so I have to get into the retirement savings
game.'' This will provide them an avenue to do just that. Those were two
different slides on different questions.
Could some employers potentially reduce salaries and then instead offer
it through pensions? I am sure that could happen, yes, senator.
Senator Eggleton: Quite possible.
I take it that this is the main reason your members would not like a
group RRSP. As far as I can see, it is really quite similar, except for this
question of the payroll tax exemption, which includes EI and CPP amounts. Is
that the only PRPP factor that would benefit your members?
Mr. Kelly: No. There are other benefits of the PRPP vehicle, but
you have hit on the chief one.
Senator Eggleton: Over and above the group?
Mr. Kelly: That is, the payroll tax exemption is a considerable
one. As I mentioned, it could be 20 per cent for some employers, depending
on what Workers' Compensation category you happen to be in.
The other is its portability. We really like the idea that if you are
working in one province or with one firm and you switch to another, you may,
as an employee, be able to take that with you. Right now at CFIB, we have a
group RRSP plan. There are employer and employee contributions. If you leave
CFIB, we have to figure out what to do with your employer contributions and
fill out some paperwork to make that happen. We feel a PRPP would be an
easier transition for those, so portability would be another advantage.
Senator Eggleton: You also said that you thought the supplementary
CPP program — that a certain political party with which I am affiliated put
forward — was also a good idea. Getting to this fee situation, that proposal
would bring in the CPP Investment Board, which has a very low fee. Is that
not far preferable to this big question mark that comes in this legislation
as to what the fees might be? They say low fees, but the minister does not
have any idea what the fees will be. We do not really know.
I do not know if you know anything about this, but in Australia
apparently they put this kind of scheme in about a decade ago. According to
one report I have seen, the big beneficiaries have been the financial
services sector, because the fees are much higher. Would we not be better
off going to something where we had that very low rate of the CPP Investment
Mr. Kelly: Our members have been favourable about the PRPP, but as
our data shows, about 70 per cent like the idea of a voluntary add-on to the
CPP. The question is, though, do you want all of your eggs in one basket? At
the moment, the CPP seems to be in fine shape. That has not always been the
case. There have been periods of time where the CPP has been massively
underfunded. There have been major problems with its investment management.
While at the moment we think things are good, do you, as an entrepreneur or
an individual, want to have all your retirement savings banked on one plan?
Senator Eggleton: Do any of the rest of you have any knowledge
about the Australian experience?
Mr. Laing: Yes, the Australian system did grow. The ministers have
acknowledged there have been some mistakes. There were three accounts per
individual, which raised the cost. That goes to an asset for life issue that
kept the costs, and yes, you are right, the financial institutions have been
a big beneficiary.
One difference between the Australian system and what the PRPP is
proposing is that we have more effective ability to pool, and we are
targeting to bring the rates lower. With the approach we are taking at Open
Access and using a discretionary account, we can bring those fees in lower
and improve the performance for the individual by executing the investment
An interesting point is that our model portfolio number one — our most
conservative, which is the pre-retiree — is coming in at the same basis
point investment fee as the CPP.
I would submit two things: We can reach and get there. We can get to the
CPP level, and also we can get there using a CPP-like structure based in
trust, based in fiduciary, and always acting in the best interests of
Senator Massicotte: If we can get the size and maintain the
simplicity, I think we can get a pretty cost-effective program, as long as
we do not screw up those two criteria.
I worry. If you look at the proposed legislation, it is the employer that
basically will choose the administrator. The legislation also provides a
specific paragraph that says there shall be no inducement or entitlement to
the employers for him to choose one over the other.
I would be a bit concerned because nearly every employer has a banking
relationship, and that is what they are called. The banks call it a banking
relationship. The employer has no financial interest to make it a more
efficient or less efficient plan; he does not care. It is basically for the
I would be quite concerned that, unless the superintendent gets involved,
he will probably choose his banker because his banker will tell him, "I
have lent you a lot of money and I would want these services.'' Legally
there is no entitlement in law, but it is a significant relationship; the
banks will be out of the door very quickly because they are already set up.
He will probably choose his bank, so what if it costs 20 more basis points
more. He will nourish the relationship and the bank will appreciate it.
How do we avoid that? How do we ensure that does not occur?
Mr. VanDerStarren: That is a valid observation. Our simple view of
all this goes back to the bias: Put the average Canadian first, and what is
the right plan?
Unless there is a regulatory body in place that has the teeth and the
ability to make sure that the fiduciary standard is imposed as opposed to a
suggestion . . .
I find often times it is, "Let us talk about a low price.'' Who knows
what that is? Everyone has a totally different definition of what that is.
It is no different than the fiduciary standard. Everyone has their own
definition of a fiduciary. Yet, if you impose it and are articulate and
clear in what the fiduciary standard is, it does not have to be complicated;
only do what is right for the plan member, period.
As long as that is in place that would mean, to your example, if there
are no proprietary funds, a bank will not likely recommend their own product
in that particular case. There must be no conflicts of interest and that is
a very simple way to avoid things like you are talking about. As an
administrator, if I am not allowed to put money into my own plan — and I am
truly allowed as a fiduciary to choose what the right option is in the
universe — the odds are pretty good that I will be acting only in the best
interests of my client.
Senator Massicotte: The problem with that is that the legislation
does not provide a fiduciary level of responsibility with the employer. It
obligates it from the administrator. In fact, the legislation proposes
indemnification by the employer to be sued if the investment goes bad. The
problem is still there. The bank will make commissions. He will make money
from it. He will encourage it.
Mr. Kelly would you comment? How do we get around this?
Mr. Kelly: There are absolutely risks associated with that, but I
would challenge the assumption that an employer would not care.
I have to tell you, for the small employers we are dealing with, their
employees are often family members or a next door neighbour. These folks are
concerned about their employees' retirement.
From the conversations I have with business owners every day, they are
worried about how their employees will do in their retirement. I do not
think we are going to have trouble engaging them in that. Would they look
for easy and available solutions to them? Sure. Would they consider their
banking relationship because they have a trusted adviser at RBC Royal Bank
or TD Canada Trust or wherever? I am sure that would be the case as well.
However, I think for the most part that for an employer who is willing —
this is why we are concerned about mandatory registration — and if it is
completely voluntary and they are choosing to get into it, that employer
will be motivated to find the best tool. They will view this as a way of
attracting workers from one location to another. If it is mandated on them —
The Chair: Mr. Kelly, we have to move on to the next questioner.
We have a number of questioners today. It is a most interesting topic.
Senator Patterson: The Federation of Independent Business had a
news release on the option of increasing CPP benefits in December of this
past year. It stated that doubling CPP benefits as proposed by some would
kill 1.2 million person-years of employment in the short term. Could you
outline how you came up with that calculation, please?
Mr. Kelly: That is based on the Canadian Labour Congress proposal
to double CPP benefits, which would require a 60 per cent increase in CPP
premiums. If that proposal were put into place — the numbers you quoted are
accurate — our economic modelling shows that that would kill the equivalent
of 1.25 million person-years of employment.
We worked with the University of Toronto in their economic modelling to
come up with that estimate. That is because this would be a mandated
increase in their fees; a mandated tax increase to put more money into the
Canada Pension Plan.
Remember that employers stepped up when the CPP was broke. Employer
premiums nearly doubled to shore up the Canada Pension Plan that was in such
bad shape. Many of our members supported an increase in the Canada Pension
Plan at that time because they viewed CPP as a very important tool.
This is different. The CPP is in fine shape. The idea of expanding it
would mean a giant payroll tax increase at a very vulnerable point in the
economy and our members do not favour that at all.
Senator Patterson: On the question of costs of the service and the
risk of not having low cost, Mr. Kelly, you said employers would be
motivated to find the best tool and that would presumably include low-cost
tools. Do you not think that there could and would be competition amongst,
say, banks to offer attractive packages and bring costs down in the
Mr. Kelly: We hope. There are also more players than just banks in
this equation, which is good. There is a larger financial services industry
that would, we hope, compete for their business. We suggested in Quebec that
we are looking at potential deals, and we had a lot of people coming to the
table. The management fees at this stage were in the ballpark of what our
colleagues were saying — around 125 basis points.
There is some real evidence that these fees, while not tiny, would be
significantly lower than the tools that are on the table today, and that is
a good thing. Therefore, competition can help us in this regard.
Again, we have a love-hate relationship with the financial services
sector as a whole; Senator Ringuette will know a lot about that. However, I
have to say that we are feeling good that there is movement afoot to keep
these fees low. We are not confident that mandating or capping fees, as I
believe has taken place in Quebec, will work. In fact, it can mean you get a
pretty crappy investment.
Senator Ringuette: Yesterday, Mr. Menzies, the Minister of State
for Finance, was before us and I asked specific questions. Regarding the
possibility of taking RRSPs and moving them to the pool system, there was no
answer. After three years, the people who are putting this legislation
before us cannot answer the question. I asked about protection against
bankruptcy; there was no answer there, either. "Well, we will get back to
you; we will put it into the regulations.''
Another question that unfortunately I did not have time to ask yesterday
was about the issue of foreign investment. Currently, in the RRSP system, I
think the maximum is 20 per cent that you can invest in foreign —
Mr. VanDerStarren: It was. That has changed.
Senator Ringuette: We do not know. There is no provision in here
with regard to foreign investment of plans. I think that this will be a
major flop unless there is a specific maximum cost attached to the
regulation or attached to this bill.
The Chair: Is that your question?
Senator Ringuette: My question is: How can we prevent a major
Second, for Open Access Limited, are you under the supervision of OSFI?
Mr. VanDerStarren: Yes, we are regulated.
Regarding the first question and how we can prevent this from about
becoming a flop, we have talked enough at this point about that fiduciary
standard needing to be imposed. The other piece in all of this is to ask
If you are wealthy enough to hire a discretionary manager, we understand
for a certain segment of the population, it is the right thing to do. Why is
it right for one portion of the population and not right for a significant
larger portion of the population — the 11 million who do not have any
workplace pension plan?
We urge you to understand that we are the only private firm that was
actually invited to speak with each of the federal-provincial-territorial
working groups across the country.
There is a paper in our package that we left with you and I urge you to
read it. You will find that the range of opinion is very personal, but there
are some consistent threads. There is fear; there is no question about that.
At the same time, there is a hope that because of the scale of this project
it will not be yet again a "flop,'' in the way you are describing it.
That discretionary management model is something to look at. If we can do
it for other places and others areas, why not for the PRPP?
By the way, on the cost side of things, we are proposing with the
discretionary model that cost would be identical to what any other
self-directed model would be. That is important because we do not want our
people having a choice and picking one because it is cheaper than another.
We are saying that all the logic in the world tells you that people are ill
equipped to make financial decisions on their own. Do not price it higher
because no one will pick that model. Ensure the pricing is identical to what
else is out there in the marketplace, so you have a true choice based on one
criterion: "Do I feel comfortable making my own choice?'' Whether it is the
right choice is a whole other issue. So, do I have a comfort level choosing
my own, or am I able to finally go someplace and get exactly the same level
of management and purity from another source at the same price?
Senator Ringuette: Look at other financial products. When they are
first introduced into the market, they seem to be alluring. Then greed sets
in, and greed can be pretty destructive to Canadian consumers.
Mr. VanDerStarren: Thank God we have government and OSFI to ensure
that does not happen in this case, because it will happen unless there is
something very concrete that comes out.
Senator Ringuette: Perhaps Mr. Dussault could shed some light on
three considerations: the chances of transferring existing registered
retirement savings to this system; is it worthwhile? If it is not specified
in the regulations, how can we be sure that the costs will actually be
We know that right now the fees imposed by Canada's banking sector on
registered retirement plans are double what they are in the United States.
We have seen that in this committee. How do we keep this from happening if
it is not set out in the legislation?
Mr. Dussault: Even if you were to legislate the matter, keep in
mind that banking institutions, banks and insurance companies, are free
enterprises and profit centres. It is tough to restrict their activities;
you can oversee them closely but I am not so sure how you could go about
limiting their fees. You could always try.
Senator Ringuette: But the objective depends on the fees: if this
kind of plan is to succeed, it will depend solely on its appeal from a cost
perspective. Otherwise, it has no merit.
Mr. Dussault: Earlier we talked about the possible competition
between financial institutions. That competition exists, and for the past 40
years, we have not really felt the effects of any such competition on RRSPs.
Senator L. Smith: Mr. Laing, Mr. VanDerStarren and Mr. Kelly, how
do you see this rolling out in terms of competition? Will this be a niche
market where certain players enter the marketplace? As a small business
owner, I am involved with a small company and our biggest challenge is
maintaining people, as Mr. Kelly brought up, because we cannot afford a
How will this roll out, as you see it? You talked about 125 basis points.
However, realistically, how do you see the industry rolling this out?
Mr. VanDerStarren: There are a couple of factors. One, if you
equate it to Canada Savings Bonds and the marketing side of things, I am
sure there will be a government push to ensure the country is very well
aware of these new entities called PRPPs or BRSPs. However, what will be
different versus the Canada Savings Bond is that you will have the private
sector and there will be that competition that we spoke of earlier. This is
a product that took a while for the industry to start to adapt to, but they
now understand that it is not about high profit anymore; it is about high
volume and a much lower margin.
Therefore, with that higher volume, there will be huge incentive to get
that volume up as high as they possibly can. I also believe that when the
press gets a hold of this and recognize this is something that is good for
Canadians, you will see this massive awareness for this product, driven by
the private sector and its advertising and desire to by assets into their
own firms. At the same time, you will have a media presence that will be
high, as well.
I do not think anyone disagrees with the fact it has to be low price; we
just do not define that what "low price'' is. In a competitive marketplace,
for any other product you look at, that price is set. Someone will come out
with a lower version. You see it in the index fund and across the board
right now. Do not worry about the competitive side. Leave that to the
private sector. They will figure that stuff out. They will drive that price
down, particularly because of what is at stake here.
This is where we come back to government involvement with OSFI as an
example even as a regulator. To be able to have the authority to make a
difference in the space and to ensure that, again, someone puts on that new
bias and questions what is the right solution for average Canadians.
If we get the right solution, "right'' is very easily defined. There are
all kinds of papers that talk about what right is. Do not look at it from a
firm's perspective; look at it from that average Canadian's perspective and
magic will happen. You will get the answer. Should the funds be locked in?
Yes, it is a pension plan. Should it be opt out versus opt in? Yes, because
behaviour says if you are acting in their best interests, lock them in
because 80 per cent of the people will stay there. They will have the
illusion that they have the chance to opt out, but they will not act on it.
Do what is right for them in terms of structure.
Does a fiduciary make sense versus allowing a propriety product? Of
course it makes sense. It is a very simple checklist to go through. When you
do that you will have a product that will achieve the scale that you are
Senator L. Smith: Mr. Kelly, 3,000 of 9,000 members are showing
significant interest. Maybe that is a very good percentage with a lack of
knowledge that people have, especially small business owners who are trying
to survive, who are tied to their heads with a bank and would look at this
as a great opportunity.
Mr. Kelly: The other piece that that survey result showed is that
there was one third who were interested, a third who were not interested and
another third who were not sure. That speaks to the issue that this is not a
product in the field right now. There will be a lot of questions asked.
Again, there are two parties who could screw this up: the financial services
sector and provinces as well. That is why we are dependent upon both to do
the right thing in introducing these products.
We are reasonably confident, though, that the message has been heard and
that there are enough players in this industry — and groups like us and
other associations — that can start to play a broker role in ensuring that
their memberships have access to lower cost funds. There will be some
additional checks and balances in the system than those that exist today.
Senator Eggleton: The recent recession brought to our attention
the lack of savings Canadians have. The markets are up and the markets are
down. If you happen to be starting into your retirement when your savings
are down that is not so good. This legislation, as far as I can see, does
not have any provision to try to rectify for the bad years. Do you think
that that kind of provision should be put in?
Mr. VanDerStarren: This is a long-term proposition. You will go
through waves of very high and very low markets. That is not ever going to
change. We are in a completely different space right now in terms of market
volatility. To look at it in chunks as small as that would be a mistake.
This is no different from the CPP projecting out 75 years. This is a
Senator Eggleton: In that case there are defined benefits. I am
referring to the case of retiring when the market is down.
Mr. Laing: You have addressed an issue and I think it is
important, but financial services firms, as fiduciaries, have to represent
the members' needs and allocating the investments better so they are not an
exposed in a downturn.
Mr. Kelly: From my perspective, I am not sure what we would do
about that anyway. Those are the realities of the marketplace, save
requiring people to put money into a defined benefit plan. Someone is on the
hook for that at some later stage. Not everyone has a public sector pension.
It is an absolute reality that that can happen. I am not sure there is a
particularly great alternative.
The Chair: Thank you very much. I must say, on behalf of all of
the committee, all of you were very well informed and very well prepared.
This was a great addition to our discussion on this bill, and we thank you
very much for appearing before us.
We will now hear from a further three organizations. We are very pleased
to welcome, representing OMERS Administration Corporation, Anne Soh,
Vice-President, Actuarial Services; and Neil Hrab, Manager, Government &
Stakeholder Policy and Research.
Also, we have Guillaum Dubreuil, Vice-President, Federal and
International Affairs of the Regroupement des jeunes chambres de commerce du
Québec; and James Pierlot, Founder and Principal of Pierlot Pension Law.
Honourable senators, again, we have approximately one hour for this
Ms. Soh, we will hear from you first, then Mr. Dubreuil and Mr. Pierlot
Anne Soh, Vice-President, Actuarial Services, OMERS Administration
Corporation: Thank you, Mr. Chairman.
Senators, I am very pleased to be here today. I joined OMERS in May 2010.
With me is my colleague, Neil Hrab, Manager of Government & Stakeholder
Policy and Research.
The OMERS Administration Corporation is responsible for OMERS plan
administration pension services and investment of plan assets. OMERS also
has a Sponsors Corporation. As a large multi-employer defined benefit
pension plan, OMERS serves more than 950 employers in the province of
Ontario, including local government agencies. OMERS has a total membership
of about 423,000 members, including more than 265,000 active members and
One in twenty working Ontarians is a member of OMERS. This is a
significant portion of Ontario's population who are on the path towards
steady retirement income. Their OMERS pension will reduce the burden on
social assistance programs by providing retirement income in a
cost-effective manner. The size of the plan allows OMERS to attract
top-notch professionals to pursue assets with long-term stable returns and
provide best-in-class pension service solutions to members and employers.
OMERS is a jointly sponsored pension plan with a tradition of employer
and member governance. Employers and members have an equal voice at the
boardroom table and they share direct responsibility for all major decisions
and the plan's success.
Broadly speaking, we conduct our pension and investment activities within
the contours of both Ontario and federal pension and income tax legislation.
Our focus is on investing contributions and the investment income we
generate to secure members' retirement benefits at a reasonable cost to
members. Over two thirds of each dollar of pension benefits paid retired
members comes from investment income.
OMERS' highly skilled investment professionals manage over $55 billion in
assets that generate the income necessary to pay pensions. There is value in
OMERS, not only to members but to the Canadian economy as well. About two
thirds of the plan assets, totally over $37 billion, are invested in Ontario
and the rest in Canada. A significant portion of these investments have been
made in companies where OMERS has a major ownership stake. Well over 10,000
people are employed in these companies, all of whom pay taxes in Canada.
We commend the government and Minister of State Menzies for introducing
Bill C-25; and we applaud the progress that this proposed legislation has
made to date. OMERS wishes to make a useful contribution to today's
discussion of Bill C-25.
Regarding Bill C-25 and pooled registered pension plans or PRPPs, our
position has been and continues to be very clear. OMERS continues to support
the development of the PRPP proposal according to three clear principles:
First, participants should have access to low-cost, sophisticated investment
services; second, PRPPs should provide limited or no choice in investment
decisions to keep costs low and reduce confusion; and third, eligible
administrators should include large pension plans, like OMERS, in addition
to other regulated financial institutions. This opportunity will provide for
competition to keep costs for participants lower while keeping quality of
Thank you, Mr. Chair and the entire committee, for inviting us here today
and allowing us to contribute to your deliberations.
The Chair: Thank you, Ms. Soh.
Mr. Dubreuil, please proceed.
Guillaume Dubreuil, Vice-President, Federal and International Affairs,
Regroupement des jeunes chambres de commerce du Québec: Good evening,
Mr. Chair. The mission of the Regroupement des jeunes chambres de commerce
du Québec, or RJCCQ, is to defend and promote the social and economic
interests of Quebec's young business people. A veritable network of young
entrepreneurs, business people, self-employed workers and professionals, the
RJCCQ has been representing and defending the interests of over 7,500 young
professionals for nearly 20 years. Its members are under 40 and come from 30
junior chambers of commerce and youth business associations across Quebec.
With respect to the legislation being considered today, the RJCCQ joined
forces with a partner organization, Question Retraite, to commission a
survey a few months ago. I am going to share the results of that survey with
you because they are quite telling.
The survey, which was conducted in October, reveals that a majority of
young professionals currently expect to work beyond 65 years of age. We find
this somewhat worrisome, because while the RJCCQ encourages people to work
until the age of their choice, we also believe it is not up to our
generation, workers under 40 years old, to pay the price for upcoming
demographic changes. Therefore, we support any measure that will encourage
young workers to save for retirement, so they can retire at the age that
The survey also found that young people do not fully trust the retirement
plans offered to them by their employers. According to the survey, a large
majority of them would rather have a salary increase, receiving the money
directly, and manage a personal retirement savings plan than rely on their
employer to invest it on their behalf. Once again, we feel that the system
being discussed today could address part of this problem.
Lastly, we believe that this system could help small businesses grow
because it would allow them to be competitive as far as recruiting and
retaining professionals is concerned. Small businesses would be able to
offer employees a retirement plan, something that is currently only within
the grasp of larger corporations by and large. This would help small
businesses reduce employee turnover and ensure smoother growth.
For all these reasons, the Regroupement des jeunes chambres de commerce
du Québec is in favour of this bill and therefore the PRPP plan.
James Pierlot, Founder and Principal, Pierlot Pension Law: Thank
you, Mr. Chair and committee members, for the invitation to speak today. The
federal government's stated intention is that PRPPs are to help modest-and
middle-income Canadians who are not saving enough for retirement, primarily
through asset pooling and administration.
Bill C-25 sets standards for administration, asset management, member
enrollment and locking-in of benefits. However, it is important to remember
that the federal government has jurisdiction only over specific kinds of
employers, for example, railways, banks, postal service, et cetera. Most of
these employers already provide pension coverage to their employees, so Bill
C-25 cannot have any impact on most workers unless the provinces cooperate
by enacting legislation similar to Bill C-25. This may be unlikely given
that provincial governments have historically been unwilling to have
standardized pension legislation. You have heard in testimony that PRPPs are
pension plans and that they will help low-and middle-income workers in
retirement. I am here to challenge both of those assumptions.
With its broad powers over taxation, the federal government has
significant control over pension saving through the tax rules that apply to
PRPPs and other plans. Proposed tax rules for PRPPs were released on
December 14, 2011, the main elements of which are as follows: Contributions
will be limited to available RRSP contribution room; self-employed and
employed individuals will be able to join them; and de-accumulation options,
or receiving a retirement income, will be similar to those available for DC
plans and RRSPs. Finally, the legislation states that PRPP administrators
must be licensed and resident in Canada.
PRPPs have received a tepid response from many industry commentators for
a number of reasons. First, mandatory participation cannot be required,
giving them very little advantage compared to a group RRSP. Second, and
unlike employer-sponsored DB pension plans and the CQPP, employer-sponsored
pension plans such as OMERS, for example, a PRPP is simply another savings
vehicle that will not guarantee any particular pension.
Notwithstanding their name, PRPPs are not pension plans because they will
not pay pensions. In terms of providing opportunity to accumulate a pension,
the tables I have provided show how PRPPs compare to the CPP and QPP and to
private retirement savings vehicles now permitted under federal tax rules:
defined benefit pension plans, defined contribution plans, and RRSPs. As you
can see from the table, a PRPP is functionally equivalent in most aspects to
a DC plan or RRSP.
Also provided are stylized examples of pension outcomes for seven
individuals that represent a cross-section of Canadian workers: three who
participate in DB pension plans in the public sector and four who save for
retirement in RRSPs. As committee members will observe, especially at slide
8, slide 11 and slide 12, those who save for retirement in RRSPs and those
who would save for retirement in PRPPs will receive only a fraction of the
retirement income that DB pension plans provide to many of their members.
These outcomes show what will happen with PRPPs because the proposed tax
rules for those plans are essentially the same as those that apply to RRSPs
and DC plans. As compared to DB pension plans, such as OMERS, Ontario
Teachers PP and other pension plans in the private sector, the most
significant deficiencies of DC plans and RRSPs are that they do not pay
retirement pensions and provide inadequate contribution room for many
workers; and investment losses result in permanent loss of retirement saving
As such, PRPPs represent a further perpetuation of a problem that has
existed since federal tax rules first permitted retirement saving almost 100
years ago: You cannot participate in a pension plan that promises a target
pension benefit unless you are fortunate enough to have an employer provide
it to you. Today, only about 15 per cent of Canada's private sector workers
are in this position. Unfortunately, PRPPs as currently conceived will do
nothing to help the remaining 85 per cent. The outcomes will be similar
because they will provide only limited asset pooling. They will not pool
pensioners' market and longevity risks, which help large DB pension plans
provide pension annuities at lower costs.
Perhaps the most troubling aspect of PRPPs is the constituency for whom
they appear to be intended. According to federal government documents, those
are low-and middle-income workers. This is a significant departure from the
federal government's long-standing view that the tax-assisted retirement
savings system is intended primarily for Canadians with middle and
upper-middle incomes. For many low-income workers, saving in a PRPP or any
other tax-deferred plan could be much worse than saving for retirement
outside them. This is because income taxes and benefit clawbacks, namely the
Guaranteed Income Supplement, result in very high effective tax rates on
their retirement income, much more than on earnings saved during working
For low-and middle-income workers who retire and draw retirement income
from a PRPP, the effective tax rates on that income can be as much as 50 to
80 per cent due to the clawback of the GIS. In terms of policy outcomes,
therefore, PRPPs will not improve the standard of living for low-and
middle-income workers who retire, but they will certainly reduce the
government's expenditure on elderly benefits.
Much is made of the $600 billion in unused RRSP contribution room in
Canada, but what is often not noted is that unused RRSP room is held mostly
by low-income workers who should not be using it.
All of this does not mean that PRPPs cannot be a good vehicle for
retirement saving — they can be — and there is a lot the federal government
can do to make them better. The first thing they can do is to allow tax
prepaid savings in PRPPs. Tax prepaid saving is similar to the saving that
is available in the TFSA, the Tax-Free Savings Account, that the government
introduced a number of years ago. Withdrawals from a TFSA do not result in
the clawback of income-tested benefits.
The second thing that can be done is to require PRPP administrators to
discourage or prevent low-income workers from participating in tax-deferred
Third, allow workers to contribute to their own target benefit pensions
based on the tax rules that apply to the federal government's own workers.
Fourth, allow PRPPs to pay pensions. When members in a pension plan such
as a DC plan or in an RRSP reach retirement, they have to manage those
retirement savings through retirement, and they are no better at doing that
than they are at managing them while they are accumulating.
As currently proposed, PRPPs present only the appearance of reform
because they are simply a re-release of an existing retirement savings
vehicle. To the extent that PRPPs result in an increase in tax-deferred
saving by low-income workers, they will actually be harmful because they
will amount to a regressive tax increase on retirees.
For middle and upper middle-income workers, they will be of little help
because they do not address the gap between defined benefit pension plans
and RRSPs in terms of accumulation room, and they will not pay pensions.
The Chair: Thank you very much, Mr. Pierlot, and thank you,
witnesses, for your opening comments.
We have a lengthy list, so I will ask committee members to keep their
Senator Hervieux-Payette: You may be in the category of witnesses
that ask questions their predecessors did not foresee. You mentioned the
provinces and the need to work together. As a Quebecer, I would like to hear
your view on what Quebec is planning to do, as it seems to have gone out on
its own initiative. Will Quebec's approach in this case benefit small
businesses and average earners?
Mr. Pierlot: Generally speaking, the Quebec VRSP is very similar
to the PRPP proposal. Whether it will be to the benefit of small businesses
and workers in Quebec will depend to a large extent on who is saving in the
Studies that have been done by the C.D. Howe Institute indicate that for
workers with quite high incomes, up to $50,000 a year, the marginal
effective tax rate on retirement savings when you withdraw it from an RRSP
is significantly greater than the tax deduction you get going in. The result
of that is that workers would be much better off saving outside a
tax-deferred vehicle than within a tax-deferred vehicle because they lose a
portion of their savings.
Whether or not the Quebec model will work for any particular small
business or worker will depend entirely on the income class that is saving.
For upper income workers, the results will be essentially similar to an
RRSP, except for the potential cost saving of asset pooling and better
administration of assets. The comments that I have made that apply to PRPPs
apply similarly to the Quebec model.
Senator Hervieux-Payette: Since you have spoken positively about
the TFSA, meaning the money will not be taxable at the end, if the money is
considered a pension, and you seem to say it would not be administered as a
pension as in a regular payment every month once one retires, this new
vehicle should be treated like a TFSA and not be taken into account. Could
it be given to a worker on a regular basis in the same way pensions are
distributed when dealing with a real pension? The way you talk about it, it
is as if it would not be seen as a pension plan with the full advantages of
a pension plan.
Mr. Pierlot: In a pension plan, a defined benefit plan, such as
OMERS, for example, the pension is paid for life and the accumulation of
that pension happens under different tax rules that ensure that if there is
a market downturn, for example, more contributions can be put in so that the
pension is there. The rules under which those plans operate are superior.
However, my comments with respect to marginal effective tax rates apply
equally to income withdrawn from defined benefit pension plans to RRSPs, DC
plans and PRPPs. When low-income workers save in those vehicles, that income
is counted for purposes of eligibility to the Guaranteed Income Supplement.
As a result, the Guaranteed Income Supplement is lost at 50 cents on the
dollar for every amount taken out.
The solutions to that, as I see it, is to modify the PRPP rules to allow
two different kinds of pension saving. For those who are higher income,
allow them to use tax-deferred accounts similar to defined benefit pension
plans and RRSPs. For those with lower income, allow them to save in a
tax-paid environment so the withdrawals do not result in the clawback of
Senator Hervieux-Payette: That is very interesting. Thank you very
Senator Tkachuk: There is no question that a defined benefit plan,
like the public service plan or the teachers' plan, seems to hold a lot of
value, or the one that General Motors used to have. There are a lot of
problems with both plans, whether it is defined benefit or defined
contribution, because defined benefit plans are going broke. Many companies
have had to go to the government to save the plans because the plans were
either used up by corporations, which used the money, or the company went
broke and there was no pension left.
There is a lot to be said for a benefit plan that you have maybe a little
more control over. In the end, you will be buying an annuity and you will
have some kind of a pension, which is really what this is trying to
stimulate. There is nothing saying citizens cannot also be using the
Tax-Free Savings Account, which I think is a terrific vehicle for putting
money aside and saving cash for the senior years. It is a question of
Mr. Pierlot: You raise a number of really good points. People can
buy annuities, but typically they do not buy pension annuities.
Defined benefit pension plans, particularly the larger ones we find in
the public sector, operate very efficiently. The total operating cost of
those plans, especially for the largest ones, range between 35 basis points
and 65 basis points — that is administration, investment management,
everything — while generating quite attractive rates of return compared to
many private sector-managed products. All of that means value.
You can argue about whether the benefits are too generous, are paid too
early or are affordable, but that is really a question of adjusting the
promise at the end and making it affordable.
The defined benefit structure is probably the best one for delivery of
secure benefits at an effective cost because of the pooling of market risk
and longevity risk. There is a middle ground between the PRPP on the one
hand and the defined benefit plan on the other. Again, we can look to the
public sector for an example of that because the contributions in those
plans adjust according to the funded position of the plan, and in many of
them, the benefits adjust as well. New Brunswick has recently introduced
legislation to allow that in the private sector. It is one of the first
provinces to do that; that is, where you will actually have sustainable
defined benefit style plans that will automatically adjust over time and
avoid the kinds of disasters that we have seen in high profile cases
reported in the news.
Senator Tkachuk: You could pass a law that would guarantee the
benefit, but you cannot predict the future. I think that when they first set
up the CPP, you were guaranteed a certain amount of money at the end of it
all. In reality, what happened is that the times changed; demographics
changed. There were all kinds of cultural and social issues that affected
those pension plans. In 1997, we had to raise the rates up to 10 per cent
over a period of five years. My son and everyone else's son and daughter
around this table have to pay for my pension plan. That did not work out
that good, either. The law said I should get the money, but if there is no
money at the end of the table, it does not matter.
Mr. Pierlot: A key difference between the CPP and defined benefit
pension plans is that the CPP started with no pension fund. It was simply a
Senator Tkachuk: Yes; that is exactly right.
Mr. Pierlot: Whereas with other pension plans, public and private
sector defined benefit pension plans, their funded position is measured
every three years and sometimes every one year. If you structure a plan such
as a PRPP under those rules, where you are regularly measuring the funded
position of the plan and adjusting both the contributions and the benefits
so that it is sustainable based on what is coming in and what is going out,
those plans can be sustainable over the long term.
Senator Tkachuk: Thank you, Mr. Pierlot. That was very
Senator Eggleton: Mr. Pierlot, would we be better off going to a
voluntary supplementary CPP, tying in with the CPP Investment Board and its
Mr. Pierlot: In essence, a voluntary CPP would be very similar to
the PRPP from the point of view of marginal effective tax rates. Because all
of the assets are pooled in a single vehicle you could potentially achieve
greater economies of scale, but I think there is perhaps a better case to be
made for an expanded CPP. However, an expanded CPP presents the same issues
with marginal effective tax rates because CPP benefits reduce the Guaranteed
In terms of the models that we have out there, I still believe that the
public sector models are best in terms of their efficiency of delivery. I do
believe that there is a significant sector of the population, those earning,
say, up to $50,000 a year, who simply should not be in traditional pension
plans or RRSPs. To the extent that they do save for retirement, they should
be saving for retirement in a tax-paid vehicle like the TFSA, but adapted to
pension saving, with locking in of funds, payment of benefits in the form of
a pension, et cetera.
Senator Eggleton: You said that the larger funds — you mentioned
OMERS — largely the ones that are managing funds for public sector
employees, are between 35 and 65 basis points in terms of the fees. Where
does CPP investment fit?
Mr. Pierlot: CPP investment is in the similar range. It is a bit
higher. I think it is around 60, if I recall correctly.
Senator Eggleton: Where do you think we would end up with this
plan? The minister does not seem to have a handle on a number. What would be
your estimate of where we might end up in terms of fees in this kind of
Mr. Pierlot: The numbers that I have heard in terms of investment
management fees would be similar to what a previous witness has told you,
namely, something in the range of 100 to 125 basis points. That is
significantly higher than what the CPP charges; it is higher than what the
big public sector plans charge by half a per cent. Half a per cent does not
sound like much, but you know that half a per cent on a mortgage means a
lot. Half a per cent over a career translates roughly into 20 per cent more
or less pension over a full career. A 50 basis point difference is very
Senator Eggleton: What do you think we can learn from the
Australian experience on this?
Mr. Pierlot: I am not that familiar with the Australian
experience, but I do understand that there is quite a bit of fragmentation
in the management and that has led to higher costs.
One of the difficulties with the Australian model and with other models,
like the Chilean model, where you build up an account and at the end you get
a big lump sum that you have to deal with, is that people are typically not
very good at dealing with and managing large sums of money because it is not
within their area of expertise. Particularly as people get older, 75, 85,
people are living longer, but that does not mean they are healthier. Many
older people suffer from problems like dementia and other health problems,
which will impair their ability to manage money. It is far more preferable
to receive benefits in the form of a guaranteed pension annuity.
Senator Eggleton: The government has put forward this legislation
and wants to proceed in this direction. Are there two or three amendments to
this legislation that might make enough of a difference to make it more
worthwhile? I am thinking, in particular, of the lower-income people here.
You have mentioned low-and middle-income people as perhaps not benefiting
from this nearly to the extent that they need to, given that they do not
have the savings for their own retirement.
Mr. Pierlot: I think if lower income people are the focus, then
the best way to improve this model would be to add a tax-paid saving
component so that when people go into a PRPP, they could get some guidance
from the administrator as to whether they should save on a tax paid basis
similar to the TFSA or an a tax deferred basis. That would be a key
improvement to the legislation.
The second would be improvement that would improve retirement income
security. That is, to allow PRPPs to operate under rules similar to the
defined benefit rules under the Income Tax Act, which effectively allow
pensions to be paid from the plan.
Senator Maltais: I want to welcome all of you to the committee.
Mr. Dubreuil, I am glad to see that the junior chamber of commerce is still
alive and well. You are speaking to a former member. What you are talking
about today, we were discussing 30 years ago or more.
I am not surprised by your members' response, because defined benefit
pension plans, as other witnesses have clearly said, are allowed only in the
public and quasi-public sectors. When we are in a deficit position,
taxpayers have to make up for the shortfall.
You see the problem we are having in Montreal and Quebec City with the
police. We would have to pay an additional tax for defined benefits. So
forget that. As for young people, I have about as much confidence in their
ability to manage their retirement income as I do in that of the paper
manufacturers or Nortel. They are not any more or less competent in
administering their funds.
Young people are absolutely right in saying they do not trust large
companies to manage their funds. I am not in the least surprised by their
response. However, this bill gives them an opportunity to build a retirement
fund at their own pace, as they are entrepreneurs and will not have access
to defined benefit pension plans because they are not part of the public or
the parapublic sector. It is all very well for teachers, but we are taxed
when there is not enough money to pay their pension. The same goes for
I prefer to trust people, to trust young entrepreneurs who will be able
to build a pension plan. That is a good opportunity for them. I would like
to hear your thoughts.
Mr. Dubreuil: There is no doubt that the biggest defined benefit
plans have not worked, and we are familiar with the results. They certainly
helped undermine the trust of the new generation of workers who are entering
or have just entered the workforce. They say they cannot trust such a plan
based on those results.
Most new professionals — who are among our members — are very aware of
the current demographic shift. The system is no longer viable.
The fact is that I need to take care of myself and of my own retirement.
I must not trust anyone to do that for me. Another problem is certainly that
young people may lack some information about how to properly manage their
pension in a completely independent way.
A bill that introduces an intermediate measure — somewhere between the
two options — is an excellent alternative that would help smaller groups of
workers and employees join forces and establish a somewhat more
straightforward approach to what is happening in their retirement plan. It
would also help them build their plan up gradually, at their own pace, to
achieve something that is ultimately more sustainable.
Senator Harb: I have one question for each of you, and I will keep
Ms. Soh, you had a chance to read the legislation. Would your
recommendation to the committee be to support the legislation with amendment
or without any amendment?
Ms. Soh: We fully support the legislation's intent, and we look to
the government to pass the final legislation.
Senator Harb: Mr. Pierlot, you spoke at length. We studied these
issues quite some time ago and heard from witnesses who said that an RRSP is
not the vehicle for people with low incomes. If they do not have the money,
they will not deposit it in a retirement fund and will not use a TFSA. I
suppose one can say that the government is trying to create different
options to entice people who are probably on the middle income side and are
not saving. They are saying, "Look, if you do not want to do it this way,
do it this way. If you do not want to do it this way, maybe do it the third
Do you have any objection to this legislation, as it is now, since it
will not take anything away from what we already have?
Mr. Pierlot: In that sense, the legislation, as it is proposed,
does no harm and could potentially do some good because of the asset pooling
and greater efficiencies. The difficulty is that it could do harm if it
encourages people of lower and middle incomes to save. It is important to
define what we mean by lower and middle income. I generally would regard a
person of middle income as anyone earning roughly between $50,000 a year and
$150,000 a year, even though, at the $150,000 level, you are talking about
the top few per cent of the income distribution. It is for that band, from
$50,000 to $60,000 up to $150,000, that the tax-deferred retirement savings
system is intended. The reality is that many people with incomes lower than
that are putting money into RRSPs when they should not be. I think we
understand that people making $45,000 and $50,000 a year are putting money
into RRSPs. To the extent that this plan results in people at those income
levels putting more money into tax deferred vehicles, it will not serve
Canadians well because, to the extent that they do have money to save, they
should not be saving it in an RRSP.
It is not the case that low or lower income people do not always have
money to save; sometimes they do. Depending on where they live in Canada,
they might actually get by fairly well on an income that would be lower than
what you might need in a big city like Ottawa or Toronto, but they may have
real estate wealth. They may wish to transfer that wealth into some kind of
a savings vehicle, so they will be tempted by this vehicle unless they are
Senator Harb: You are talking about employees who prefer to manage
their own pension. They do not trust their employers and think it would be
better to take care of their pension themselves. Bill C-25 does not make the
new option mandatory. Therefore, young employees currently in the workforce
can still continue to manage their own retirement plan. So where is the
Mr. Dubreuil: There is actually no problem — our vision is very
simple. If what is presented in Bill C-25 was introduced in a business, we
hope it would be accompanied by a relevant information campaign about what
the company is offering. At that point, the employees, the majority of whom
currently have difficulty trusting their employer, could make an appropriate
decision given that this new option had been proposed to them. Do I, as a
worker, want to participate in the plan or do I prefer to opt out and manage
my fund myself? We think it is very beneficial to have this option available
Senator Massicotte: Ms. Soh, you are managing a very large, very
efficient fund. I presume that this program will interest you, and I presume
that you will be offering your services to participants and employers.
Ms. Soh: Before we make an evaluation, there are a number of
hurdles to overcome, one being the release of final legislation, the
regulations and the changes to the Income Tax Act. When those factors are in
place, we can make the evaluation.
Senator Massicotte: Are you worried, as I expressed earlier, that
the employer basically chooses the investment counsellor and the
gestionnaire — the manager. He may or may not be contributing, but he
probably has a significant relationship at a bank, with maybe millions of
dollars in loans. That is critical, and all polls would suggest that the
availability of capital is more important than what he pays. Will the bank
not have a significant advantage where the employer says, "I will give it
to my bank,'' because he will get brownie points for it and bring fees to
the bank? Are you not disadvantaged compared to the banks if you offer your
Ms. Soh: As someone said, as long as you ensure that there are a
large number of eligible administrators in the marketplace, competition will
dictate the markets.
Senator Massicotte: The employer does not care whether it is 20
basis points more expensive or cheaper. He cares about that banking
Ms. Soh: We are able to offer our services in a very low cost
manner, and that is our advantage.
Senator Massicotte: What would that rate be? What do you think the
rate will be if you do come into the marketplace and separate equity from
bonds, let us say?
Ms. Soh: As I said, there are a number of hurdles to be addressed
before we address that issue. However, we do have the expertise and
experience to administer a vehicle such as a PRPP. Take, for example, our
Additional Voluntary Contribution Program for our plan members. It is very
much like a PRPP, and our fees are $23 per year for administration plus our
actual investment expenses, which have ranged from 0.4 to 0.6 per cent in
the last five years.
Senator Massicotte: A combination of fixed income and equity?
Ms. Soh: Yes, everything.
Senator Massicotte: You said —
Ms. Soh: It is 0.4 to 0.6, well within the range that was
Senator Massicotte: When you compare all of the plans to the
defined benefit plans, especially government plans, they all look very poor.
One can argue that it is inappropriate that government employees get such
generous pension plans.
Is there a possibility, if the legislation provides for it, that you
would actually offer a defined benefit plan and take that risk to guarantee
certain results to your plan members?
Neil Hrab, Manager, Government & Stakeholder Policy and Research,
OMERS Administration Corporation: That is a very interesting scenario,
but I think we would need to have brought more information with us in order
to respond to that question.
Senator Massicotte: Is it a possibility that you would consider?
Competition may force you because everyone would like certainty. We often
hear that uncertainty is risk. You people do not have a specific pension.
Mr. Hrab: It is an interesting scenario. We would have to think
about it some more.
The Chair: That concludes our questions for the day. We would like
to express, on behalf of all our members, our appreciation for your
appearing today. Thank you so very much.