PRPPs and the role of advice
Pooled Registered Pension Plans should include a provision to provide financial advice to participants, says Advocis president Greg Pollock.
This is, in fact, what he told the federal government's standing committee. "If manufacturers are allowed to sell products that include financial advice, we think plans will serve Canadians much more effectively in the long term," he says.
Mr. Pollock believes that the industry will see two types of products: ones that include advice and those that do not.
But with the prospect of low fees, advisers are worried about having to work hard for low pay.
Quebec’s bill to introduce Voluntary Retirement Savings Plans puts retirement at the top of everyone's mind.This can only be good for advisors who specialize in this sector, believes Michele Frenette, president and founder of GRMF, a firm that specializes in group retirement plans.
However, she does not believe that these plans will be a big market for her. "The design of this kind of plan will attract small businesses with a few employees who are scattered across several regions and isolated individuals. The average deposit is likely to be low and management fees will be modest," says Ms. Frenette.
In her opinion, setting up a plan that may only have six participants will take a lot of effort in exchange for little return."Manufacturers will be required by governments to offer products with low management fees. In my opinion, these sales will not generate large commissions," she comments.
Ms. Frenette also thinks that instances of cannibalism will not be limited to group RRSPs. The individual savings sector could also experience an exodus. She believes that an individual investor in a balanced mutual fund who pays, for example, a management fee of 2 or 3% will be tempted by the lifecycle funds option in VRSPs, which will probably be offered with lower fees.
But Ms. Frenette, who has established up to nearly fifty group RRSPs, says she is still ready to roll up her sleeves and work for the benefit of her customers. "I will offer them the low cost VRSP option even if I lose by making the change." She wonders if insurers will compensate advisors in this situation.
As for Mr. Pollock, he believes that advisers must think long term rather than short term. In his opinion, small groups can become profitable over time. For example, a group plan of six employees with assets of $10,000 may seem small to the advisor. But Mr. Pollock emphasizes that the group could increase to 50, 100, or even 300 employees in the future.
Critical mass required
The PRPP issue is not making rapid headway in Ontario. There was nothing significant in the provincial budget that Minister of Finance Dwight Duncan tabled on March 28. Instead, the provincial budget document proposes to tie PRPPs to increased Canada Pension Plan contributions. This route has been widely criticized in the financial services business.
According to Mr. Pollock, this is the fate of a minority government that is forced to act under certain influences. This includes pressure from opposition parties and organized labor, critics of PRPPs who claim that this plan simply replaces one savings vehicle with another, without increasing the amount.
Mostly concentrated in the transport and telecommunications industries, few companies fall under the federal government's jurisdiction. This being the case, Bill C-25 does not represent much of an opportunity unless the most populous provinces become involved.
Mr. Pollock therefore observes that Ontario's participation is essential if the multi-employer plan is to reach reach critical mass. The resulting economies of scale will provide participants with access to low cost investments. Only Quebec has a project underway, notes Mr. Pollock. "Looking at how slowly things are evolving, I think that getting this out on the shelves and into the community in 2013 is kind of optimistic," he says.
The industry and the business community want to quicken the pace. The CLHIA, the Canadian Federation of Independent Business and the Canadian Chamber of Commerce co-signed a letter urging Minister Duncan to move forward.
The signatories, including CLIHA president Frank Swedlove, are opposed to the idea of linking PRPPs to increased Canada Pension Plan contributions. In sum, they believe that the time required to change the public plan will only further delay the implementation of a plan that will benefit the 1.2 million Ontario workers who are currently without a private plan.
Yves Millette vice-president, Quebec affairs, at the CLHIA hints at a constitutional impasse should Ontario persist in this direction. "An enhanced Canada Pension Plan would require a constitutional amendment, while the provinces are not all in agreement over this kind of bonus."
Along with the Advocis president, Mr. Millette hopes that all provinces will accept a system like the VRSP. "We need a critical mass to keep costs low. At least Quebec and Ontario would have to participate," he says. In Mr. Millette's opinion, the VRSP is currently the simplest and least expensive option available.