(This statement is not part of the Regulations.)
In December 2010, federal, provincial and territorial finance ministers agreed to move forward to introduce Pooled Registered Pension Plans (PRPPs) as an effective and appropriate way to help bridge existing gaps in the retirement income system.
The Pooled Registered Pension Plans Act (“the Act”) implements the federal portion of the framework for the establishment and administration of PRPPs. PRPPs will be professionally administered, defined contribution pension plans targeted to employees and self-employed persons who do not have access to a workplace pension plan. In 2010, more than 5 million Canadians worked for small businesses and more than 2.5 million Canadians were self-employed. PRPPs may pool the funds in the accounts of participating employees and self-employed persons (i.e. members) to achieve low costs in relation to investment management and plan administration. PRPPs are intended to have design features which will remove traditional barriers that might have kept small- and medium-sized businesses from offering workplace pension plans to their employees in the past. In particular, the fiduciary obligations related to the management of the plan on behalf of plan members will be shifted from the employer to licensed administrators. In addition, responsibilities related to the professional administration of the plan will be borne by the licensed administrator.
The Act applies to PRPPs within the legislative authority of the federal government, such as PRPPs offered to employees in the telecommunications, banking and inter-provincial transportation sectors. The Act also applies to persons employed in the Yukon, the Northwest Territories and Nunavut, including the self-employed. As with existing federally regulated registered pension plans, the Superintendent of Financial Institutions will be responsible for the supervision of federally regulated PRPPs. In order for PRPPs to be available to all employers, employees and the self-employed across Canada, provincial enabling legislation must also be implemented.
The Act provides regulation-making authority to the Governor in Council for PRPPs within federal jurisdiction. Regulations are required to prescribe details for the application of various provisions of the Act necessary for the implementation and administration of PRPPs.
The objective of the Pooled Registered Pension Plans Regulations (“the Regulations”) is to address provisions of the Act respecting
Further regulations will follow addressing the transfer of funds from a member’s account, the manner and frequency of remittances, the form and content of notices, locking-in rules, variable payments, electronic communications, and other technical rules related to the implementation of the framework.
The Act provides that the Superintendent of Financial Institutions may issue a licence to any Canadian corporation that intends to administer a PRPP and meets the conditions prescribed in the Regulations when applying to be an administrator. The Regulations require the corporation to submit a five-year business plan, demonstrate that it has the financial resources and operational capacity required to administer a PRPP, demonstrate that the officers and directors are of good character, and provide any other information required by the Superintendent of Financial Institutions to assess against the criteria.
The Superintendent of Financial Institutions will levy cost-recovery fees on administrators for the licensing and ongoing supervision of PRPPs. The authority for the Superintendent of Financial Institutions to recover costs is provided for through the Office of the Superintendent of Financial Institutions Act.
The Regulations include investment rules that provide minimum safeguards to protect plan members’ interests, as well as providing administrators with the flexibility to determine how they could best fulfill their duty under the Act to prudently invest the funds in members’ accounts. The Regulations provide a quantitative limit on holdings to limit concentration risk (i.e., a maximum of 10% of an individual member’s assets can be invested in any one entity or associated entities), provide a quantitative limit on control of corporations (i.e., a maximum of 30% on voting rights to elect directors), and limit administrators’ investments in related parties. The Regulations also require that funds in members’ accounts be held in a name that clearly indicates that the investments are held in trust for the plan, or in the name of a financial institution in accordance with a custodial agreement entered into on behalf of the plan (i.e., an agreement providing that members’ funds are invested on behalf of members and the ownership can be traced to members at any time).
The Act requires that administrators must provide members with a default investment option and may offer plan members investment choices. The Regulations require that administrators may provide plan members with a maximum of six investment options (including the default option). The limit of six investment options is intended to provide enough flexibility to plan administrators to offer options of varying degrees of risk and expected return. The Regulations provide that if an administrator permits investment choice, the options must be the same for all members of a plan, and a member will have 60 days to communicate his/her choice; otherwise, the default option will automatically apply. The Regulations also provide that an administrator must offer the same default option for all of the plans that it administers. The default option is required to be a portfolio of investments that takes into account a member’s age (for example, a life-cycle fund where age is used as the primary factor to determine the appropriate asset mix for a member) or is a balanced fund (for example, a mix of investments that takes into account the characteristics of the group of employees as a whole).
Subject to the Regulations, the Act prohibits PRPP administrators from offering, and an employer from accepting, inducements to enter into a contract to establish a PRPP. The Regulations permit the administrator to offer and the employer to accept certain inducements. In particular, the administrator is permitted to offer a product or service on more favourable terms if it is for the equal benefit of the employees of that employer that are eligible to be members of the PRPP. In order to promote competition, the Regulations also permit the administrator to provide a payment to the employer that is no greater than the employer’s costs associated with the transfer of assets from one PRPP to another.
The Act requires that PRPPs must be provided to members at a low cost. The Regulations require that costs be at or below those charged to members of defined contribution plans that provide investment options to groups of 500 or more members. The costs are to include all fees, levies or other charges that reduce a member’s return on investment, other than those that are triggered by the actions of the member. The costs of a PRPP provided by the administrator to self-employed members are required to be the same as those provided to employees of an employer participating in a PRPP.
The Act provides that, subject to the Regulations, a member may, after notifying the administrator, set his or her contribution rate to 0%. The Regulations provide that members can set their contribution rate to 0% at any time after 12 months from when they begin to contribute to their PRPP account. The Regulations also provide that the contribution rate can be set to 0% for between 3 months and 5 years. In addition, there is no limit on the number of times that the contribution rate may be set to 0%. The administrator is responsible for ensuring that the member’s contributions are set to 0%, and must provide the plan member with written confirmation of when the contribution rate will be set to 0% and when contributions will resume. In addition, at least 90 days prior to the day on which contributions are to resume, the administrator must provide the plan member with written notice of the day of resumption and the contribution rate on resumption.
The Act requires that PRPP members and the Superintendent of Financial Institutions must be provided with information as prescribed. In order to facilitate transparency and comparability across PRPPs, the disclosure requirements apply industry standards relating to the disclosure of mutual funds and capital accumulation plans, as appropriate. Administrators are required to provide information on a Web site and on the request of a member or employer, such as a description of each investment option, a statement of transfer options available to plan members, and a description of any fees, charges or other levies that will be triggered by the actions of the member. The Regulations also require that members be provided with a written statement annually that includes information such as the investment option the member is invested in, account balance information, a summary of transactions, and specific information related to the member’s investment option. The Regulations also require administrators to provide an information return to the Superintendent of Financial Institutions on an annual basis or at any other intervals that the Superintendent directs. The information return shall include information such as the options offered to members, a breakdown of costs charged to members for each investment option, any fees triggered by the actions of members, total assets under the plan and the default contribution rate set by the administrator.
The Regulations have benefitted from review and collaborative discussion with provincial and territorial officials. Associations representing small businesses, employees, pension funds, financial institutions and other stakeholders have also provided their views for consideration throughout the development of the PRPP framework and the Regulations.
Stakeholders provided comments through public consultation with the introduction of the PRPP framework, as well as written comments and dialogue throughout the development of the Regulations. The Minister of State (Finance) also met with small business owners and Chambers of Commerce across the country to answer questions and solicit feedback on PRPPs. Overall, reaction to PRPPs by various industry stakeholders and employers has been positive.
As a final phase of consultation, the Regulations were published in the Canada Gazette, Part I, on August 11, 2012, for a 30-day comment period. The Department of Finance received twelve written submissions from pension funds, financial institutions, industry and employee associations and consulting firms. A number of industry comments concerned the effort required to obtain a license to offer PRPPs. No changes were made to the licensing approach, as requiring that all prospective administrators meet the same licensing criteria adds an additional level of protection for members and employers looking to select an appropriate administrator. A few stakeholders had differing views as to whether the benchmark for determining low cost PRPPs (i.e., defined contribution plans of 500 or more members) was appropriate. No changes were made as this benchmark provides a balance between flexibility, to ensure that competition and disclosure drives down prices, and the provision of a transparent comparator that can be used by administrators and the Superintendent of Financial Institutions to determine what constitutes low cost. Some technical clarifications were made to the Regulations with respect to permitted investments, investment choices, and rights to information, which were in response to specific comments on the drafting from stakeholders. Technical changes include: updating section references in the permitted investments section which were inaccurate; clarifying that the “no charge” subsection of the investment choices requirements only applies in cases where an investment option is no longer available; and, requiring disclosure of member’s and employer’s contribution rates as part of the member’s annual statement.
The ‘One-for-One’ Rule does not apply to the Regulations, as there is no change in administrative costs to business.
The small business lens does not apply to the Regulations, as employers’ participation in PRPPs is optional.
The Regulations are required to prescribe details for the application of various provisions of the Act necessary for the implementation and administration of PRPPs. The Regulations require that all prospective administrators meet the same licensing criteria in order to add an additional level of protection for individuals and employers seeking to join a PRPP. The permitted investments provisions provide minimum safeguards to protect plan members’ interests. The provisions respecting investment choices are meant to provide enough flexibility for plan administrators to offer members investment options of varying degrees of risk and expected return. To reduce the potential for conflicts of interest between administrators and employers, the Regulations specify that inducements are only permitted when they are for the equal benefit of the employees or to cover the cost of transferring assets from one PRPP to another in order to promote competition. The benchmark for determining low cost PRPP (i.e., defined contribution plans of 500 or more members) provides a balance between flexibility to ensure that competition and disclosure will drive down costs while also providing a transparent comparator that can be used by administrators and the Superintendent of Financial Institutions to determine what constitutes low cost. In order to facilitate transparency and comparability across PRPPs, the Regulations apply industry standards for the disclosure of PRPP information to members.
The Regulations apply to federally-regulated PRPPs. The Superintendent of Financial Institutions, under the direction of the Minister of Finance, is responsible for the control and supervision of the administration of the Act. The Superintendent of Financial Institutions is responsible for issuing licences to administrators, and has the authority to compel information, issue a direction of compliance, and terminate a PRPP as provided for in the Act. Through bilateral or multilateral agreements with provinces that enact similar legislation, the federal government could authorize the Superintendent of Financial Institutions to exercise any powers of a supervisory authority of a designated province, and authorize a supervisory authority of a designated province to exercise any of the Superintendent’s powers under the Act.
Financial Sector Division
Department of Finance
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