A new DC plan meant to cover the self-employed and those at small companies could eat away profits of other DC managers, as Jay Cooper reports
A new national defined contribution plan proposed by Canada’s Department of Finance could force defined contribution plan administrators and asset managers to come down on fees. The proposed plan could even cannibalise the existing hold business managers have in higher fee products, industry experts say.
After assessing that many Canadians are not saving enough for retirement, the department of finance proposed that Pooled Registered Pension Plans (PRPPs) be created to improve retirement savings options. The federal and provincial governments are still working through many details of potential PRPPs, but one of the end goals is to create a “straightforward and administratively low-cost retirement option for employers to offer their employees,” according to a document from the department of finance explaining the PRPPs. Another goal is “enabling more people to benefit from the lower investment management costs that result from membership in a large, pooled pension plan.” Two groups of people that may particularly benefit from nationalised PRPPs include the self-employed and those working at small companies that do not offer any type of pension plan.
No-one knows yet how big the PRPPs will become, or whether the new vehicles will be attractive enough to make Canadians pull investments from mutual funds and their current defined contribution plans, both of which have higher fees in Canada than other parts of the world, and invest that money in PRPPs instead.
While it is hard to estimate how big the PRPP funds will start out since no one knows how many employers will jump on board, a quick estimation by Towers Watson’s senior consultant actuary, Ian Markham said the fund could easily reach C$2bn ($2bn) in the first year. That estimation is based on Canada aiming the plan toward middle income workers who make between C$30,000 and C$100,000 a year. If that group of people, which represents about four million Canadians, has an average salary of say, $50,000, and they each have 1% of payroll put toward the PRPP, then it would reach the C$2bn mark.
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