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PRPP and ORPP: Huge Pension Developments in Canada Reflect Political Divide

***UPDATE August 12, 2015****

As an update to the article below, the Ontario Ministry of Finance announced yesterday that Defined Contribution plans that meet certain thresholds WILL be classified as “comparable plans” for the purposes of exemption from the ORPP. The full announcement is available by clicking here.

The basic threshold is that the “DC plan must:

  • Have a minimum annual contribution rate of 8 per cent
  • Require at least 50 per cent matching of the minimum rate from employers.”

In the meantime, the ORPP has become a major political football in the current federal election campaign. Prime Minister Harper has come straight out to accuse the ORPP of being nothing but a job-killing tax (despite the fact that 100% of the contributions go directly to the workers and not into government coffers like any other tax).

The Ontario government has responded by pointing out that the ORPP is designed to ensure that Ontario workers are saving sufficiently for retirement, and that they are disappointed that Ottawa was unwilling to amend the CPP to increase savings rates and thereby make the ORPP unnecessary.

Here is our full article on the ORPP and PRPP as published in June ….


PRPP and ORPP: Huge Pension Developments in Canada Reflect Political Divide

Exciting developments are underway in the Canadian pension world as governments take steps to help Canadians save for retirement, but behind all the new programs are some very strong philosophical differences.

As most readers of this magazine will be acutely aware, Defined Benefit (DB) pension plans have suffered a precipitous decline in Canada and most other countries in the past twenty years. The costs of administering plans and providing actuarial services climbed higher and higher to the point where only the larger plans with around 1,000 members and above could reasonably absorb the costs.

The other problem of course was that many pension plan members in the 1990’s wanted to opt-out of their boring old DB plans and use their pension funds to make huge gains in high flying tech stocks like Nortel … so they begged their employers to let them out of the company DB plans so they could transfer their assets to Defined Contribution (DC) plans where they could keep all the gains for themselves – which they did, until the tech bubble burst and DC funds cratered for years.

In Canada, thousands of DB plans were either frozen to new members or closed all together, especially amongst smaller businesses (DB plans are still thriving in the benefit architecture of large unions and governmental organizations.) The result was that millions of workers needed to turn to alternatives such as employer-sponsored DC plans  (if they existed at the employer), or do without employer-sponsored schemes altogether and simply try to personally save for retirement through RRSPs, TFSAs, and the vagaries of personal investments such as home equity or playing the stock market.

What a boondoggle! A primary pillar of pension savings was pulled out from under the collective feet of millions of Canadians and nothing was put in place to replace it (though Group RRSPs, a form of DC plan for small businesses, made an admirable effort). As a result, many people are now finding themselves ill-prepared for retirement and with no reasonable prospects for improving the situation anytime soon (unless they win big at the casino or work at Walmart until they are around 80 years old).

While this was going on, the governments of the country were NOT standing idly by (thank goodness!). They knew that the government has a key role to play to gently nudge or outright push people towards being able to take care of themselves in the future (otherwise the government may be expected to do it!), and so they set about thinking up initiatives that would help to prevent millions of elderly Canadians from spending their golden years pushing brooms at fast-food restaurants.

So, what “Big Idea” did the smarties in Ottawa and provincial capitals come up with?

Well, there were actually two, one which came from the right of the political spectrum, and the other from the left. In Ontario, both ideas were just passed into law (as pension programs for workers) in May of this year, but that does not mean that both will catch on in actual practice in the marketplace where small employers will need to make these savings programs a reality (you know, where the rubber hits the road).

Pooled Registered Pension Plans

The first idea, Pooled Registered Pension Plans (PRPPs) was proposed during the 2011 federal election. After the election, the government moved ahead quickly to lay the foundations for PRPPs at both the federal and provincial levels, with a number of provinces following suit and reading PRPPs into law in the past two years (Ontario being the most recent). However, there is still a ways to go as nobody except the feds has completed a regulatory framework (it takes time to create this once the legislation is passed).

In general, the idea behind the PRPP is very well thought out and creates a framework for people to really start to take care of their retirements. Under this model, an employer can contact a financial services company and have a PRPP set up for their employees. The process is supposed to be so easy that one financial services provider, Manulife, claims a pension plan can be set up in less than thirty minutes, after which the employer’s role is mostly complete (compare this simplified setup to the ghastly process of setting up a DB plan and you can see that some very clever people put a lot of thought into streamlining the process so that small employers could set up company pension plans with minimal discomfort).

Once the PRPP is created, the financial services company would then automatically enroll every employee in the company, and each employee would then begin to see deductions taken from their paystubs as a small percentage of their salary was set aside for their retirement.

To avoid any resistance from employees, they were given the option to opt out of the plan after it was set up. In addition, employers were given the option to also make matching contributions to the pension plans of the employees (but they were NOT mandated to do so).

Unlike Group RRSPs (another form of pension savings plan for small employers), contributions to a PRPP do not count as taxable income. Also, unlike Group RRSPs, if an employer decides to make contributions on the behalf of the employees, these contributions are deductible as a business expense, AND the employer does NOT have to pay CPP, QPP and other payroll taxes on the contributions.

The genius part of the equation was the “P for Pooled”, in that administration and investment management would be handled by a financial services company which would pool the millions of account holders for efficiency and economies of scale, rather than the old DB model where every small pension plan needed its own investment manager, administration contract, and actuarial services provider. The pooled approach is also expected to be much more efficient than the Group RRSP approach, where fees have typically been quite high.

Manulife got so excited at the prospect of signing up all these millions of account holders and collecting and managing all of their pension savings that they went out and purchased the web address: so that they could get ready for the wave of employers signing up for these new savings vehicles.

It has taken a few years, but finally things seemed to be falling into place for PRPPs as the provinces get closer to finalizing the rules, which would allow financial services companies to start selling PRPPs (they are already available to some federal workers).

But remember what I said about the source of this program? I.E., the federal government? Well, lo and behold, guess which party was in power when PRPPs were proposed? The Progressive Conservative party (which is centre-right, for those who are reading this article in faraway lands and might naturally be confused by the concept of a conservative who also claims to be progressive).

PRPPs met several important conservative ideological criteria, namely:

• Employers were NOT mandated to offer OR contribute to PRPPs (many small business owners would view such a mandate as a job-killing tax).
• Employees could opt out if they so desired (conservative governments are generally loathe to force people to save their money if they don’t want to).
• Administration and investment management would be handled by the private sector (because conservatives believe that the free market is the most efficient provider of any kind of services – except, of course, services provided by military, police, fire, healthcare, social security, and government itself).

Meanwhile, as the PRPP program was wending its way through the setup process, a provincial government with a different political philosophy was cooking up an alternative program to compete with PRPPs.

Ontario Retirement Pension Plan (ORPP)

While the Conservative party had ruled in Ottawa since 2006, the centre-left Liberal party had ruled in Ontario during the same time period. And while the Ontario Liberals played nice and passed the legislation to allow PRPPs to move forward, they also came up with their own program to promote pension savings, the ORPP (Ontario Retirement Pension Plan), which takes a very different approach to PRPPs.

• Unlike PRPPs, employers ARE mandated to BOTH offer AND contribute to the ORPP, unless the employer offers an approved comparable alternative such as a DB plan, DC plan, a Group RRSP, or a PRPP. This means that virtually ALL workers in Ontario will be covered by some kind of pension plan.
• Employees CANNOT opt out (the big bad government forces them to save for their retirement, just like with the Canada Pension Plan).
• Administration and investment management of this massive pension plan (it is projected to cover around 3.5 million workers) will NOT be handled by the private sector but will be managed by a corporation specifically created for that one task of managing the ORPP, with the expectation that an entity focused on providing the lowest possible cost of service rather than the highest possible profits to shareholders will do a better job of keeping administration costs down.

In addition, the ORPP is in effect a Defined Benefit plan, whereas PRPPs are DC plans. Employees who make the mandated contributions to the ORPP will receive a guaranteed pre-determined benefit for life, unlike PRPPs where the employees own their contributions, plus interest, and can use this amount to purchase an annuity at retirement or withdraw a lump-sum.

As an example of the scheduled benefit for an ORPP member, a person with a salary of $45,000 would contribute $2.16/day. At retirement, they would stand to collect $6,410/year for life. Not enough to live on, but this benefit will help fill the gaps in the Canada Pension Plan and the Old Age Security program.

Comparing the two programs, one cannot help but wonder, who in Ontario will ever use PRPPs?

At this point, it is impossible to say, but many people expect that most small employers will end up in the ORPP, while PRPPs will likely appeal to a few self-employed people and not many others. While that might happen in Ontario due to the introduction of the ORPP, in other provinces that have not set up ORPP-equivalents, PRPPs could still become a significant savings vehicle as they are a big improvement on Group RRSPs.

At public hearings about Ontario PRPPs in April of this year, Wynne Hartviksen, executive assistant to the president of CUPE Ontario (Canadian Union of Public Employees) said that CUPE was against PRPPs being offered in Ontario for a number of reasons: “We know that private investment vehicles like RRSPs and PRPPs have higher financial service costs and frankly seem designed to deliver investment returns into the hands of banks and the financial services industry rather than into workers’ pockets at retirement.”

The Liberal government of Ontario went ahead in spite of opposition from unions and passed legislation for PRPPs into law, but by also passing legislation to allow the creation of ORPPs, it is likely that the final word will be spoken by the marketplace: will small Ontario employers adopt the mandatory ORPP or will they opt for an approved alternative such as a PRPP?

Only time will tell. Whatever happens, Penad will be there to report on new developments (so stay tuned!).


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New Pension Benefits Standards Act Becomes Law in BC on Sept 30, 2015: Are You Ready?

In British Columbia, the new Pension Benefits Standards Act, SBC 2012, c.30, (the New Act), as amended by Bill 10-2014, the Pension Benefits Standards Amendment Act, will come into force on September 30, 2015. The New Act is largely based on the recommendations of the Joint Expert Panel on Pension Standards (JEPPS).

The New Act has significant changes. For example,

• the administrator of a pension plan will be responsible to develop a governance policy regarding the structures and processes for overseeing, managing and administering the plan. This governance policy will help define the responsibilities of, among others, the plan sponsor, the plan administrator, and participating employers. See Section 50 of the new regulation for details.

• any record pertaining to a pension plan, or a copy thereof, MUST be retained in Canada. See Section 34.

• the duties and obligations of the various parties involved in a pension plan, including administrators, are spelled out in detail. Section 35 addresses the responsibilities of the administrator. Sections 45-48 describe employer responsibilities, and Section 51 addresses fundholders.

Please contact your Penad administrator for more information on these changes.

Click the links below for direct access to the documents in question:

Bulletin PENS 15-002 with Summary of Act Changes

Pension Benefits Standards Act

Pension Benefits Standards Amendment Act

Joint Expert Panel on Pension Standards


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Money Laundering and Terrorist Financing in Canada: New Proposed Regulations are Announced

Canada is refining its approach to money laundering. On July 4, 2015, new proposed amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PC Act) were published in the Canada Gazette. The clock is now ticking as this signals the start of a 60 day consultation period.


Norton Rose Fulbright has a comprehensive overview here: CLICK HERE …


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July CIA Interest Rates for Commutation


2.4% 10 Yrs / 3.7%  —  January

1.9% 10 Yrs / 3.3%  —  February

1.9% 10 Yrs / 3.4%  —  March

1.9% 10 Yrs / 3.4%  —  April

2.2% 10 Yrs / 3.6%  —  May

2.2% 10 Yrs / 3.6%  —  June

2.3% 10 Yrs / 3.8%  —  July


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Bill 34 and Bill 57 in Quebec: Amendments to the Supplemental Pension Plans Act

Have you heard about the changes happening in Quebec, where Bill 34 amends the Supplemental Pension Plans Act (SPPA)?

There are significant changes to MEPPS (multi-employer pension plans).

In addition, Bill 57, “an Act to amend the Supplemental Pension Plans Act mainly with respect to the funding of defined benefit pension plans” was introduced just last month, on June 11.

You can find a very good synopsis of the changes at McCarthy Tetreault. CLICK HERE FOR FULL ARTICLE …


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Is Berkshire Hathaway Exchanging Nuptials With an Unsuitable Spouse?

Everyone knows that Warren Buffet of Berkshire Hathaway likes to buy quality companies and leave the current management team in place with a totally hands-off approach. He essentially rewards a successful track record.

But what happens when you have more money in the bank than quality companies in which to invest? Maybe then you consider going down market?

Stacey Muirhead has an interesting take on a recent Berkshire partnership …



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Top Twelve Disruptive Tech Trends?

It turns out that the future is known and available for all. At least, according to a new book from McKinsey (No Ordinary Disruption: The Four Global Forces Breaking All the Trends).

What can you expect in the coming couple of decades?

1) Cheaper energy storage (batteries) which will transform transportation and energy systems.

2) Genomic analysis tools will lead to dramatic health improvements and life extension by 2025.

3) Advanced materials as engineers learn to manipulate things on a molecular level.

4) Autonomous vehicles. Why drive when you can play Go Fish?

5) Renewable energy. The sun will account for more than all other forms of electric power generation combined by 2050.

6) Robots. Well, duh!

7) 3-D printing. Why buy shoes when you can print them?

8) Mobile Internet. Are you reading this on a PC? What’s a PC?

9) Automation of knowledge work. By 2025, computers could do the work of 140 million knowledge workers.

10) Internet of things. Today, 99% of physical objects are not connected to the Internet. Soon, almost everything will be.

11) Cloud. Soon, every new startup will have the same IT backbone and scalability and reach as the largest corporations.

12) Advanced oil and gas recovery. The world carbon market will transform as fracking releases gas from rocks.



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Flash! Secret Security Hole Revealed by Source Code Theft

IMPORTANT NOTE: Penad software does not use Adobe Flash Player and is not susceptible to the security problem described below. However, if your computer uses Flash, it IS susceptible. In such a case, a hacker can take control of your computer. If Penad software is running on that computer, then the hacker may be able to access Penad software and data. Because Adobe has NOT yet (as of this article) released a security patch for this newly discovered problem, we recommend that you disable Adobe Flash Player to ensure you are not vulnerable to attack.

News Flash: Adobe Flash Player is NOT SAFE FOR WORK!

A few days ago, a hacker broke into the files of an Italian computer “security firm” and released their internal company emails and the company source code onto the Internet. The targeted company, Hacking Team, has made a business of finding security holes in computing operating systems and exploiting them on behalf of their clients.

Their value proposition is that they will help clients break into and take control of the computers of their targets. Hacking Team clients include the governments of Russia, Saudi Arabia, Oman, Sudan, Egypt, and the USA.

An analysis of Hacking Team’s source code and email communications has revealed that Hacking Team had identified a previously unknown security hole in Adobe Flash Player. This security hole HAS NOT BEEN FIXED BY ADOBE AS OF THIS WRITING.

Using this security hole, a hacker is able to take control of a target computer running Adobe Flash Player. Hacking Team described this security hole as “the most beautiful Flash bug for the last four years”. Computers running Windows, OS X and Linux are all vulnerable.

Now that Hacking Team’s approach has been released to the Internet, EVERY HACKER ON EARTH is now able to exploit this security hole. Because Adobe has not yet released a fix, your computer is vulnerable if it is running Adobe Flash Player. We therefore recommend that you disable Flash immediately.

Adobe has issued the following statement:
A critical vulnerability (CVE-2015-5119) has been identified in Adobe Flash Player and earlier versions for Windows, Macintosh and Linux. Successful exploitation could cause a crash and potentially allow an attacker to take control of the affected system. Adobe is aware of reports that an exploit targeting this vulnerability has been published publicly. Adobe expects to make updates available on July 8.


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Are You Ready for Windows 10?

Here are some interesting facts about Windows.

— Windows is currently the OS on 1.5 billion PCs.

— 77% of businesses with Windows still run Windows 7 on some or all of their PCs, because Windows 8 and 8.1 were/are so reviled.

— Only 18% of companies deployed Windows 8 or 8.1 on their computers.

— Because of the failure of Windows 8 and 8.1, there is a huge pent-up demand for an upgrade path.

— Windows 10 will be launched on July 29, 2015, and it will be free for people running Windows 7, 8, and 8.1.

— 60% of IT departments have already tested Windows 10, and 73% plan to adopt Windows 10 by 2017.

— Windows 10 will actually have a Start button, just like in Windows 7. Amazing, but the more things change, the more they stay the same.



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Are You Aware of the 2015 Canada Pension Plan and Old Age Security Benefit Rates?

For those already receiving CPP benefits, their rate will increase by 1.8%. The maximum CPP benefit for new recipients age 65 is now $1,065 per month. The amount you receive is based on your average yearly maximum pensionable earnings for the five years prior to retirement, plus whether or not you took early benefits. Speak with your financial planner to calculate your possible benefit and best retirement age.

The OAS rate for the first quarter of 2015 (January to March) is $563.74 per month.

NOTE: The Old Age Security (OAS) benefit is paid to qualified Canadian citizens regardless of income during their working years. The Canada Pension Plan (CPP, or the Quebec Pension Plan in Quebec) is based on contributions and income during your working years and also offers disability, death, survivor and children’s benefits.


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