Draft Pooled Registered Pension Plan Regulations and an accompanying Regulatory Impact Analysis Statement were released for public comment on August 10, 2012. This package of regulations covers only some of those areas for which regulations supporting Bill C-25, the federal government’s recently passed Pooled Registered Pension Plans Act (Act), are required. Another package of regulations is due to follow. The following are some of the most interesting aspects of the draft regulations.
In order to be granted a licence to administer a pooled registered pension plan (PRPP), a would-be administrator will have to be a corporation, and it will have to file with the Office of the Superintendent of Financial Institutions Canada a five-year business plan explaining why it believes that the PRPPs it proposes to administer would be sustainable over that period; how many PRPPs it intends to register; how it intends to meet the Act’s "low cost" requirement (more on that below); what it estimates member fees and charges will be; that it has the financial resources to administer PRPPs and risk management procedures in place; and, interestingly, that its "officers and directors are of good character." How "character" will be assessed in this context is not clear from the draft regulations.
Zero-Rated Member Contributions
For those employees who do not or are not able to opt out of PRPP membership on religious grounds, and who otherwise fail to terminate their membership in a PRPP within the 60-day opt-out window following notification of the provision of the PRPP, they will instead be able to set their contribution rate at zero for anywhere between three to 60 months after the first 12 months of membership. Thereafter, they will be able to repeat this election as often as they wish. This "zero rating" procedure will undoubtedly be burdensome. It is likely to lead to increased costs for administrators of PRPPs with a number of chronic zero-rated members, each holding a relatively small account balance.
As concerns the investment of PRPP assets, a PRPP administrator may offer no more than six investment options, including a default option. The default option must be either a balanced fund or a fund tailored to a member’s age (e.g., a life cycle fund). The administrator must offer the same default option in all of its PRPPs. Therefore, even where a PRPP administrator establishes several PRPPs, each with varying investment option lineups, these PRPPs will have the same default fund in common. It appears from the draft regulations to be difficult for the administrator to change the type of default fund after a PRPP is established.
Also, it will come as no surprise that the draft regulations contain investment restrictions very similar to those applicable to registered pension plans, with a few notable exceptions. For example, the "10% Rule," which prohibits registered pension plans from investing more than 10% of the book value of the pension fund in the same "person" or associated or affiliated persons appears in the draft regulations, with some modifications. The PRPP-specific version of the 10% Rule exempts investments in index funds, as well as contracts pursuant to which the investment return is based on a widely recognized index or a broad class of traded securities. (Interestingly, the draft regulations’ version of the rule against related party transactions exempts only investments in index funds but not contracts based on an index. This omission could be an oversight.) The PRPP-specific version of the 10% Rule also calculates the 10% threshold based on market, rather than book, value — a basis announced, but never implemented, for registered pension plans.
"Low Cost" Requirement
Some may find anticlimactic the draft regulations’ answer to one of the Act’s most anticipated questions: What constitutes "low cost," and how will it apply? "Low cost" is defined as costs at or below those incurred by members of defined contribution plans that provide investment options to groups of 500 or more members. The cost must be the same for all members of the PRPP. In other words, it appears that low cost will be by reference to market terms. It is clear, from both the low cost and the licensing requirements, that financial institutions already dealing with capital accumulation plans will have a definite advantage in this regard.
Last but not least, there are only two categories of permissible inducements a PRPP administrator will be able to offer: the administrator may offer to pay the employer’s transfer costs when switching from another PRPP; and the administrator may offer a product or service on more favourable terms and conditions than would otherwise be offered, "if the inducement is for the equal benefit of the employees of that employer." Given the regulations’ requirement elsewhere that the same costs apply to all members of a PRPP, it would seem that an issuer will not be able to induce an employer to join a PRPP in which others participate with a cost lower than what the other members and employers enjoy. This may well lead to the creation of separate PRPPs.
Interested parties have 30 days to comment on the draft regulations.
The federal government separately announced that future regulations will address remaining open issues under the Act, including transfers from member accounts, the manner and frequency of remittances, the form and content of notices, locking-in rules, variable payments and electronic communications.