Finance Committee on Feb. 16th, 2012

[Diane Lafleur]

The design is intended to be portable right across the country.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

But does it require the buy-in of each individual province, and do you have that?

[Diane Lafleur]

Right now the regime that is before you applies to federal areas of employment, telecoms and banking, interprovincial transportation, etc. But in order to apply right across the country, yes, you're correct that the provinces need to bring in their own provincial legislation.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Okay.

When you were putting this plan into place, had anybody done an analysis or looked at the report on the Australian super fund? It was in for 10 years. I think it was at the 12-year mark that they did a study, or the study was released, and what they found is that it had higher fees, higher costs, and poor investment returns. In fact, it barely stayed even with inflation. Was that looked at at all?

[Diane Lafleur]

When we did policy work to develop the PRPP framework, we certainly did spend quite a bit of time looking at examples in foreign jurisdictions, including the Australian example, to see what lessons we could learn from that. What we've tried to do with this framework is import the design elements that have proven to be beneficial and successful and improve on those that seem to have some shortcomings, if you will.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

The implication I think we have with the PRPP that's similar to the RRSP is that there will be an inclination to take part by people who have a lot more disposable income than perhaps some other groups.

We do have a generation of young people today—and I'll include my own family in that, my kids—who have a tendency not to look much more than six months down the road. What I'm concerned about is that this will not do anything to encourage those people who could save—we can debate who can afford it and who can't afford it, but those who could. I don't see that necessarily causing them to save, the ones who are kind of superficial at this point in the way they look at their own income and expenditures. We've got a high level of indebtedness too. By a modest increase to the Canada Pension Plan, as we've been talking about—again, $161 a year—I think we could wind up with something far more substantial.

[Diane Lafleur]

Well, as the minister said, you need full consensus to make changes to the CPP.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

That's the point we disagree on, because two-thirds of the population with two-thirds of the provinces is not consensus-driven. It's driven by a constitutional—

[Diane Lafleur]

You're correct about the formula, and it's my understanding that the test was not met.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Well, we can debate that. That's fine. I appreciate it.

Thank you, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Marston.

I'm going to take the next round as the chair.

I wanted to follow up on questioning by a couple of my colleagues, and I'll ask the officials from OSFI. My view is that OSFI is one of the gems of the Canadian financial system, in terms of its regulatory oversight functions, and I think this is an important point. It's brought out in the questions and answers we have as committee members, but I think it's important if we can get the OSFI officials on the record, to really reassure Canadians in terms of the oversight that will be done by OSFI with respect to the PRPP.

Mr. Grace, do you want to start, sir?

[John Grace, Specialist, Pension Policy, Office of the Superintendent of Financial Institutions]

I don't know if you want to pose a question to me exactly or how you would like me to approach that topic.

[The Chair, Conservative, James Rajotte]

I'm trying to explain this to people in my riding, and they raise issues of what the cost structure will be vis-à-vis RRSPs, which is what Mr. Hoback was raising. Some people will also raise the issue of whether it will be there. Is it certain? How certain can I be if I invest in this that there will be good oversight over my investments that I make in this plan?

[John Grace]

Right. Well, the framework is similar in many respects to a DC, a defined contribution pension plan, where members are provided an opportunity to make investment choices among options provided. As has been noted, an important investment option as well will be a default option that an administrator would offer, and the draft legislation provides a duty on the administrator to invest the assets prudently, and it also requires that the administrator administer the PRPP as a trustee for the members. OSFI's role would be to oversee the activities of an administrator, and we'd follow a risk-based approach in assessing compliance with the requirements of the legislation, including requirements around the investment options offered and including the default option.

[The Chair, Conservative, James Rajotte]

We have that in our briefing here as members, but for the benefit of the public, can you go into the default option in terms of what that is exactly?

[John Grace]

I think, as Diane Lafleur mentioned, typically an administrator would be expected to offer a number of investment options to members of the PRPP.

In some cases, members may not be engaged and may not actively make a choice, in which case funds would be put into what's typically called the default option, and that occurs in defined contributions—

[The Chair, Conservative, James Rajotte]

Which would be the lowest-risk option?

[John Grace]

Not necessarily. It's not necessarily the lowest risk. There would be a requirement that the investment be a prudent investment as set out in the act, as well as potentially set out in more detail in regulations.

Generally speaking, the default option would be geared towards providing a prudent investment in the context of retirement savings, so a long-term view, if you will, but with a balance of risk and return.

[The Chair, Conservative, James Rajotte]

Okay. Can I return in my remaining time to the issue of cost? I am getting people in the financial industry coming to me and challenging me. They're saying they're not sure this is actually going to be lower cost than RRSPs. I say if you have a fund of this size, in fact you spread the risk and you lower the cost.

I mean, that's obviously the benefit, and the minister spoke to that. Madame Lafleur, you spoke to that as well.

Our background document says:

The legislation provides that the PRPPs will be required to be low cost to members. The Superintendent will monitor fees in accordance with the guidance on low costs that will be prescribed in regulations. Low costs will be obtained through pooling, competition between eligible administrators as well as transparent disclosure of cost to members.

I'm wondering, Ms. Lafleur, if you can expand on that and help me convince people that this will be lower cost than what's currently offered to individuals through their RRSPs.

[Diane Lafleur]

As you mentioned, pooling is a key feature of making sure the costs are low. RRSPs are set up as a series of individual accounts that have to be administered independently, and that's quite costly. It means that in an RRSP situation people are paying what we call retail sorts of fees—fees that you and I pay as individuals. If you're going into a pooled arrangement, it allows you to get what we would call more wholesale types of fees—big pension fund types of administration fees—because you're dealing with more scale in terms of the funds.

The other aspect that has been alluded to is that the design of the PRPPs is intended to be fairly simple, and therefore from an administrative burden point of view, both on the administrators but also on the employers, there's going to be less cost. Because the system is intended to be right across the country and portable, there's scale for administrators in terms of who they can offer to, how big these funds can get.

All of these factors together mean that by pooling their investments together and joining into these PRPPs, people can have advantages that only big pension funds have been able to offer their members in the past.

And this now will be available to the self-employed, which is really quite innovative.

[The Chair, Conservative, James Rajotte]

Okay, thank you. I appreciate that.

I'm going to Ms. McLeod now, please.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you, Mr. Chair. I'm going to share my time with Mr. Hoback.

I'm wondering if you could take me through what will happen next. This legislation is going to pass. There will have to be regulations. We understand that Quebec is willing and interested in moving forward.

For example, what if you are someone who is currently employed by something that is regulated by the federal government, one of the banks, and you invest in a program and then you move to Quebec—in Quebec, of course, theoretically, the capacity would be there—and then you move to British Columbia?

Can you talk a little bit about how you see things rolling out as we move forward?

[Diane Lafleur]

I can really only speak to the federal level. Obviously we're hoping this legislation moves forward as quickly as possible. Then there are a number of regulations that need to be put into place to complete the framework.

We have been in discussions with our provincial and territorial colleagues about the design of those regulations and the key elements of those. They're full partners, essentially, in the policy discussions.

We hope that once the legislation is in place, we can move expeditiously to complete the framework.

We've designed the legislation, and it's our intent, by including the provinces and territories in our discussions, to design the regulations in such a way that they can be used as a model, if you will, that can be quickly imported into provincial legislation and regulations. Hopefully they will be able to take what is before you today and import it and quickly adopt a very similar model.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

If someone, for example, works for a bank and the bank has offered a program through Y and then they change jobs, could they still choose to stay with the original person that provided the program? Could they say they know their new employer has a different group through which he is providing a plan, but they've started there and are happy, and could they ask if they can keep their contributions going to the original?

[Lynn Hemmings, Senior Chief, Financial Sector Division, Department of Finance]

Yes, they could.