Pooled Registered Pension Plan (PRPP)

The Federal Government recently passed Bill C-25 also referred to as the Pooled Registered Pension Plan Act. while still in its infancy, and with many details still to be drawn up, this plan provides yet another method for Canadians to save for their retirement. Standard Life has put out a good summary of what we know thus far. I have linked it below. I have also summarized what I feel are the most important parts.

Rob's Summary

• All employers will be required to offer the plan to all employees working for at least 24 months.
• Employees will be "auto-enrolled" and can opt out.
• Employees can voluntarily contribute a percentage of their earnings to the PRPP by payroll deductions.
• The employer is NOT required to match or contribute (at this time, this could change)
• The suppliers of these plans will largely be existing financial institutions such as banks and insurance companies
• Investment fees are to be kept to a minimum <1%
• Since fees are to be kept so low there will be a very low level of service, there is no overhead to pay for extra service or pay advisors commissions.
• All contributions are LOCKED IN
• Access to the Home Buyers Plan and Lifelong Learning Plan tax free withdrawals/loans are not allowed
• Investments will presumably be a list of funds similar to today, but likely focusing more on Asset Allocation and Target Date/Retirement Date Funds
• There is currently no default fund selected but it is expected to be a Retirement Date fund targeting retirement at age 65.
• This is likely a good thing for Canadian, as our savings rate is abysmally low, however, as this is currently voluntary, it is doubtful that many employees will participate in the PRPP if employers don't match, and even then there are drawbacks to the PRPP such as the locking in provision and loss of Home Buyers Plan and Life Long Learning Plan when compared to the also voluntary RRSP.
• Broker are going to hate the PRPPs. They will pay little or no commissions. Pension managers with large blocks of business are already terrified that their commission stream is going to dry up. There will certainly be a shift in how we as advisors market and sell group savings plans. Many will switch to a fee for service model, provide little or no service, or exit the market all together. It will be interesting to see how the industry reacts to this new plan and its implications on our bottom line.
• Similar plans have recently been launched in Australia and the UK. in those countries the employer must match employee contributions, which some expect may come to the PRPP if adoption rates are low.

Everything listed above is correct to the best of my knowledge at the time of writing, as many details have still yet to be finalized they may change in the future. That being said take everything above with a grain of salt, as very little is concrete at this point in time.

Standard Life Summary


*edit; Spelling


--
Robert Reynolds, GBA
Certified Group Benefits Advisor
Hendry McKenzie Reynolds Employee Benefits Ltd.

Toll Free: 1-888-592-4614
rob@hmrinsurance.ca
www.hmrinsurance.ca

E.O. E.

Insurance and LGBT

   

I have a few clients who are Gay, Lesbian, Bisexual or Transgendered hereafter referred to as LGBT. Each time I work with an LGBT client, I find there is a lot of incorrect assumptions or misinformation about if they can get insurance.

The simple answer is YES of course you can get life, disability, critical illness insurance.

Canadian insurance companies make no distinction between any sexual orientation, and neither do I. I have clients and close friends who are LBGT and I am always happy to meet new client and make new friends. I did want to touch on a few bits of the misinformation that I have heard over the years, and just shed some light on a few points.

Do I have to reveal my sexual preference when I fill out an application?
No, there are no questions asked about orientation. The only thing that might give a hint is the beneficiary designation, as you have to indicate relationship and gender of the beneficiary. I will often use the words, “partner” or “spouse”, however, you can put down “friend”, “companion” or whatever term you like.

Do I need to be legally married to get a “joint” policy?
No, as long as there is an insurable relationship (someone stands to lose something if the other dies) anyone can get a joint policy with anyone else.

Are there any special medical questions I have to answer?
Nothing that everyone else doesn’t need to answer. Each insurance company has a list of medical questions they ask and everyone applying needs to answer the same questions.

Are there any questions that I might have a problem with?
I hazard to say it, but the only thing remotely possible is the questions regarding exposure to HIV or AIDS. As long as you have made wise choices over the years you shouldn’t have any greater exposure than anyone else. Everyone has to answer these questions.

What if I am Transgendered, what do I put down for gender?
Insurance rates are primarily based on two factors, age and gender. If you are transgendered we use the bits you were born with.

What if I am undergoing hormone therapy?
You would need to disclose that you are taking medication, you would need to provide, dosage, when you started the program, and if there have been any complications. The underwriters may rate (charge more) or decline the policy, as there are other serious medical issues which can arise from hormone therapy. I haven’t run into this situation yet personally, so I can’t say for sure.

While I am not of that persuasion myself, I am happy to work with anyone who is LGBT.

I also want to say a special Thank You to my friends Kelzey and Tryce who helped vet this post. 


--
Robert Reynolds, GBA
Certified Group Benefits Advisor
Hendry McKenzie Reynolds Employee Benefits Ltd.

Toll Free: 1-888-592-4614
rob@hmrinsurance.ca
www.hmrinsurance.ca

E.O. E.

Bonds for dummies

Stocks are easy to understand, you own part of a company --> company makes money --> you make money. easy-peasy.

Bonds on the other hand confuse the heck out of just about everyone, even (especially) those that sell them. I have read countless dry, boring pages on how bonds work, prices, yields, jargon, and almost all totally uncomprehencible.

So how do bonds work? Well I think I have a understandable, if not exactly technically perfect, method of explaining bonds, here goes...

"My word is my bond"

You have all heard that saying. What does it mean? A bond is a promise, more specifically a promise to pay back borrowed money.

Say it's lunch time, your friend Jon comes up to you and asks to borrow $10 for lunch money. He promises to pay you back $11 tomorrow. His promise is his bond, he might even write it down on a piece of paper.

"I Jon will pay back Steve $11 tomorrow for a loan of $10 today."

Boom we just created a bond.

We have all the parts of a bond in the example above, we have a bond price, $10. We have a interest rate, $1 per day, and we have a maturity date, tomorrow.

Now what if you only had $10 to lend, but your other buddy Jack, also wants to borrow $10 for lunch, but Jack gets his allowance tomorrow, so he offers to pay you $12 tomorrow. The bond you bought from Jon just lost value, as the $10 you loaned to Jon for $1 could have earned you $2. On the other hand if Jack only offers $0.50 you look like a star with your bond from Jon. So as you can see the value of your bond changes with the interest rate being paid, as interest rates move higher, your bond is worth less, if interest rates move lower, your bond is worth more.

What makes interest rates go up or down? Supply and demand, mostly, but also risk. Say Jon and Jack are both competing for your lunch money loan. The one who offers the best interest rate is probably going to win; as long as they are equally trustworthy.

But what if they aren't equally trustworthy? what if Jon is a stand up, honorable, prompt, courteous and trustworthy guy and you know he is going to most likely pay you back (government bond). On the other hand Jack, is a unreliable, jerk who always breaks his promises. You might think twice about lending to Jack (Junk Bonds). Because people are not as trusting of Jack, and they know they might lose their money, they are less likely to lend to him, that is, unless he offers a higher interest rate. If you know your money is safe with Jon you might lend it to him for $1, but since Jack is less reliable, and you are taking a bigger risk lending to him, you want $3 from him before you are willing to lend to him. The quality of the borrower has a big impact on the interest rate they have to pay to attract investors.

So that's bonds, not so hard right?

TL;DR: I would gladly pay you Tuesday for a hamburger today.


--
Robert Reynolds, GBA
Certified Group Benefits Advisor
Hendry McKenzie Reynolds Employee Benefits Ltd.

Toll Free: 1-888-592-4614
rob@hmrinsurance.ca
www.hmrinsurance.ca

E.O. E.

Gamble with a guarantee

 

Segregated Funds have maturity guarantees. This means that after 10 years (usually) if you have lost money, the insurance company has to pay you back either 75%, or 100% depending on the contract, of your money. Here is the first such occasion where our office has seen this happen. The image above is an actual RRSP statement we received recently. Personal information has been redacted for privacy reasons. As you can see the original deposit (Net Transaction) was $58,218.41 this was deposited nearly 10 years ago on Feb 25, 2000. The client had invested heavily in the NASDAQ index and we all know how that went. 

  

NASDAQ index from 1999 to 2009 - OH GOD IT BURNS.

So in about three weeks, this client will be receiving a cheque from Industrial Alliance Pacific for 100% of his original investment, $58,218.41 A pretty terrible rate of return for 10 years of time, but far far better than the loss he would have otherwise be stuck with. 

Segregated Funds, it's whats for breakfast.

Group Savings Plan Returns are NOT the Same as Private Plan Returns

Did you know that Group Retirement Savings Plans, namely Pensions, Group RRSPs, Group TFSA and Deferred Profit Sharing Plans (DPSP) report their gains differently than privatly invested RRSPs, TFSAs or other investments?

In the private or "retail" space, everyone pays the same fee's the only exception to this are very high value clients typically with excess of a quarter million dollars invested. You, me the guy down the street, we all pay the same fee for the same investment fund. Members in the same Group Plan all pay the same fee as each other, but each group plan is different.

Group pensions or RRSPs can easily amass a quarter million dollars, most pensions are measured in  millions of dollars. Because these plans are so large they receive a "bulk discount" on the fees they pay. The fee's each plan pay depend on the invested assets of that plan, each plan is a different size, and therefore pays different fees. There is an obvious challenge in providing each and every group plan with their own specific rates of return, especially in the days before computers, so group returns are reported GROSS of fees. When you see a return from a fund held by a group plan to find your true rate of return you need to subtract your plan specific fees.

In the retail channel since everyone pays the same fee, it is easy to simply subtract the fee from the gross return and post the NET return. Everyone paid the same fee so only one statement is needed.

Lets compare a retail fund to the same fund held inside a pension plan. I manage a pension plan with a value of approximately $6 Million in invested assets. Because of the large dollar amount the fees charged for each given fund are greatly reduced compared to retail funds. I have randomly selected the Great West Life Diversified Fund it is available through both retail channels such as brokers as well as it is currently held inside the pension fund I managed.

Fees

Great West Life Diversified Fund (No Load, Retail)
Management Expense Ratio (MER) 2.78% 

Great West Life Diversified Fund (No Load, Pension)
Management Expense Ratio (MER) 1.535%

The retail MER is nearly double the pension MER. The 1.245% difference is added return for the pension fund member. Remember, it is the same fund, but the person in the pension made an extra 1.245% more this year than the retail investor. A little over 1% doesn't sound like much, but it can definitely add up over time.

Returns

Great West Life Diversified Fund (No Load, Retail)
One Year Return (as at Sept. 30, 2009) =  -1.22%

Great West Life Diversified Fund (No Load, Pension)
One Year Return (as at Sept. 30, 2009) = 1.31%

Now recall that retail fund returns are published NET of fees and Group funds are published GROSS of fee's. Without remembering this fact it looks like the Pension fund has out performed the Retail fund by almost 3%.

To find the NET return of the pension fund we need to subtract the MER from the published GROSS rate of return.

Gross rate of return - fund MER = Net rate of return
1.31%                  -   1.535%   =            -0.225%

Obviously, neither of these funds have performed very well over a one year period, regardless of performance though, the fact remains the person invested in the pension fared better than the retail investor.

The group plan lost only a little less than one quarter of one percent, the retail investor lost nearly one and a quarter percent.

TL;DR Group savings plans have better rates of return for the same fund as retail investment funds, all thanks to lower fees.