IPP vs. PPP: Peer Review?

A recent post claimed the superiority of the PPP over the IPP. I have on many occasions disputed this. The PPP is a trademarked name attached to a hybrid IPP. Most current IPPs have similar hybrid clauses, or can be amended to include them. My position is straight forward, that the "innovations" that the PPP offers are irrelevant in the provinces that don't require provincial registration (BC,AB, MB, Quebec) , and therefore funding problems cannot occur. In Ontario, the Ontario Pension Benefits Act provides substantial latitude to avoid or eliminate funding problems (Rule 48).

One of Canada's most decorated, qualified and talented financial planners, Jason Pereira, responded to the aforementioned post. For whatever reason his comments disappeared soon after their posting. Full disclosure, Jason is a friend and we have worked together on many client situations and continue to discuss particular strategies and the state of financial planning as a profession and a vocation.

For the sake of honest debate and true due diligence I am re-posting them here. Enhancing retirement savings is something Canadian professionals and entrepreneurs need to do, particularly in the era of a government that labels them tax cheats and class enemies. I encourage anyone considering a pension option to simply do their homework. Talk to multiple providers, ask how many plans they have set up, examine their service commitment and ability to deliver and then make a choice. Debate and full disclosure is good for consumers and the market place alike.

Jason posted:

The claims in this post require some elaboration and peer review. Trevor Parry, Lea Koiv, Stephen Cheng, Fraser Lang, William Kennedy, or Mark Lesniewski, feel free to jump in on anything I missed.

Thank you Lea Koiv for your assistance on this matter.

Claim 1: Asset allocations can generate higher ‘special payments’

The assumed ROR that must be used is 7.5%. However, this is but one of many assumptions that must be used per ITA Regulation 8515. So it depends on how all the assumptions play out. It would be appropriate to state that there is the “potential” for additional contributions. You can’t just say that the investments tanked, so you automatically get an additional company contribution. This option is also identical with an IPP and not a point of differentiation. 

Claim 2: Taxes can be lowered at plan termination by making use of DC account.

This bears explaining. There is no cap on transfers from DC RPPs to other money purchase plans, including RRSPs.The only way this makes sense is if you contribute to the DC plan instead of the DB. The issue here is twofold. You are paying additional fees for access to the same limit as the RRSP, and you are giving up the ability to make top-up contributions due to underperformance on amounts contributed to the DC. Again, not an advantage.

Claim 3: When plan is in excess surplus additional RRSP deductions can be claimed. 

So long as you are accruing a pension under the DB component, or contributions are made to the DC component, you have a Pension Adjustment. This PA reduces the next year’s RRSP contributions.  With an excess surplus, assets have to be 25% in excess of liabilities using the Maximum Funding Valuation basis for valuation before contributions must cease. Few plans are in excess surplus, so this such an advantage is theoretical. The portfolio would have to return of more than 9.375%/year compounded consistently for this to be an ongoing issue.

Claim 4: Fiduciary standard of care (trustee-like)

The real question is, in this case, is: So what? You are not providing fiduciary oversight on the asset held within the plan, which frankly would be what would benefit the client the most. The administration of these plans is routine and formulaic. So where do the fiduciary duty kick in? At the time of sale? The numbers alone should prove or disprove if this strategy makes sense. 

Claim 5: We audit the actuarial team that does the day to day administration.  

Who does valuations? As per previous exchanges, this looks to be outsourced to IA. What exactly do you mean by audit? More to the point, actuarial mathematics is not for the faint of heart for if you don't have an actuary on staff, who is event qualified to perform said audits? 

Claim 6: We have expert Pension Lawyers on staff - IPP actuaries do not.  

Pot vs Kettle. You outsource actuarial. Actuaries outsource legal. The real question is why would they have legal on staff? The core function of IPP providers is administration and actuarial work. The vast majority of business don't have full time legal on site. Is this to their determent? Frankly if one were to choose what a provider in this field should have on staff, it would be actuarial, not legal staff. 

Claim 7: Only INTEGRIS offers a Corp. Trustee option for a nominal fee of only $300/Yr - instead of having to appoint three people as individual Trustees for the pension plan - which is required for all IPPs!  

There are several corporate trustees available in the market. Furthermore the vast majority of IPPs simply name individuals as trustees who charge nothing for said service.

In closing, as previously discussed the PPP is nothing more than an IPP with a hybrid option. A solution that has been offered by other vendors for years. The only difference is a trademarked name. To disparage IPPs in favour if an IPP with a brand name trademark makes little to no sense.