Is there as silver lining for prpp?
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The document discusses the critical need for banks and financial institutions to develop de-accumulation products for retiring baby boomers in Canada, as a significant portion of the population transitions from saving to relying on their retirement assets. With a projected one-third of Canadians entering retirement in the next decade, institutions must adapt by offering holistic cash management solutions that address the unique needs of this demographic. The Pooled Retirement Pension Plan (PRPP) is highlighted as a potential solution that banks and credit unions can leverage to provide competitive, low-cost payout options amidst an evolving financial landscape.
Is there as silver lining for prpp?
- 1. DRAFT De-Accumulation: The Critical Next Frontier Getting the solutions right for the cash management needs of baby boomers By Scott Wilkinson July 2014
- 2. De-Accumulation: The Critical Next Frontier 2 The next battleground for banking and wealth wallet-share and relationships are pay-out solutions for mass/mass- affluent retiring baby-boomers. Mega Trend: Retirement 2026 StatsCan data indicates that an aging population is a mega trend in Canada. 1/3 of Canadian households are going to transition from debt takers and savers to retirees in the next 10 years. These 10 million Canadians also represent the largest cohort of savers, debtors and fee payers for Canadian banking and wealth management. In place of debt and savings, these consumers are going to need de-accumulation products – also known as pay-out solutions. The de-accumulation discussion touches every aspect of your customer’s relationship with the credit union and invites a richer conversation about assets, life goals and financial enablement. At stake is not only the $1.2 trilion assets under management from which Canadian banks and credit unions earn fees and spreads; but, possibly the banking relationship from cash management products, as these customers open themselves to the most significant switch and bundle messaging since their first job. How the bank reacts to this mega-trend will define your success for the next 25 years. Living Longer, Living Better Canadians are living longer and are more active in their early retirement than previous generations. Retirement used to be short. Few people retired able to enjoy leisure activities, travel. The Baby Boomers will be among a generation who expect that retirement will be their reward for working, saving and contributing to Canada’s stellar growth. But this means having the financial means – and products that facilitate that lifestyle. With Canadians living longer, pay-out solutions will have to embrace holistic cash management needs of all families to enable early retirement lifestyle choices, flexible long-term health solutions and generational wealth transference choices. Life Insurance Companies Set To Benefit … Banks too The apparent victors of the pay-out bonanza appear to be Canada’s life insurance companies. Regulatory and political pressures have given the insurance companies a monopoly on annuity based pay-out solutions in addition to allowing them to provide investment, wealth management and banking solutions. As demonstrated by Manulife Bank and Investors Group
- 3. De-Accumulation: The Critical Next Frontier 3 Trust, insurance companies increase the investment in their banking offers and leverage advisor network the insurance capacity to offer compelling integrated banking offers to retiring customers is no longer a mere scare scenario. Guidance by the Minister in 2012 has further precluded banks from offering “annuity-like” pay-out models as banking product. Canadian banks have been precluded from leveraging distribution capabilities for insurance functions – and are limited to selling simple drawn down pay-out models or referring customers to third-party insurance offers. But the large banks do dominate distribution – particularly in core banking and mutual funds – and therefore will have the capacity to transition at least part of their assets in to RIF / Straight- line drawn down products. While draw down pay-out models have their place, by and large, they are not a compelling offer to most consumers as the design of the model has two key draw-backs compared to annuity based models. First, draw down models are finite – they last as long as there is a balance of earnings, and may not be compelling to most consumers. First, longer living means consumers who rely on draw down models might outlive their savings. Second, the “monthly payment” from annuities are, generally, superior to the cash flow generated from draw down models. Mass / Mass Affluent Are Under-Served Mass and Mass-Affluent consumers have few choices when looking for pay-out solutions in the current market. These consumers are looking for simple to understand, easy to buy monthly cash-flow. The are seeking predictability, and flexibility for travel, life-style, aging, health and family needs. But also want to maximize their immediate, life payments and inheritance transfers. Strangely, Canada has seen less innovation and competition for the pay-out solutions space – largely due to insurance lobby success in Ottawa. De-accumulation solution competition and disruption are significant trends in UK, Australia and European markets where banks, insurance providers and emerging models are driving lower cost and compelling service propositions for consumers. But with demand, innovation and disruption will have to occur. The credit union movement has a unique opportunity to lead de-accumulation innovation because of its place as a trusted service provider to communities, businesses and with regulators.
- 4. De-Accumulation: The Critical Next Frontier 4 The PRPP Pay-Out Opportunity On the surface, then, bank prospects in the de-accumulation market look bleak. However, possible reprieve may be at hand through the humble PRPP (Pooled Retirement Pension Plan). The PRPP was introduced by the Federal government as an accumulation pension vehicle for small businesses and self-employed. PRPP has been pilloried by established pension stakeholders as another RSP with lower margins. Certainly, provincial adoption of PRPP has been slow and arduous – with Ontario even going alone with in a government run defined benefit plan. PRPP offers four key advantages for banks. First, the legislation has black letter allowance for banks to sell PRPP products in branches. Second, PRPP explicitly has provisions for pay-out solutions, including pooling functions with underlying annuity offers. Third, PRPP legislation specifically allows pool investment in proprietary bank deposits, investments and other asset products – thereby allowing the bank to maintain balance sheets. Third, PRPP explicitly allows individuals to sign up for plans and transfer in RSP assets. In essence, then, PRPP can be the basis for a complete de- accumulation product suite for most mass and mass- affluent customer needs. The PRPP program limits providers to offering 6 plans of PRPP, managed independently through an administrator. Of those plans no mention is made at how many plans need to be accumulation based – or, de-accumulation based. Therefore, for example a PRPP offer can include three possible accumulation offers (aggressive growth, balanced growth, and capital preservation plans) and three de-accumulation models (Maximum draw down plan, blended draw-down, life-value plan) that would replicate value produced from annuity and GMWB type plans. Insurance Companies Currently Dominate PRPP and De-Accumulation Strategy Life insurance companies have been the first to start offering PRPP products – notably Standard Life and Manulife have been leaders in initial offerings. However, life insurers have three primary disadvantages in leveraging PRPP. • First, while they have the infrastructure components for PRPP delivery (annuity knowledge, pension systems and calculators, service delivery infrastructure) they are most at risk of fee cannibalization to their traditional group and individual insurance
- 5. De-Accumulation: The Critical Next Frontier 5 businesses – and if their business is not at risk of cannibalization their sales people compensation certainly is. • Second, Life companies have not been aggressive at focusing on disrupting their own cost structures to deliver a truly low cost PRPP solution and will be therefore at risk as competitive solutions come available. It is not clear given global complexity of their businesses and legacy inheritance that the big 3 insurance companies can sufficiently reengineer themselves to be low cost, customer focused organizations in the next 10 years. • Third, outside of the traditional small employer model, PRPP as we are discussing in this model will be an opportunity sale – sales that banks and credit unions excel at. Mass and mass-affluent customers do not have easy access to independent advisors and wealth specialists. They go to the branch for general products that meet most of the needs at a low cost. PRPP market success will be defined by lowest fees, returns on investment, simplicity of sales and delivery, and fiduciary responsibility of the plan to sustainable investment operations. Banks are Positioned to Be Superior Delivers of De-Accumulation Products Generally, the banks have been superior to insurance companies at more quickly driving mass productization and selling capacities to their channels. They are also more effective at selling to mass customers, have the advantage of branches, own the cash management products for bundling, and have been successful at driving cross sales between elements of the customer relationship with the banks. This also therefore implies a de-accumulation solution that is simple to sell, that is integrated with debt, payments and transaction products suitable to customer life-stages, and that can evolve with the customer as they age and life needs change to health, care provision and inheritance planning. The larger credit unions have many of the same advantages of a branch distribution network, trusted wealth advisors and existing cash-flow and debt products. In order for credit unions to be successful with PRPP they will have to pressure themselves to find low-cost solutions. Principally, banks will need to look outside of their existing infrastructure and embrace shared service and technology providers.
- 6. De-Accumulation: The Critical Next Frontier 6 PRPP Filing: Key Activities PRPP will require creating an OSFI regulated pension plan and therefore will not be an insubstantial investment. OSFI’s primary concerns are plan sustainability and consumer efficacy. As part of forming a pension plan, the provider will have to present a business plan and operating plans. This will likely be a 6-12 month process. As next steps, therefore, we would recommend the organization consider the following activities. • Open conversations with OSFI and legal advisors • Market sizing and strategy analysis • Status of provincial legislation and regulations • PRPP Business and capital model design • Application to OSFI for PRPP Pension license • Distribution and sales calculator design • Training design • Back-office administration, operations and reporting • Pool design, annuity and treasury solutions • Commencement ### Resources: http://www.osfi-bsif.gc.ca/Eng/pp-rr/ppa-rra/prpp-rpac/Pages/default.aspx
- 7. De-Accumulation: The Critical Next Frontier 7 About the Author: Scott Wilkinson is a management consultant, entrepreneur and financial services executive. As a professional management consultant with a focus on financial services innovation projects, Scott has helped over 30 leading US, Canadian and UK financial brands such as AGF Funds Management, MGIC, GE Capital, American Express, Charles Schwab, VISA, and IBM with new product and channel growth strategies. Scott has written about the Canadian and US mortgage, e-commerce, deposits and payments markets. In addition to consulting, Scott has held successive product and corporate development roles within the banking and financial technology sector, including RBC Royal Bank, CIBC and Real Matters Inc. Scott most recently formed, launched Canada’s first banking outsourcing solution for Canada’s broker deposit market for International Financial Data Services. Scott is a Certified Management Consultant and holds a BA from the University of Toronto and an MBA with Distinction (Ivey Scholar) from Richard Ivey School of Business at Western University. Scott is a board member of Radius Child and Youth Services, Canada’s leading provider of abuse counseling services and research services, and advisory board member with Enterprise Ireland’s North American Financial and Technology panels. Scott is also a member of the C.D. Howe Institute, Canada’s premier public policy think tank, and active in financial services, innovation and community and mental health discussions. Contact Information: Scott.p.wilkinson@gmail.com 416-669-5540