The Pooled Registered Pension Plan has been a complete faiure. Discussion on the use of PRPP for de-accumulation products including annuities potentially is a silver lining for how FI's could embraced legislative program to delivery value to aging consumers.

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

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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.

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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

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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.

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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

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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