The main proposed PRPP tax rules are the following:

• A corporation residing in Canada that is  licensed to administer a PRPP under applicable Canadian legislation or similar provincial legislation will eligible to administer a PRPP.
• A PRPP administrator will have to file annual information returns by May 1 (instead of June 30 for registered pension plans (RPPs)) of the following calendar year.
• It will no longer be required to have an employer-employee relationship in order to participate in a PRPP. This will permit employees whose employer has no involvement with a plan, as well as self-employed individuals, to participate in a PRPP.
• It will also no longer be required for an employer to make a minimum contribution to a PRPP, unlike current RPPs where participating employers are required to contribute a minimum of 1% of the total compensation for all active members per year.
• Contributions to a PRPP made by employers, employees and self-employed individuals will generally be deductible for tax purposes.
• All PRPP contributions, including any employer contributions, made by and on behalf of a PRPP member will be limited to the member’s available RRSP contribution limit for the year. In other words, all PRPP contributions, including those paid by the employer, will immediately reduce the member’s RRSP contribution room for the year and therefore, will immediately reduce the member’s ability to make deductible RRSP contributions in that same year.
• Good news though — There will be no requirement for an employer to report pension adjustments (PAs), as is currently required under an RPP, since PRPP contributions will be made under a member’s available RRSP limit.
• Employers will be permitted to make direct contributions to a PRPP on behalf of an employee. These will be excluded from salaried compensation (like employer contributions to an RPP) and as a result, employer contributions will not be subject to CPP/QPP or Employment Insurance withholdings, for example.
• There will be no “qualified investment” rules for PRPPs. Instead, some general rules will apply to ensure that investments are reasonably diversified and do not present risks of self-dealing.
• The existing transfer rules for defined contribution RPPs will generally apply to a PRPP, with some exceptions.
• In the event of termination of membership, employment, or death of the member, or division upon marriage breakdown or common-law partnership, the member or the spouse will have the following options:
  • Transfer the assets to another PRPP or another pension plan, if that plan permits.
  • Transfer to an RRSP or RRIF, including for example, a Locked-in Registered Account or a Life Income Fund for locked-in funds.
  • Purchase of an immediate or deferred life annuity that will meet certain conditions.
  • Leave the assets in the PRPP and receive RRIF-like payments.
  • These options (plus the option of transferring the funds to a Registered Disability Savings
  • Plan (RDSP) to the extent RDSP contribution room is available) will also be permitted for a deceased member’s financially dependent child or grandchild in the case of either a mental or physical infirmity.
  • These options (plus the option of transferring the funds to a Registered Disability Savings Plan (RDSP) to the extent RDSP contribution room is available) will also be permitted for a deceased member’s  financially dependent child or grandchild in the case of either a mental or physical infirmity.
  • In addition to one of the options described above, a deceased PRPP member’s spouse or common-law partner will be permitted to become a successor PRPP member, taking over ownership of the deceased member’s PRPP account funds and making ongoing decisions in respect of those funds as a member of the plan.
  • It has also been announced that the Goods and Services Tax and Harmonized Sales Tax (GST/HST) rules under the Excise Tax Act will be amended to ensure that PRPPs are subject to the same GST/HST treatment as RPPs. It is proposed that amendments to the GST/HST rules under the Excise Tax Act be implemented concurrently with the income tax amendments. The result is something of a double edged sword: on one hand, the governments wish to increase pension coverage in Canada with the introduction of PRPP, but on the other hand, they wish to tax the savings!
  • It is proposed that these changes come into force at the same time as the Pooled Registered Pension Plans Act (Bill C-25). The Government intends to introduce legislation for these proposals as soon as they are able.  With this announcement, the Quebec Finance Minister, Mr. Raymond Bachand, will be able to fulfill the commitment made last March in his 2011 budget speech: to put the Voluntary Retirement Savings Plan (VRSP) into effect.

 For more information please contact Tom Castonguay, CFP at 1.604.832.2029

Tom Castonguay, president at Shelter Bay Financial, says although today’s low interest rates can limit the appeal of regular annuities, the benefits of back-to-back annuities is are too great to ignore.

‘When you’ve seen your portfolio drop from 400k to below 300k and now still not be back to 400k your priorities change to preserving your nest egg.’  As boomers start their retirement years they want to enjoy retirement without the stress of market performance or the need for above average returns.

Insured annuities are one of the best options in the market today.  This strategy creates an income with a life annuity and preserves wealth with a permanent life insurance policy.  The concept is that, a client buys a permanent insurance policy and a life annuity for the same amount.  The income tax due on the annuity income is much less than a non registered GIC which generates surplus after tax revenue while preserving wealth (life insurance payout) for beneficiaries.

‘Due to the permanent nature of this strategy – it should only be used with non registered wealth that will not be required during the annuitant’s life time.  Once an annuity is purchased the decision cannot be reversed so careful consideration must be given to the plan.’ says Castonguay.

With the current low interest environment this strategy works best for larger amounts with those in the highest marginal tax bracket.  But for those looking for higher returns without taking on more risk this option is worth considering. 

Another nice advantage is that once a back-to-back is set up there are no more investment decisions to be made.  Longer term estate planning can be done while an individual or couple is healthy enough and able to make their own decisions.

 Among its findings:

 • the total market share of biologics has grown from 8.3 per cent of drug spending in 2005-06 to 11.3 per cent in 2009-10, an annual growth rate of 12.1 per cent;

 • while the most expensive five per cent of drug claimants account for 40 per cent of drug plan costs, almost half of those costs are now derived from biologic drugs; and

• those age 35 to 44 have the highest annual growth rate in drug costs, thanks largely to the use of biologic medications.

 While biologic drugs have a far higher success rate than traditional chemical-based medications, their costs far exceed those of older pharmaceuticals. For example, the newly developed vaccine Provenge, used to treat prostate cancer, costs $100,000. To date, many of the newly developed biologic drugs are immunomodulators and antineoplastic, used to treat illnesses such as rheumatoid arthritis, Crohn’s disease, ulcerative colitis, psoriasis and certain cancers.

 However, their expansion into other treatment modalities is just a matter of time. According to a Thompson Reuters-Newport study of US drug trends, 6,000 biologic drugs were in clinical trials in 2009. That compares to 1,200 in 2005. The study predicts that by 2014, six of the top 10 drugs on the market will be biologics.  Already, the top 12 biologic drugs account for $30 billion in US drug spending, the Thompson Reuters-Newport study says.

 For plan sponsors with drug plans, biologic drugs are one issue that can be expected to dominate their claims experience — and its related costs —in the near future.  Shelter Bay Financial employee benefit consultants are experts in managing sustainable employee health plans for groups of all sizes.

Canadian organizations are considering innovative strategies as a means to better manage their prescription drug costs but are slow to actually put these solutions in place, according to a new Aon Hewitt survey.

Despite the fact that prescription drug costs have increased at least 8% per annum over the past few years, they make up an average of 60% to 80% of companies’ health benefit budgets. And, few plan sponsors have introduced leading-edge approaches to contain costs, such as managed drug formularies and optimized provincial plan co-ordination, and educating employees with targeted messaging for specific drug classes, according to the survey—although 30% of respondents indicated a willingness to consider these options at some point in the future.

According to Tim Clarke, plan sponsors should consider incorporating these key elements into their cost management strategy. “Fewer than 10% of survey respondents currently have preferred provider pharmacy arrangements, encourage mail-order delivery for maintenance drugs, negotiate discounts or provide case management for high-cost claimants. These strategies may provide significant savings in the next few years.”

Recent regulatory changes have been enacted to help stem the rapid increase in drug prices. Several of the more commonly prescribed drugs are scheduled to lose patent protection soon, which is likely to result in the availability of less expensive generic versions. And several provinces have passed legislation to regulate generic pricing, which should drop the average cost of many drugs set to come off patent. Shawn O’Brien, a senior health and benefits consultant, says that while these are positive developments for drug pricing, they may be causing a false sense of security among plan sponsors.

“These factors have led some plan sponsors to conclude that their drug plan expenses will decrease even if they do nothing,” said O’Brien.

Clarke says the prescription drug landscape is changing and it would benefit plan sponsors to think long term when it comes to developing a cost management strategy. “The number of biologic drugs in the pipeline is increasing—which is great news for those suffering from chronic conditions such as rheumatoid arthritis, multiple sclerosis, Crohn’s disease and lupus. The challenge for organizations is that these drugs cost $20,000 to $50,000 per year per prescription, and as much as $100,000 for some rare diseases. Organizations need affordable solutions that help employees and family members suffering from these conditions.”

The news isn’t all bad, though. According to the survey, 47% of respondents indicated that they are ensuring reductions by requiring mandatory generic substitution, while another 30% stated they are considering taking this action. Eighty percent said they have introduced pay-direct drug cards and 12% are thinking about introducing them; 46% encourage plan members to request a 90-day supply for refills, with another 36% are considering doing so; and 32% require pre-authorization for certain high-cost drugs, while another 34% may do likewise.

Clarke and O’Brien advise that plan sponsors review their drug plan usage before implementing any cost-containment solutions—something that 84% of respondents indicated they already do at least annually. Through analysis of employee prescription drug usage and trendspotting, organizations can pinpoint areas of concern. More sophisticated benchmarking and cost-projection modelling provide additional insight.

Armed with this information, plan sponsors can determine which modifications would have the greatest impact on current and future drug plan costs.

 Contact an Employee Benefit Consultant

From the state of the economy to the implementation of drug reform legislation and prolific genericization of branded products, there has been much speculation about the impact that biologic drugs will have on private plans. Less than five years ago, most of this discussion took place in the future tense. Long development times in the pipeline—combined with a heavy degree of media attention on the “futuristic” nature of newer, more complex agents—instilled in many plan sponsors a lingering feeling that biologics were just a distant blip on the radar.

Many plans now realize that biologics are growing significantly as a percentage of the total drug spend in Canada for both private and public payers. While it is difficult to get a good picture of biologic trends in Canada, we can look to the U.S. for some context. According to a 2011 Thomson Reuters–Newport report, sales of the top 12 biologics in the U.S. reached roughly $30 billion in 2010. The issue for plan sponsors and employers today is managing coverage of these agents, knowing that many are both effective and pricey. To do that with authority, plan sponsors need to understand what biologics are, as well as what to expect in terms of their use and cost.

History lesson
The use of biologics is not a recent development. Insulin (which has been used in Canada to control diabetes since the early 20th century) and vaccines (first developed in the late 19th century) are part of this group, as are drugs derived from bacteria and micro-organisms (excluding antibiotics) or developed through specialized methodologies such as recombinant DNA procedures. Health Canada also considers blood and blood products, as well as other agents that span a number of therapeutic categories, as biological products.

One of the key differences between traditional pharmaceutical medications and biologics lies in how each is manufactured. The former are chemically synthesized in a process that is relatively easily replicated—think of these as recipe-based products. The latter are derived from living cells, tissue or micro-organisms using much more complex, highly controlled manufacturing processes that are unique to each drug. They are more expensive to research, manufacture, store and deliver than pharmaceuticals—and, as a result, they can cost the plan sponsor much more.

Biologics grew from 8.3% of the total share of drug spending in 2005/06 to 11.3% in 2009/10

One class of biologics has come to dominate the field of drug benefits. This class—called the immunomodulators and antineoplastics—includes a number of products used to treat severe rheumatoid arthritis (RA), juvenile RA, Crohn’s disease, ulcerative colitis, psoriasis, psoriatic arthritis, ankylosing spondylitis and cancer. These drugs first appeared in Canada in 2001 with the introduction of Enbrel for the treatment of RA. The number of drugs on the market and the scope of indications for use have grown significantly over the past 10 years.

While the pace of approvals for new biologics in Canada and the U.S. has slowed somewhat in recent years, the number of indications for existing agents has increased. As biotechnology-driven product development becomes an attractive focus for research-based pharmaceutical companies, plan sponsors can expect to see more products and higher sales in the near future.

The Thomson Reuters–Newport report also notes that fewer than 1,200 clinical trials for biologics were under way between 2000 and 2005. Over the next five years, that number swelled to nearly 6,000 trials. In 2009, the U.S. think tank EvaluatePharma suggested that in 2014, six of the top 10 drugs will be biologics.

Also under the “future-is-now” theme is the concept of therapeutic vaccines (used to treat a disease instead of preventing it), some of which are tailor-made for patients using their own DNA. InEmerging Cancer Vaccines: Forecasts, Developments and Pipeline Analysis, 4th Edition, healthcare market research publisher Kalorama Information in the U.S. estimates that the cancer vaccine market alone could be worth US$7.7 billion by 2015. The new therapeutic vaccine Provenge (marketed in the U.S. for treating prostate cancer) is thought to add approximately four more months of overall survival; however, it costs almost $100,000 per patient.

The Green Shield Canada 2010 Drug Trends Study, conducted in partnership with Brogan Inc., analyzed more than 56 million drug claims across Green Shield’s entire client base from 2005 to 2010 to assess trends in drug spending and utilization. The data in this survey represent the entire amounts paid out for each claim, including what Green Shield pays on behalf of the plan sponsor and what the plan member pays out of pocket. Following are some of the study findings as they relate to biologics.

• Biologics grew from 8.3% of the total share of drug spending in 2005/06 to 11.3% in 2009/10. This increase was led by immunomodulators (biologics such as Humira, Remicade and Enbrel) and antineoplastics.
• The total spend on biologics increased from 2005/06 to 2009/10, with an average compounded annual growth of 12.1%. That growth rate is now slowing due to a plateau in new indications and agents within the biologics class (immunomodulators and antineoplastics) that drives most of the costs for this category.
• The most expensive 5% of claimants are driving more than 40% of plan costs. Those numbers may not be surprising, but what’s driving that spending is enlightening: almost 50% of those costs are directly attributable to biologics.
• Digging deeper into this finding, analysts found that the 35- to 44-year-old age group had the highest annual growth in costs, at 3.4%—again, due to biologics use.

Costs under the microscope
As biologics ramp up their dominance of private payers’ drug spend, what can plan sponsors do to balance the clinical use of biologics with cost containment?

Understand what’s going on in your plan
Robust data are the cornerstone to setting a flexible policy that captures maximum savings today while positioning you to make efficient course corrections when they’re required. Even a small percentage point change in costs with these pricey drugs can make a significant dent in your plan’s drug spend.

Cover the most cost-effective product
Any major price differentials within therapeutic classes of biologics are due primarily to price competition. All plans should default to covering the most cost-effective agent within a class first, allowing a plan member to move on to other agents in the class only when he or she experiences an undesired response to the first drug.

Typically, when we think of lower-cost agents, we think of generic drugs. The correct terminology is subsequent entry biologics (SEBs), and they will offer fewer potential savings than traditional generic drugs as compared to brand name drugs.

Since biologics are susceptible to therapeutic differences caused by even slight changes in manufacturing processes—and since those processes themselves are protected intellectual properties—manufacturers of SEBs essentially have to invent their own processes to “imitate” the original drug. This will keep costs high. Although savings on SEBs may be only in the 15% to 20% range compared with innovator products, they are still worth considering as mandatory substitutions as they become available. Setting a plan policy that automatically reaps potential savings requires sound research and analysis, as well as a high degree of engagement with consultants who can reliably assess relative efficacy and determine cost-effectiveness.

Communicate your policy
Plan members often view drug benefits as a simple customer value proposition: a yes or no on a drug’s coverage tells them whether or not their drug plan is a worthwhile benefit. Clearly communicating your plan’s policy on biologics so that members can understand why certain drugs are covered can help reinforce the value of a benefits package. It can also help to ensure that a drug covered under the plan will be prescribed at the outset, which removes the need for claim denials at the pharmacy level.

Biologic drugs represent a new vista of treatment options for a wide range of diseases. Many of them are effective in getting people back to work—and keeping them there. The time has come to make biologics an active part of the conversation on drug plan philosophy, design and policy. Applying sound logic and careful measurement to your biologics policy can help to ensure that plan members get the right drug at the right time—and at the best possible price.

Sal Cimino is director, pharmacy services, with Green Shield Canada

Our advisors are able to create custom programs specifically designed  for your needs.  the possibilities include custom retirement planning, top ups for life and health insurance, comprehensive health care solutions and tax conscious savings opportunities.

Your solution may include one or all of the following:

• Retirement & Estate Planning
• Disability Protection
• Life Insurance
• Investment Counselling & Wealth Creation
• Additional Health Care Funding

Many options are available to enhance executive compensation beyond the usual salary and bonus. We specialize in developing personalized solutions for your specific Executive Benefits Program to meet your needs.