Robert L. Brown, Tyler Meredith | March 28th, 2012
With a population that is both older and retires younger than the rest of Canada, Quebec has had to move faster than other provinces to prepare for populating aging. Despite these unique challenges, this week’s provincial budget laid out arguably the most comprehensive approach in Canada so far in terms of labour market and pension reform.
In the context of the ongoing pension reform debate in Canada, the details outlined by Finance Minister Raymond Bachand are game-changing. For several years governments in Canada have debated various options to increase retirement savings and improve the security and stability of retirement income. With Quebec and Alberta opposed to expanding the CPP and QPP for the time being, it appeared up until this week that the federal government’s proposal for purely voluntary pooled registered pension plans (PRPP) would be the only way forward.
Instead, Quebec announced it will require its new plan to be offered in all workplaces with five or more employees where pensions or group RRSPs are not currently available. This is a giant leap forward. As the federal plan hinges on provincial implementation, Quebec’s policy framework could be precedent setting.
The long-term decline of workplace pension coverage throughout the labour market, particularly in the private sector, is a major problem. While it is certainly possible for individuals to save enough for retirement on their own, empirically, few do.
When Quebec’s Voluntary Registered Savings Plan (VRSP) is fully implemented by 2015 an estimated 2 million workers will be added to pension rolls. This will raise the pension coverage rate from about 40% today –approximately the same across the Canada – to 95%.
As we outlined in an IRPP study earlier this month, there are still other changes that are necessary to make the PRPP framework proposed by the federal government meaningful for workers and businesses.
First and most importantly is the need for mandatory employer contributions as a key component of any occupational pension plan. While Quebec’s plan does not require employers to contribute, the government will exempt such contributions from payroll taxes and deduct them from taxable income as with other registered pension plans. Given that payroll costs remain a concern for short-term economic recovery, and that QPP rates are already set to rise over the next few years, this is a creative first step.
As we also show in our study, Canadian pension funds and RRSPs have expensive management fees. These fees accumulate and can drain a large amount of capital over the course of a saver’s working life but to reduce them, funds need access to scale. Having mandated the VRSP across workplaces without existing pension coverage, Quebec’s approach will provide sufficient scale to lower fees somewhat. However, similar experience in countries like Australia suggests the market will not reduce costs as quickly or as deeply as would be possible through regulation, which should still be explored.
Although the plan will be defined contribution, that is workers are not guaranteed a particular benefit upon retirement, Quebec’s attempt to reduce investment risks for participants is promising. VRSPs will offer a default lifecycle investment strategy, meaning that asset allocation adjusts automatically with age. This will partly relieve the burden that workers face in managing their own funds, though they will still be able to withdraw funds prematurely.
We believe a target benefit design whereby participants have a better sense of the retirement benefit they can expect within a pre-defined range is preferable, and can be achieved without jeopardizing cost-predictability for employers. Quebec is actively considering this model as part of its ongoing review of the retirement income system in the province. We encourage the province to adopt it as part of the VRSP at a later date.
The new pension model introduced by Ottawa last year gives provinces significant flexibility to make improvements. In this respect, Quebec’s plan represents an ambitious effort to achieve incremental, yet broadbased reform. Hopefully other provinces will take note.
Tyler Meredith is a Research Director at the Institute for Research on Public Policy and Robert Brown is a retired professor from the Department of Statistics and Actuarial Science at the University of Waterloo. They are the authors of the new study “Pooled Target Benefit Pension Plans: Building on PRPPs,” published by the Institute for Research on Public Policy.