Yesterday, the Quebec government tabled its 2012 budget, which included detailed provisions for the voluntary retirement savings plan (VRSP)—Quebec’s version of the pooled registered pension plan (PRPP).
Quebec is the first province to set out a detailed framework of provincial rules that will apply for PRPPs.
The VRSP requirements will be implemented as of Jan. 1, 2013.
The mandatory requirements for employers to implement a VRSP and for auto-enrollment with the initial auto-escalation features are particularly welcome as most observers, including me, have professed these to be necessary elements towards achieving the low-cost objective for PRPPs.
The ultimate default contribution rate of 4% of earnings is a little light. The budget documents say that this rate will achieve a 60% income replacement ratio at end of career for “the average worker,” which falls short of the 70% ratio that is widely held as a standard target. A 70% target would likely require a 6% default contribution level. However, since there is a gradual transition to the 4% level until 2017, there is time for later budgets to further increment the default level, perhaps depending on receptiveness to the current levels contemplated.
Another area of concern for PRPP administrators, relative to the low-cost objective, is the desire for harmonization of legislation among jurisdictions. Of course, as the first province out of the gate this is not a concern for Quebec, but it will be a potential issue for every other province. Variations relative to default contribution rates would not be particularly problematic, but it would be hoped that other provinces will choose to emulate almost all other features of Quebec’s legislation. Of course, there could be opportunities to improve upon the Quebec model, but any desire to do so should be weighed against the impact of added costs that will inevitably arise from non-harmonized rules.
The low-cost standard basis set for the VRSP is a relative to one that will allow for initially higher management fees until a VSRP achieves an appropriate level of for economy of scale. Although this seems to provide flexibility for VSRP administrators, competitive requirements will auger for fairly low rates out of the gate. It will also be important for the Régie to ensure independence in relation to the determination of fee levels charged to “institutional pension plans of similar size,” perhaps through direct surveys of such pension plans rather than reliance on information supplied by the PRPP administrator.
The default lifecycle investment fund is no surprise, as the industry and other commentators have generally had consensus on this point. The restriction to a maximum of five other funds is significant, however. In practical terms, such funds will most likely be limited to a suite of “target-risk” or asset allocation funds. This will have many possible repercussions. At the top of the list, many commentators have suggested that employers that currently sponsor traditional plans (e.g., DB or DC registered pension plans, group RRSPs or deferred profit sharing plans) will be keen on PRPPs to relieve themselves of onerous obligations. These employers could well face a backlash from employees if current arrangements featuring popular investment options are abandoned and replaced by a VRSP or PRPP stripped down to a lifecycle default, with options limited to a target-risk suite.
Another repercussion will be robust competition. Fiduciary obligations imposed on VRSP administrators will require close control on how funds are invested. VRSPs (and PRPPs) will, no doubt, experience significant growth as they roll out across Canada in volumes of assets invested. Investment fund managers who are not currently closely affiliated with large financial institutions will be driven to have their own VRSP offering to ensure that they can continue to participate in the retirement savings investment marketplace.
Stay tuned. The VRSP/PRPP race is on!
The highlights of the VRSP as presented in the budget are as follows:
Companies with five or more employees that do not already offer a group retirement savings plan will be required to:
- choose a VRSP,
- automatically enrol all employees that have at least one year of continuous service and deduct contributions from payroll and
- remit to their VRSP administrator.
Employers will have until Jan. 1, 2015 to comply with these requirements. After Jan. 1, 2015, new employers will have one year to comply. Compliance enforcement will be carried out by the Commission des normes du travail, which is Quebec’s labour standards regulator. Companies that are too small to be captured by the mandatory requirements may offer a VRSP voluntarily.
There will be no mandatory requirements for employer contributions. Voluntary employer contributions will be exempt from payroll taxes and tax-deductible to the employer. Employer contributions will be subject to the money purchase pension limits (e.g., requirement to report pension adjustment) and will be locked-in until the employee reaches age 55.
Auto-enrollment and auto-escalation
Employees may voluntarily opt out by withdrawing within 60 days of auto-enrolment, after which employee contributions will commence to the VRSP.
Individuals who are not captured by VRSP auto-enrollment (e.g., self-employed and others), or who have opted out, may voluntary join the VRSP of their own choice.
Default employee contribution rate will be auto-escalated as follows:
- 2% from January 1, 2013 to December 31, 2015
- 3% from January 1, 2016 to December 31, 2016
- 4% as of January 1, 2017
Treatment of employee contributions
Employee contributions will be subject to the same treatment as RRSP contributions and, accordingly, RRSP maximums will apply in relation to the sum of both VRSP and personal RRSP contributions. Lock-in rules will not apply to employee contributions.
Default investment option will be a lifecycle fund. VRSP administrators will be permitted to provide up to five additional funds as investment choices.
Management fees will be the same for all VRSP participants, and VRSP administrators will be required to demonstrate to the Régie des rentes du Québec that such fees are comparable to those charged to institutional pension plans of similar size.
Oversight and administration
The Régie will register VRSPs and be responsible for oversight.
VRSPs will be “completely administered by the third parties, such as financial institutions or investment fund managers,” and will require a permit issued by the Autorité des marchés financiers.
The Quebec government will set aside $2 million of funding for each of its 2012/2013 and 2013/2014 fiscal years to enable implementation of infrastructure and broad distribution of information for VRSPs.
Andy Riga of the Montreal Gazette reports, Province to introduce voluntary pension plan:
I'm actually in full agreement with the critics, Quebec already has a pension plan, QPP, and its assets are managed by Quebec's large pension fund, la Caisse de dépôt et placemens du Québec. Another option would have been to create a new fund (modeled after the Caisse) to manage the retirement savings of these self-employed workers.
Saving for retirement will soon be easier for the 2 million Quebec workers who do not have access to company pension plans.
Quebec is introducing Voluntary Retirement Savings Plans, a new tool that will target those who work in small and medium-size enterprises or are self-employed workers. VRSPs will be similar to Registered Retirement Savings Plans.
All companies with at least five employees and that do not already offer a pension plan will be required to offer VRSPs by Jan. 1, 2015.
All employees in those companies with at least one year of uninterrupted service will be automatically enrolled in a VRSP but they will be able to opt out. The self-employed can also participate.
"Everyone acknowledges the need to save more for retirement," Finance Minister Raymond Bachand said Tuesday.
"However, there are two obstacles.
"One: saving on your own requires a lot of discipline.
"Two: managing your savings is a complex task that requires time and expertise."
With the VRSP, "our objective is to simplify things," he said.
The new program is modelled after similar plans in other countries, including New Zealand's KiwiSaver.
Bachand announced he was creating VRSPs last year.
On Tuesday, he explained how they will work.
Here are the highlights:
- As with RRSPs, any money deposited into a VRSP can be deducted from taxable income on Quebec and federal tax returns.
- Again, as with RRSPs, money accumulated in a VRSP will not be taxed as long as it is not withdrawn.
- Contributions to VRSPs will be subject to the same annual cap as RRSPs - a maximum of 18 per cent of earned annual income.
- VRSPs will be adminis-tered by third parties - financial institutions and investment-fund managers. They will be overseen by the Régie des rentes and the Autorité des marchés financiers.
- To limit complexity, VRSP administrators will only be allowed to offer participants up to five investment options, reflecting different risk levels. For example, a younger employee may invest more in stocks, while a worker closer to retirement may opt for more bonds.
- VRSP management fees will be kept low. Quebec says by automatically enrolling employees, it hopes to "foster the participation of a large number of workers." That, in turn, will create economies of scale and help reduce costs, Bachand said. The administrator will have to show that its management fees are "comparable to those of institutional pension plans of similar size."
- Companies will be required to deduct VRSP contributions from paycheques and remit them to the VRSP administrator. Companies can choose to contribute to their employees' VRSPs.
- In 2015, the default contribution rate for employees will be two per cent of salary. In 2016, it will rise to three per cent. In 2017, it will be four per cent. However, employees can chose how much they contribute and can change the amount at any time.
The Canadian Federation of Independent Business praised Quebec for leaving out companies with fewer than five employees from the VRSP program. But it is concerned VRSPs will add a further bureaucratic burden to small businesses.
CFIB vice-president Martine Hébert said she fears it will "create bureaucratic nightmares for both employees and employers."
The Fédération des travailleurs du Québec denounced the VRSP program.
Michel Arsenault, president of the union federation, said few employees will have the money to contribute to VRSPs. Quebec should instead beef up the Quebec Pension Plan, Arsenault said.
The Parti Québécois complained there is no guarantee that management fees will be kept low. To keep costs low, the government should have opened the administration of VRSPs to public tender, said PQ Treasury Board critic Sylvain Simard.
The Fédération des femmes du Québec also criticized the plan, saying it will do nothing to help women, who tend to earn less, take more breaks during their careers and live longer.
The federation of women's groups said the advent of VRSPs could encourage companies to abolish corporate pension plans.
Instead of creating VRSPs, Quebec should increase employee and employer contributions to the QPP, which provides pensions for life, the federation said.
The other thing that gets me is this: " To limit complexity, VRSP administrators will only be allowed to offer participants up to five investment options, reflecting different risk levels." So if I wanted to get a bunch of doctors, lawyers, accountants and other self-employed to invest in a Quebec hedge fund registered with the Autorité des marchés financiers (AMF), under the current rules of VRSP, I can't because of the fees and (biased) 'risk profile' of the entity.
A more valid concern, one that worries me a lot, is why would a company keep offering a traditional defined-benefit plan when it can scrap it and get into a VRSP? It simply doesn't make sense to continue offering a DB plan if you're forced into investing in VRSPs.
Like other provinces, Quebec has a serious problem with the looming retirement crisis. Paul Delean of the Montreal Gazette reports, Two million Quebecers have no private pension plan:
Will Quebecers start saving more for retirement when offered the chance to participate in a pooled registered pension plan, rather than contribute on their own to Registered Retirement Savings Plans?
We'll find out, starting in 2013.
The provincial government announced in Tuesday's budget that, starting in January of 2013, Quebecers will have the option of being part of a new, communal pooled pension plan.
All employers in the province with five or more employees and no existing pension plan or group RRSP will be obliged to enrol their staff in a pooled plan and make the specified payroll deductions for them, by 2015 at the latest, although they won't be required to make contributions themselves or administer the funds. That job will be left to professional money managers.
Employees who don't want to participate will have to opt out, which is likely to significantly increase participation rates, based on the example of other countries, said Yves Millette, senior vice-president of Quebec affairs for the Canadian Life and Health Insurance Association.
"The difference with the federal initiative (announced in November) is that it will be mandatory in Quebec for all employers with five employees or more to implement," Millette said.
"This is significant. Those who haven't looked closely at their future will participate more, I expect, than they have to RRSPs and group RRSPs."
Companies with fewer than five employees, the self-employed and individuals can participate as well, if they wish.
The government says professional management and economies of scale on fees should allow participants to get better returns from their savings and consequently save more for retirement, although returns are not guaranteed.
Jean-Francois Sénécal, tax manager at accounting firm Bessner Gallay Kreisman, says the plan "may create somewhat of a headache for employers, because it's mandatory for the employer but voluntary for the employee. It's a lot of administration, especially when employees change jobs."
About 2 million Quebecers are covered by private pension plans, while 2 million others need to provide their own nest egg over and above basic Quebec Pension Plan and Old Age Security benefits.
The pooled pension plan would be distinct from Canada and Quebec Pension Plans, which will continue collecting dues and distributing money according to their own formulas. Like RRSPs, contributions will give rise to a tax deduction.
An estimated 1.5 million Quebecers have RRSPs, but contribution rates in the province have lagged the national average and many planholders consider them complicated and stressful to manage.
Low investment returns, coupled with longer life spans, have increased the urgency of boosting individual savings, especially for middle-income earners, the government said. It estimates 30 per cent of workers have no savings at all, most in the $20,000-to-$60,000 income bracket.
The pooled pension plan will be transferable if an employee changes jobs, investment options will be risk-adjusted as participants age, and contribution rates can be altered, or temporarily suspended, as situations change, the government said.
Most retired Quebecers live on about 70 per cent of pre-retirement income, with more than half that money coming from OAS and QPP .
Someone earning $40,000 a year would have to set aside $2,500 annually for 30 years to maintain his or her standard of living for 13 years in retirement, according to government estimates.
Where do they come up with these figures that most retired Quebecers live on about 70 per cent of their pre-retirement income? And half of that comes from OAS and QPP? !?
Bottom line: Canadians and Quebecers aren't saving enough for retirement but PRPPs in Canada, and VRSPs here in Quebec, will do nothing to significantly halt the inexorable trend toward pension poverty.
The smartest Canadian pension fund managers know this and have been making the case for boosting DB plans and expanding the CPP and QPP so more people can retire in peace and security. Everything else is just pandering to the banksters and insurance hacks. Stop putting lipstick on the pension pig!
Below, Mario Dumont et Martin Pelletier analyze the Quebec budget 2012 (in French). Quebec's official Debt-to GDP stands at 55% but when you add hidden debts that even Quebec's Auditor General has highlighted, the amount of debt is staggering. The government needs to start cutting expenses and making better decisions, especially on retirement plans. If pension poverty continues, social welfare costs will explode and taxpayers will end up paying for this down the road.