Friday, April 19, 2013

Should Quebec Adopt a Longevity Plan?

Rhéal Séguin of the Globe and Mail reports, Panel proposes pension plan for elderly retirees in Quebec:
A new universal supplemental pension plan is one of the key proposals by a blue-ribbon panel to provide financial security for elderly retirees in Quebec.

A committee of experts examining the province’s underfunded retirement system recommended Wednesday that Quebec take the bold and innovative step of creating what it calls a “longevity pension” where, at age 75, retirees would receive an additional income.

As workers live longer and retire earlier, enormous pressure is being placed on existing private and public pension plans. Those managed by the Quebec Pension Plan alone are underfunded by $41-billion, the committee reported. The committee recommended that, to improve their solvency, the workers and employers need to restructure the plans over a five-year period.

The experts also called for the implementation of a voluntary retirement savings plan.

The Quebec government said it will hold public hearings and act quickly on some of the report’s recommendations.

“A bill [on a voluntary savings plan] was being prepared and will be tabled soon,” Premier Pauline Marois said in the National Assembly on Wednesday.

However, the government appeared less anxious to take a position on the committee’s longevity plan proposal. Ms. Marois invited the opposition parties to take part in a non-partisan debate next fall in seeking solutions to the serious financial problems facing the province’s retirement-income system.

In creating the longevity plan, the government should allow easier withdrawals from retirement savings, the committee recommended.

The committee confirmed that a growing number of workers were outliving their savings at a time when almost half of the four million workers in Quebec – or 47 per cent – have no group retirement plan. Their only source of income after retirement will be benefits from the Quebec Pension Plan and federal Old Age Security.

The longevity plan recommendation would be an additional way to require workers to contribute to another mandatory pension plan to ensure an adequate source of income in the latter years of their retirement.

“The status quo is not a solution,” said committee chairman Alban D’Amours, who was the former president and CEO of Desjardins Group. “The objective here is that everyone be given access to a reliable pension income.”

The proposed longevity plan would be fully funded by employer and employee contributions, and all workers – regardless of income – would be required to contribute. The plan’s cost was estimated to be the equivalent of 3.3 per cent of earnings shared equally between workers and employers up to a maximum contribution of $840 a year per employee.

Earnings at 75 years of age would be the equivalent of 0.5 per cent of earnings up to a maximum allowed by law. For instance, a young worker earning the maximum allowable income, $51,000, and who paid $840 a year into the plan, would receive $14,564 a year as a supplemental income at age 75.

The experts also concluded that while defined benefit plans provided the best protection at lower cost, several plans remained in serious financial difficulty. As many as 72 per cent of the plans had a degree of solvency of less than 80 per cent.

“Increasing life expectancy, early retirements, an aging population, the decrease in interest rates and financial market volatility have made the weaknesses blatantly obvious,” the report stated, adding that hopes of a market turnaround to correct the problem was an “illusion.”

The committee of experts recommended the government allow for more flexibility for negotiations between company management and employees to solve the financial problems facing the defined benefit plans. The objective the committee insisted on was to help workers plan their financial security in preparation for retirement.

“The longevity plan allows people to save more and it will cost a lot less than if we did nothing,” Mr. D’Amours said at a news conference. “Our entire pension system is coming under attack. If we do it [the longevity plan] today it is a savings plan. But if we do nothing, tomorrow it will become a tax.”

However, the business community expressed concerns that the new longevity plan amounted to a new tax on small and medium size companies. The Canadian Federation of Independent Business estimated the new plan could cost $5-billion a year – a heavy burden for many small companies and their employees to carry.
Kevin Dougherty of the Montreal Gazette also reports, ‘Longevity pension’ would cost working Quebecers $843 a year:
If proposals to fix the province’s ailing pension system become law, working Quebecers would pay $843 a year, and their employers would add an equal amount to fund a proposed new “longevity pension.”

And before the report was even presented Wednesday, Premier Pauline Marois said legislation to do just that is being prepared and would be presented soon.

Marois called for unanimity among all parties in the assembly, “to protect the retirement of those who have contributed all their lives to retirement plans and others who have not, who need more support.”

The longevity pension is the main recommendation in a 219-page report presented Wednesday by seven pension experts after 18 months of behind-the-scenes consultations and deliberations.

Benefits under the new plan would be paid starting at age 75 — on top of federal Old Age Security and existing Quebec Pension Plan benefits, adding as much as $14,564 a year to a pensioner’s income.

Quebecers are retiring earlier and living longer, putting unsustainable pressure on private pension plans.

The panel of experts was named by the Liberal government of Jean Charest in 2011 because private pension plans in the province have a shortfall, which has grown to $41 billion, between the money they have and the pensions they are committed to paying out.

But the panel, headed by Alban D’Amours, former head of Quebec’s Desjardins financial co-operative movement, broadened its focus to the restructuring of the province’s pension regime, looking 40 years ahead.

The looming problems are considerable.

The proportion of Quebecers working and paying taxes will drop to two working Quebecers for everyone over 65 by 2030.

As well, interest rates on investments average 2.3 per cent, far from the 10-per-cent-plus returns once promised by financial planners, touting, “Freedom 55” — the dream of stopping work 10 years before the usual retirement age.

Volatile financial markets suggest there is no respite ahead and Quebecers must make pension adjustments.

About 2.4 million working Quebecers have no private pension plan to supplement their government pensions.

The longevity pension would leave Quebecers with a 10-year period after the normal retirement age of 65 when they would have to either count on personal savings or continue working.

The committee makes no recommendation to raise the retirement age, but Luc Godbout, a Université de Sherbrooke tax expert and panel member, said too many Quebecers now claim their Quebec Pension Plan benefits at age 60 and their Old Age Security at 65, getting less than they could should they keep working and defer their government pensions.

By setting 75 as the age additional benefits would be paid, the committee sends a signal that there is no advantage to early retirement, and suggests that Quebecers save more before they retire.

“We are reinventing savings,” D’Amours said.

And while D’Amours stressed payments into the longevity pension are “not a tax,” Martine Hébert, Quebec vice-president of the Canadian Federation of Independent Business, called the new charge a “payroll tax” that would add to the burden on small businesses in the province, making them less competitive.

D’Amours said calling it a payroll tax is “a bad reading” of the plan, conceived to be 100-per-cent capitalized, meaning that everything paid into the plan will be paid out, without taxpayers contributing.

“It allows people to save more,” he said. “It allows small businesses to assume their responsibilities.

“And it will cost less than what we would have to pay eventually if nothing is done in 10 or 15 years, when the problem of longevity will be even more apparent.”

Without the longevity pension, pensioners with diminished resources would turn to government, seeking relief paid “with our taxes,” D’Amours said.

Yves-Thomas Dorval, president of the Conseil du patronat du Québec employers’ group, suggested the government could reduce other payroll taxes to ease the burden, but said overall the D’Amours report is positive.

“There are measures that will encourage people to work longer,” Dorval said.

He said contributions to pay the longevity pension would remove about $2 billion a year from the economy.

“That is a large impact,” Dorval said.“On the other hand, it is like a transfer for later because it is money that will be used later.”

While primarily intended to help Quebecers with no pension plan, the longevity pension would also ease some of the pressure on private pension plans.

The report’s authors explained that employers could adjust their private pension plans, reducing employees’ payroll pension deductions by a corresponding amount.

And the private plans would not duplicate the benefits of the longevity pension after age 75, easing the underfunding problem for company pensions.

The committee also proposed measures favouring negotiations to resolve the underfunding problem in a 15-year time frame.

Another proposal would allow an employer to unilaterally abolish secondary benefits, such as retirement at full pension before age 65.
The details of the report are available here on the Régie des rentes du Québec's website. The committee's presentation is available here (French only) and the full report is available here.

The Committee is composed of the following 7 volunteer members:
  • Mr. Alban D'Amours, Committee Chair; President and CEO of the Desjardins Group (2000-2008)
  • Mr. René Beaudry, actuary; Partner, Normandin Beaudry
  • Mr. Luc Godbout, tax specialist, Université de Sherbrooke
  • Mr. Claude Lamoureux, President and CEO, Ontario Teachers' Pension Plan (1990-2007)
  • Mr. Maurice Marchon, economist, HEC Montréal
  • Mr. Bernard Morency, Executive Vice-President, Caisse de dépôt et placement du Québec
  • Mr. Martin Rochette, lawyer; Senior Partner, Norton Rose 
I commend the work of all the members who produced this report and believe they are spot on with their recommendations. It's time Quebec gets serious about addressing problems in our retirement system.

The need to overhaul Quebec's retirement system is pressing. In an article earlier this week on Quebec's ailing pension system, Kevin Dougherty of the Montreal Gazette reported the following:
The Institut de la statistique du Québec estimates that at the end of 2012, private defined-benefit pension plans in Quebec had a total deficit of $40.6 billion. Also, 74 per cent of defined-benefit plans were only 80-per-cent solvent.

The problem affects both private and public-sector employees, as well as those with no pension plan except federal Old Age Security. The federal payout can be supplemented by the Canada Assistance Plan, and the more generous Quebec Pension Plan, funded by employee and employer contributions.

About 40 per cent of Quebecers have savings sheltered from the taxman in Registered Retirement Savings Plans, leaving 60 per cent of Quebecers with no retirement savings.

Now, Quebecers can claim a reduced pension, under the Quebec Pension Plan from age 60.

Quebec’s average retirement age in 2011 was 60.9 — compared with 62.7 in Ontario and the Canadian average of 62.3.

While Quebecers are living longer, retirement incomes are not always indexed to offset inflation.

Some employees, such as those who worked for once-solid companies like Nortel Networks and Abitibi, are not getting the pensions they were promised.

Quebec’s municipalities say they have a combined $5-billion deficit in meeting their obligations under defined-benefit pensions for civic employees — or about $100,000 for each employee.

Montreal Mayor Michael Applebaum has told the D’Amours committee that raising city taxes to cover pension deficits is not a foreseeable solution.

“It is a question of equity for Montrealers who, for the great majority, do not have a pension plan,” Applebaum said.

Éric Forest, president of the Union des municipalités du Québec, told The Gazette in an interview Monday that there is no single recipe to solve the problem, but he appealed to the government to “give us the tools” to work out agreements with public-sector unions.

The Conseil du patronat du Québec employers’ group told the D’Amours committee Quebec should consider raising the retirement age to 67 from 65, noting the finding of economist Pierre Fortin that since widespread public-pension plans began in Quebec in the 1960s, people are working 10 years less, on average, and draw pension benefits 20 years longer.

Conseil du patronat president Yves-Thomas Dorval said raising the retirement age is the easiest way to deal with the pension problem, while raising taxpayers’ contributions would have a negative impact, reducing investment and consumption spending, while holding down job creation and wages.

“It will touch everyone,” Dorval said.

And while some boomer-generation employees, in good health and with children still studying, are putting off retirement, most pension plans remain geared to retirement at 65, with early retirement at 55.

But Quebecers can expect to live much longer after that. The Institut de la statistique du Québec calculates that between 1980 and 2011, the life expectancy of Quebecers rose to 81.8 years from 75, with women living four years longer than men on average.

In Quebec between 1971 and 2011, the number of people over 65 doubled to 16 per cent of the total and will continue to rise to 28 per cent of Quebec’s population by 2051.

A study last year found that in the year 2000, there were five people working for everyone over 65 in Quebec, falling to four working to every one over 65 in 2010, and by 2030, there will be two people working for every Quebecer over 65.
In other words, longer life expectancy and demographics will place enormous pressure on our retirement system and it would be wise to adopt the committee's recommendations as soon as possible, ignoring the irrational complaints of the Canadian Federation of Independent Business.

A few things that I am wondering is who will manage this new longevity pension plan if it is adopted? The Caisse or a new fund? Also, why do we have so many underfunded public and private plans in Quebec? Why can't we just consolidate these plans and manage them with more rigor, transparency, adopting the best governance standards in the world?

But the message from this report is clear, we need to act now. Alban D'Amours is absolutely right, "the status quo is not a solution," it's just a downward path toward full-fledged pension poverty for millions of Quebecers.

Below, an RDI Économie interview with committee chairman Alban D’Amours from February 2013 (French only). Will embed more recent interviews as they become available.