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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.

Highlights of the VRSP as presented in the budget are as follows:

Mandatory offering
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.

Employer contributions
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.

Investment options
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
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.

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!

Greg Hurst is a Vancouver-based pension consultant with Greg Hurst & Associates Ltd.

These are the views of the author and not necessarily that of Benefits Canada.

© Copyright 2014 Rogers Publishing Ltd. Originally published on benefitscanada.com

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See all comments Recent Comments

Peter Gorham:

Quebec believes that a 4% per annum contribution is enough to produce a 60% income replacement ratio in retirement. Based on my calculations, a person who starts 4% contributions at age 25 and continues up to age 65 will need to earn a rate of return that is 7.2% greater than wage increases in order to generate a 60% replacement ratio. So if wage increases are 3% on average, that’s a total investment return of 10.2%! Wow.

If one starts contributing at age 20 and keeps it up to age 65, that contribution will only need to earn 6% above wage increases to hit the 60% replacement ratio. My mother warned me about people who promise such wondrous results.

My calculations are based on a retirement income with a 60% spousal benefit and indexing at 60% of CPI.

If Quebec will guarantee their rates of return, I’d gladly move there and start smoking whatever is producing their enthusiasm.

Wednesday, March 21 at 5:05 pm | Reply

Greg Hurst:

According to Quebec’s Budget document:

“The replacement rate includes the Old Age Security Pension, the Guaranteed Income Supplement, the QPP
pension and the VRSP. The following assumptions are used: retirement at age 65, life expectancy to age 82,
saving starts at age 25, rate of return net of management fees 5.75%”

Furthermore the 60% replacement ratio happens at a $50,000 income level – lower incomes have a higher replacement ratio while higher incomes have a lower ratio.

The document is available here: http://www.budget.finances.gouv.qc.ca/Budget/2012-2013/en/documents/retirement.pdf

I’ll happily leave it to others (like Peter) to test their calculations

Wednesday, March 21 at 6:29 pm | Reply

Peter Gorham:

Thanks for the clarification, Greg.

By including OAS, GIS and QPP, I am able to come close to the replacement ratios in the budget documents.

HOWEVER: As Quebec states, this requires a rate of return of 5.75% after investment management fees. If we assume a life cycle fund that averages 50% bonds and 50% equities over its life, and further assume a 3.5% return on bonds net of fees, that requires an 8% return on equities, net of fees. In today’s economy, both those returns are very aggressive – even if the VRSP manages to get investment management fees as low as 0.5%.

Is Quebec maybe banking on a cyclical increase in bond yields to produce the long-term rates that this forecast is using?

Another issue is the life expectancy of age 82. That appears to be based on the 1995-97 Canadian Life Tables. The 2000-2002 tables produce a slightly longer life expectancy. But the main issue is that Canadian Life Tables include all residents of the province – those able to work and those not able. When you include only people able to work, life expectancy gets longer – possibly as much as 4 or 5 years!

Bottom line: I like the Quebec VRSP proposal. I hope that the rest of Canada will follow Quebec’s lead particularly with the mandatory aspects. But let’s take off those rose-coloured glasses and produce a more reasonable retirement income forecast. Aggressive forecasts should have no place in our communications.

Friday, March 23 at 10:24 am

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