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!