Roughly two million Quebecers who don’t have access to a pension plan at work could find themselves automatically enrolled in one starting Jan. 1, 2013, thanks to the province’s new voluntary retirement savings plan (VRSP).
Unlike the federal government’s proposal for a pooled registered pension plan (PRPP), the Quebec plan is not going to be voluntary.
“That’s quite significant,” said Lorraine Allard, a partner at law firm McCarthy Tetrault in Toronto.
While employees can bow out of the VRSP within 60 days of enrolment, automatic enrolment is a great advantage for Quebec workers, said Renée Laflamme, vice-president of group savings and retirement at Industrial Alliance Insurance and Financial Services in Quebec City.
A lot of employees in Quebec, as it is in the rest of Canada, are employed by smaller employers and do not have any vehicle to save money other than an individual retirement savings plan (RSP), she said.
“And with (the VRSP), it sort of gives them more discipline or facility — it makes things easier for them to save, it’s taken out of their paycheque every other week.”
Group RSPs, for example, can see very low enrolment because they’re not mandatory, so this is an important feature.
“It has been shown in other countries that it does create... a higher level of participation,” said Laflamme.
To ease employees into the concept, their default contribution rate will be set at two per cent for 2013, 2014 and 2015, three per cent for 2016 and four per cent as of January 2017.
It’s about getting people used to the fact they can live on the remainder of their earnings, and then raising the rate gradually, said Allard.
“It’s geared toward people who don’t necessarily save for retirement already and a lot of people wouldn’t, perhaps because they feel they can’t afford to take two, three, four per cent — whatever it is of their earnings — and set it aside on a yearly basis, so I’m just guessing the policy reason behind this is they want to make this as painless as possible.”
The VRSP will also have a default option for investments that will be based on a life cycle approach in which the risk level is adjusted based on the participant’s age. That is a great advantage, said Laflamme.
“Having the default option as a life cycle fund is innovative… in the sense that we don’t have any such standard in any of the pension minimum standards legislation across Canada,” said Clair Ezzeddin, a lawyer at McCarthy Tetrault in Montreal.
The government also said there should be a maximum of five investment options per plan, in addition to the default.
“Most people are not necessarily knowledgeable about ‘What is it that is a good rate of contribution? What is the best investment for me?’” she said. “It is important to make it as smooth as possible for both the employer and the employees.”
Roughly one-half of workers do not have access to a pension plan set up by their employer, according to the Quebec government in its budget paper Quebecers and Their Retirement: Accessible Plans for All. The VRSP has been created to deal with two challenges: the insufficient retirement savings of workers and the financial pressure on pension plans because of an aging population, fewer new contributors and low interest rates, said the paper.
“Implementation of VRSPs goes hand-in-hand with the ongoing review of Quebec’s retirement income system that must result in solutions that protect our pension plans and, thus, produce stable and predictable income for all workers.”
The plan’s legislation will be tabled this spring and companies that are obliged to offer VRSPs will have until January 2015 to comply.
While it’s good the government excluded small employers with fewer than five employees, the Canadian Federation of Independent Business (CFIB) would have preferred it wasn’t mandatory for businesses to offer the VRSP because it will mean coping with red tape, said Martine Hébert, Montreal-based vice-president of CFIB’s Quebec branch.
“We are a little bit worried because we still don’t know what kind of additional paper burden there is going to be for small employers.”
With the new plan, employees are going to ask questions around how their money is guaranteed, how to get out of the plan or how much they will make when they retire, she said.
“Small employers, they don’t have the expertise to answer all these questions, so we’re a little bit worried about that.”
However, employers will not be required to contribute to VRSPs and, since the plans will be administered by third parties, the administrative burden will be substantially limited, said the government.
While employers might see the plan as additional work, it needs to be seen as part of the total compensation for employees, said Laflamme.
“Of course, the employer will have to determine their carrier and will have to do the enrolment but, past that, it’s not going to be any different than doing a remittance that they already do in different types of remittance on a paycheque.”
And with the shortage of resources coming up as baby boomers retire, it could help attract the best workers, she said.
“Although there might be some additional administration work required from the employer, the advantage that they provide to their employees is much greater.”
While the employee retention aspect is diminished if every employer has to provide a VRSP, there could be an incentive for employers to provide contributions, said Ezzeddin.
“Providing a plan at all is difficult for them if they are a smaller employer,” she said. “(The VRSP) makes that whole process easier.”
Overall, the VRSP could have some attractive features, said Hébert.
“If it’s a flexible and low-cost tool, it might be interesting for small business,” she said. “Maybe some of them will decide to contribute because it’s another vehicle (and) it’s easier and cheaper to contribute than to have a group RSP.”
Employer contributions will be locked in but participants may withdraw their own contributions at any time, subject to provincial and federal tax. It’s not clear, however, what happens if someone is terminated from a position as to whether he would have access to the employer contributions. The legislation should clear that up, said Allard.
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Pension plans comparable with VRSPs elsewhere in the world
There are pension plans comparable with VRSPs elsewhere in the world, in particular in New Zealand, the United States and, soon, the United Kingdom.
New Zealand: New Zealand’s KiwiSaver plan is available to all and must be offered by the employer. Unless the employee elects to opt out, he is automatically enrolled in the plan. Early withdrawal of amounts accumulated is generally not allowed, other than in the specific cases stipulated by the legislation. Like the VRSPs, the plan offers a degree of flexibility. Savers can opt for a contribution holiday lasting five years at most.
United States: In the United States, the 401(k) plan is optional for employers. Those that decide to offer it can opt for automatic enrolment. While there is no rule concerning the default option, the “life cycle” approach is used in more than 60 per cent of plans. Early withdrawal of amounts is not allowed, other than for exceptional cases such as grave illness.
United Kingdom: Beginning in October 2012, all eligible employees will have to be automatically enrolled in one of the authorized plans, including the new National Employment Saving Trust (NEST). The default employee contribution rate will ultimately be eight per cent. The new plan administered by the NEST will incorporate the main characteristics of VRSPs.
Source: Quebecers and Their Retirement: Accessible Plans for All, Quebec government
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