On March 17, Québec tabled its 2011-12 Budget . The Budget and its accompanying paper, "A Stronger Retirement Income System," contained two significant announcements regarding pension coverage. First, the Budget announced a proposed new retirement savings vehicle called a "voluntary retirement savings plan" (VRSP) to give effect to the federal and provincial governments’ proposed "pooled registered pension plan" (PRPP) framework in Québec. McCarthy Tétrault has previously summarized the federal-provincial PRPP framework here.
Second, the Budget announced changes to employer and employee contribution rates and benefit levels under the Québec Pension Plan (QPP) to respond to increased funding pressures that are accompanying the accelerated aging of the population and its increased longevity (a trend common across Canada). The government has indicated that the changes to the QPP would be implemented gradually to minimize their impact on businesses and employees. This alert aims to provide an overview of each change and how it may affect your business.
1. Proposed VRSP
The Budget indicates that the Québec government will enact legislation to allow for the creation of VRSPs on a province-wide basis. In line with the federal-provincial PRPP framework, Québec’s VRSPs would be large, pooled, defined contribution plans administered by third parties, currently proposed to include certain financial institutions. Third-party administration would relieve employers from many of the administrative duties that arise with single-employer pension plans. Additionally, VRSPs would cover employment with a number of employers, making them potentially better suited to the many employees who change employers throughout their careers.
Participation in a VRSP would be available to all:
- self-employed individuals; and
- other "savers."
In the case of employees, employers who do not already offer a pension plan would have to choose a VRSP product to which their employees could contribute. Employers would not have to contribute to the VRSP, but they could choose to do so. As well, employers would be required to automatically enroll their employees in the VRSP, and employees who do not wish to participate would have to take proactive steps to opt out. Like the federal-provincial framework, the Budget identifies automatic enrollment as the preferred means for maximizing coverage under these new arrangements.
On the other hand, the Budget provides very little information regarding how the self-employed may choose to participate in VRSPs. The Budget is also unclear on what is meant by the term "savers," and how these individuals ̶ who are neither employed nor self-employed ̶ will be able to contribute to VRSPs under existing income tax rules.
The Budget also indicates that Québec will work with other provinces to harmonize the operation of VRSPs with other provincial PRPPs that become available in those jurisdictions. At the same time, the Québec Budget explicitly calls on the federal government to pass specific amendments to remove potential barriers to Québec’s VRSPs as envisioned. The federal government has already announced its general intention to amend the Income Tax Act (Canada) to give effect to the PRPP framework (which changes could appear in this week’s Federal Budget scheduled to be tabled on March 22), although it will remain to be seen whether the federal changes will fully facilitate VRSPs.
Finally, the Budget paves the way for a public consultation process touching on issues such as choice of investments, the fiduciary role of VRSP administrators, default contribution rates and portability. Québec’s consultations would follow the current federal-provincial consultations on PRPPs that began in February and are scheduled to end in April.
2. Changes to the QPP
Separately, the Budget announced the government’s intention to amend the QPP by gradually increasing the contribution rate from 9.9 per cent to 10.8 per cent by 0.15 per cent a year over six years. This is estimated to increase employer and employee contributions by $85 million each in 2012.
To reflect demographic pressures on the QPP, beginning on January 1, 2013, the monthly reduction rate for pensions commenced prior to reaching age 65 would be gradually increased. Beginning on January 1, 2014, QPP benefits would be enhanced for individuals commencing QPP pensions after age 65 and before age 70. The combined effect of these measures is to discourage early retirement and to incentivize postponed retirement, up to a maximum enhancement of 42 per cent (compared to the current 30 per cent) for those retiring at age 70.
Finally, the Budget proposes an automatic QPP contribution rate adjustment mechanism beginning in 2018 if the QPP’s triennial actuarial report discloses that existing contribution rates are insufficient.