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Normandin Beaudry

Report by the Committee of Experts on the Future of the Quebec Retirement System

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There, in black and white

NB Bulletin Vol. 16 N. 2, April 2013

Yesterday, the committee of experts on the future of the Quebec retirement system, chaired by Alban D’Amours, released its report. In the coming weeks, a series of four communiqués will present the key recommendations in greater detail.

In the interim, this is an overview of the key aspects of this report.

Mandate

At inception, the committee of experts was charged with studying the complementary retirement plans under the supervision of the Régie des rentes du Québec, i.e., mainly defined benefit plans. At the request of the Government of Quebec and the stakeholders consulted, the mandate took on a more comprehensive scope: the financial security provided by the Quebec retirement system as a whole.

Objectives, Values and Principles

The committee of experts determined the basic premises of this exercise by returning to the very foundations of a retirement system.

The social partners were of like mind on two objectives:

  • To enhance financial security at retirement, i.e., obtain assurance of sufficient and realistic retirement income
  • To promote the permanence of the retirement system, i.e., design a sustainable retirement system. Sustainability cannot be dissociated from the financial security that the system must provide to Quebecers

The committee retained three values:

  • Intergenerational equity: the retirement system must benefit all generations; deficits must not be systematically transferred to subsequent generations
  • Transparency: plan administrators, employers, unions, participants and beneficiaries must be informed of the scope of the risks that can affect their benefits and financing
  • Accountability: retirement is a responsibility shared between the State, employers and individuals

Four principles guided the recommendations:

  • Respect of the actual costs: financial security at retirement rests largely on financing the actual costs of pension commitments
  • Flexible legislative framework: pension plans must have a more flexible legal framework to stabilize financing and meet the needs of the various stakeholders
  • Pooling: the retirement system should derive greater profit from the benefits resulting from the management of group savings and longevity risk
  • Diversified income sources: the variety of income sources contributes to better risk sharing and to a less vulnerable retirement system

Recommendations

Based on these fundamentals, the committee of experts issued 21 recommendations that it divided into five categories, three of which concern defined benefit pension plans.


1) Return to Financial Reality

For a few years now, falling interest rates, pension fund returns and increased life expectancy have led to a significant deterioration in the financial situation of defined benefit pension plans in Quebec, like elsewhere.

The committee of experts believes the current pension plan situation is no reason to give up. It is important to favour the maintenance of defined benefit pension plans, which provide a greater guarantee of financial security at retirement.

To do so, the committee issued recommendations aimed at simplifying the existing financing rules, protecting basic plan commitments and ensuring these plans are viable for future generations:

  • Use a single financing base for all defined benefit pension plans in all sectors:
    • This base will be the “enhanced funding” that will use realistic hypothesis that more closely reflect the actual costs.
  • Abandon the solvency method for financing pension plans:
    • This method will nonetheless be retained to govern the management of surplus assets, combined with a provision for adverse deviations increased to 15%. It will also serve to establish the debt of the employer in the event the pension plan is terminated.
  • Amortize deficits over a period of 15 years that will gradually be reduced to 10 years
  • Review the calculation method for transfer values based on corporate bonds rather than federal bonds
  • Institute measures for increasing risk management, including the obligation to develop a funding policy

In general, the new “enhanced funding method” will mean that benefits for future services will cost more, and that deficit amortization costs will more closely reflect the actual costs:

  • For retirement plans that are currently subject to the solvency method (mainly private companies), the cost of benefits for future services should increase on average 15%. Conversely, the new method will relax the deficit amortization costs (lower amortization payments).
  • For retirement plans that are currently exempt from the solvency method (mainly municipalities and universities), the costs of benefits for future services should increase on average approximately 20%. The new method will also be stricter with regard to deficit amortization (higher amortization payments).


2) Improve Governance and Flexibility

The committee of experts proposes a set of measures for better governing and managing retirement plans, including:

  • Promoting true cost sharing between employers and employees. For public sector retirement plans, the committee recommends making it mandatory to share equally the current service costs
  • Offering employers the option of withdrawing a portion of surplus assets from the plan while the plan is in effect, subject to certain conditions
  • Allowing retirement committees to purchase life annuities from insurance companies and thereby release themselves from liability to affected retirees. In return, these retirees will no longer be vulnerable to the effects of a possible bankruptcy of their former employers
  • Allowing retirement funds to manage their assets in separate accounts for retirees and other participants


3) Restructure Defined Benefit Retirement Plans

The committee of experts proposes that the parties agree on how to restructure retirement plans to make sure they endure. Therefore, in the five years after the new funding rules come into effect, employers and pension plan participants (employees, retirees and participants entitled to a deferred annuity) can agree to review or suspend certain vested rights, including:

  • Pension indexation, before and after retirement
  • Early retirement subsidy
  • Pension subsidy for surviving spouse
  • Transformation of so-called “final earnings” pensions to “career earnings” pensions
    It is important to note that the basic pension cannot be reduced, nor can the pensions of retirees. For them, only the indexation can be changed.

The agreement between the parties must be negotiated with participants or they must be consulted. In the fourth and fifth years, if the parties do not reach an agreement, employers may suspend or revise the pension indexation by making a payment to the plan that would reduce the deficit in proportion to the impact of any indexation changes.


4) Institute a Longevity Pension

To reduce the risk of Quebec workers outliving their retirement savings, the committee of experts recommends implementing a longevity pension, a new plan exclusively for workers, managed by the Régie des rentes du Québec.

The longevity pension will be a lifetime pension payable as of age 75, but no earlier. It will provide for the annual accumulation of an annuity of 0.5% of earnings (up to the maximum pensionable earnings, i.e., $51,100 in 2013). This longevity pension will most benefit those who contribute to it for the longest, i.e., young workers.

To ensure intergenerational equity, the longevity pension will be entirely financed in advance according to realistic assumptions that more closely reflect actual costs. The total cost, estimated at 3.3% of earnings, will be shared equally between workers (1.65%) and employers (1.65%). This cost could be reduced or cancelled by reallocating current savings.


5) Reinvent the Place of Personal Savings

The committee of experts insists on a sound diversification of retirement income sources and recognizes the importance of savings plans and personal savings.

It recommends the swift implementation of voluntary retirement savings plans (VRSP), with some changes to make them more effective. To better meet the needs of savers, the committee also proposes measures to optimize the disbursement of amounts in the savings plans.

Normandin Beaudry consultants will continue to analyze the implications of these recommendations for the retirement system and for Quebec workers. This analysis will be the subject of a series of four bulletins in the coming weeks.

 

 

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