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Normandin Beaudry

The Longevity Pension from Every Angle

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There, in black and white

NB Bulletin Vol. 16 N. 4, may 2013

The Expert Committee on the Future of the Quebec Retirement System, chaired by Alban D’Amours, released its report on April 17, 2013. Among the Committee’s 21 recommendations is an innovative measure that has created quite a buzz, the longevity pension. This bulletin explains this new pension.

Main features

The longevity pension is a new fully funded defined benefit pension plan that would be offered to all Quebec workers to reduce the risk of outliving retirement savings. The longevity pension would not be a new provision of the Quebec Pension Plan (QPP) but rather an additional pension plan funded by all Quebec workers between age 18 and 74.

This new component of the Quebec retirement system would provide a life annuity payable as of age 75, without any early or deferred payment options. The longevity pension would thus increase the retirement income of Quebec workers as of the first month following their 75th birthday.

The longevity pension would accumulate through annual pension credits equivalent to 0.5% of a worker’s earnings, up to the maximum pensionable earnings (YMPE) of the contribution year ($51,100 in 2013). No pension would accrue during periods of inactivity. Earnings considered in the pension formula would be indexed before retirement to age 75 based on average YMPE of the last five years at that age.

There would be no maximum number of years of pensionable service. A worker could accumulate an annual pension credit of 0.5% throughout his or her entire career, from age 18 through 74. As there would be no retroactive recognition of years of service when the plan is introduced, the longevity pension would mainly benefit young workers. For example, a worker who is 25 years of age and plans to work to age 70 without any periods of inactivity would accumulate a longevity pension equivalent to 22.5% of his or her indexed earnings (that is, 0.5% multiplied by 45 years of service).

After payment starts, at age 75, the pension would also be indexed annually based on the increase in the consumer price index, subject to conditions related to the financial position of the plan. In addition, the pension would be guaranteed for five years after retirement in the event of the death of the pensioner.

Funding and tax treatment

Unlike existing social programs, the longevity pension would be fully funded based on conservative assumptions to ensure intergenerational equity. The longevity pension would be administered by the Régie des rentes du Québec, with assets managed by the Caisse de dépôt et placement du Québec.

All Quebec workers between age 18 and 74 and their employers would together contribute 3.3% of earnings up to the YMPE. The cost would be shared equally between workers (1.65%) and employers (1.65%). Self-employed workers would pay both shares.

Costs of the longevity pension were estimated conservatively assuming a 3% expected real rate of return. In estimating the costs of a plan funded like the longevity pension, this assumption is highly important, much more so than in the case of a plan like the QPP which is entirely funded on a pay-as-you-go basis.

Quebec workers would be entitled to a tax credit for contributions made to fund the longevity pension, and there would be no pension adjustments based on plan contributions. As for employers, they would be able to deduct contributions made to fund the longevity pension.

Integration with the existing system

The cost of the longevity pension could be reduced or even entirely eliminated in some cases through reallocation of existing savings. If the longevity pension is introduced, contributions currently made to supplemental pension plans or personal savings could be reduced in favour of the new pension plan:

  • Personal savings: workers who currently make significant contributions to an RRSP and/or a TFSA could reduce their contributions to these vehicles in favour of the new longevity pension, which would be payable as of age 75.
  • Defined contribution plans: required employer and employee contributions to defined contribution plans could be adjusted in consideration of the required contribution to the new longevity pension.
  • Defined benefit plans: defined benefit plans could be integrated with the longevity pension, so that plan benefits would diminish starting at age 75 by an amount equivalent to the longevity pension. Not only would this reduce the plan’s longevity risk, but it would also reduce plan costs—which would mean employer and employee contributions could be reduced accordingly. The Expert Committee even recommends that integration be mandatory for public sector plans.

Quebec workers currently saving little or not at all for retirement would not benefit from a reallocation of savings. For these workers, the longevity pension would be new retirement savings.

Objectives and considerations

The longevity pension is designed to meet a number of concrete objectives identified by the Expert Committee:

  • Pool longevity risk by sharing it among all Quebec workers.
  • Narrow the gap between retirement incomes of workers participating in private pension plans and those who do not benefit from such plans.
  • Reduce pressure on defined benefit plans by diminishing exposure to longevity risk, a risk these plans currently cover.
  • Facilitate retirement planning by reducing the retirement period for which Quebec workers would have to save; for many workers, the longevity pension combined with the pensions of other public plans would be enough to meet their income needs after age 75.
  • Ensure intergenerational equity with a longevity pension that would be fully funded up front based on realistic assumptions.

Some considerations:

  • The longevity pension would solve a number of issues for workers earning less than the YMPE, but will only partially solve those faced by workers with earnings superior to the YMPE.
  • Workers with low incomes who are eligible for the federal government’s guaranteed income supplement might find their benefit reduced or even eliminated after age 75, when they start receiving the longevity pension.
  • Companies established in Quebec would have to consider this new payroll cost, which could have an impact on the competitiveness of Quebec employers.

Why the longevity pension instead of
enhancing the Quebec Pension Plan (QPP)?
  • Introduced 50 years ago, the QPP was designed for other times. Today’s demographics (life expectancy, births per couple) are very different. The longevity pension is based on the reality of 2013.
  • Enhancing the QPP would require bigger contributions than the longevity pension.
  • A new QPP contribution could eventually be used in part to compensate for the underfunding of the existing plan component, as it is only partially funded.
  • Nearly two-thirds of Quebecers request their pension at age 62 or earlier. Enhancing the QPP would only exacerbate this. The longevity pension provides no incentive to retire early.
  • Since their creation, the Canada Pension Plan (equivalent to the QPP elsewhere in Canada) and the QPP have always offered similar coverage and benefits. A federal-provincial discussion would thus be required before enhancing the QPP. However, as there is no equivalent to the longevity pension, Quebec can act on its own in this and could even inspire the federal government and other provinces to introduce similar measures.

 

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