Key Elements of the Quebec Pension Plan Enhancement: For a Better Understanding and Appreciation

With the tabling of Bill 149 on November 2, Minister of Finance Carlos Leitão announced the enhancement of the Quebec Pension Plan (QPP). This announcement is positive for all workers, particularly the younger generation, as the maximum retirement pension benefit will increase from $13,400 under the current QPP to more than $20,000.

Outlined below are the key changes that were announced, which we examined in detail during a breakfast seminar and a webinar held on this topic last week.

The current Quebec Pension Plan, known as the “base plan”, will be gradually enhanced through the introduction of a second plan—the “additional plan”, which is divided into two components: the first component begins in 2019, while the second kicks in in 2024. Let’s look at how the contributions and benefits will change.

The base plan already provides retirement benefits of 25% of pre-retirement earnings, up to the maximum pensionable earnings (MPE, which is $55,300 in 2017).

With the gradual phasing-in of the additional plan, benefits will be added to those of the base plan. First, from 2019 to 2023, benefits subject to the MPE will increase gradually from 25% to 33.33% of pre-retirement earnings, under the first component of the additional plan. Thereafter, under the second component, the MPE will rise to reach 114% of the current MPE starting in 2025.

The graphic below shows the benefits under the base plan and those of the two components under the additional plan.

Additional contributions will also be gradually phased in from 2019 to 2025. They will be shared equally by employers and employees and will be placed in a fund separate from that of the base plan. Unlike the base plan, the additional plan is designed to be fully funded by the contributions to be paid into it. The graphic below shows the contributions in percentage of pensionable earnings for each component:

While the additional contributions are equal to 2% in the first component of the additional plan and to 8% in the second component (shared equally between the employer and the employee), ultimately, these will only represent approximately 0.8% to 1.3% of a worker’s earnings. The table below shows the contributions, in percentage of earnings, taking into account the basic exemption of $3,500.

The maximum annual benefits under the current base plan amount to approximately $13,400 for a retirement at age 65. Retirement benefits will increase to more than $20,000 with the additional plan, in today’s dollars. This represents an increase of approximately 50% of the current plan’s maximum retirement benefits!

The graphic below shows the current benefits of the base plan as well as the eventual benefits under both plans for various levels of average earnings (5 years).

The additional plan’s assets are projected to exceed those of the base plan in 2041, meaning it will take approximately 20 years for the additional plan to build up the same assets as the base plan did after 75 years! By 2065, assets of the additional plan are expected to reach $800 billion.

The additional plan should therefore be in a position to support future benefits thanks to cash inflows provided by approximately 70% of investment income. As for the base plan, it is essentially supported by employer and employee contributions, representing approximately 75% of annual cash inflows.

The graphic below presents the evolution of assets under management for each plan, according to the actuarial valuation as at December 31, 2015.

The introduction of new provisions to the Quebec Pension Plan, very similar to those of the Canada Pension Plan introduced over a year ago, is likely to please all Quebec workers, especially the younger generation. The additional plan will significantly improve retirement benefits at a reasonable cost, thereby improving the security at retirement for all workers.

The enhancement is also an excellent opportunity to review retirement planning concepts. In order to better manage longevity risks, workers may consider postponing their retirement benefits from public pension plans at a later age in order to receive higher benefits. The retirement pension under the Quebec Pension Plan is 42% higher while the one from the Old Age Security is 36% higher when a worker elects to start receiving payments at age 70 instead of 65. Retired workers’ needs between their actual retirement date and age 70, could be compensated by initiatives resulting from their personal savings.

Allowing the start of retirement benefits from public pension plans at age 75 and authorizing faster decumulation of locked-in amounts—two measures that would require minor adjustments to existing legislation—would also provide retirees with greater financial flexibility.

In light of this enhancement, plan sponsors may also want to reconsider the structure of their pension plans.

Normandin Beaudry consultants welcome the provincial government’s decision to rally to the rest of the country, a decision that will ensure Canada’s pension system remains one of the best in the world.

Please feel free to contact us for additional information.