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July 10, 2013
Expert Committee proposes third pension for Quebec

Quebec should introduce a new public pension plan to ensure that the  province’s workers will have improved income security after age 75, according to the province’s Expert Committee on the Future of the Quebec Retirement System.

In its review of the province’s retirement system, the Committee found that while today’s two-tiered public pension system comprising the Old Age Security (OAS) program and Quebec Pension Plan (QPP) provided a good level of income replacement for lower income workers, it does a poor job of replacing incomes at or above average earnings levels.  (The average earnings level in Quebec is $39,000 per year.)  

For example, it says, at the $20,000 per year income level, the combined OAS and QPP replaces almost 90 per cent of pre-retirement earnings.  At the $40,000 salary level, the two public pension plans struggle to replace 51 per cent of income.  At the $60,000 per year level, the replacement income rate slips to just above 30 per cent.

However, the Committee projects that with the cost of living indexation formula used by the federal OAS plan, the income replacement rate of the dual pension plans will fall over the next 40 years from 51 per cent to 38 per cent for those at the average salary level.  Unless they have a supplementary retirement income source, most Quebec workers will not have enough to live on at retirement, the committee warns.

“For workers whose incomes are average or above average, the protection provided by the public plans must be supplemented by supplemental pension plans or personal savings – or both – for them to reach the desired objectives with respect to financial security.  In that regard, all workers are not adequately protected,” according to the Committee’s report entitled Innovating for a Sustainable Retirement System.

Approximately 1.9 million Quebec workers, or 47 per cent of the Quebec workforce, do not participate in any type of group pension or registered retirement savings plan.  In other words, almost half of Quebec’s workforce will be totally dependent on the OAS and QPP for their retirement income in the coming years.

Compounding the problem:  more people are retiring earlier and living longer, adding more strain to the already stretched OAS and QPP plans.  

To address this problem, the Committee recommends the introduction of a third public pension system for the province.  Under the third system, from age 18 to 74, employees would contribute 1.65 per cent of their earnings until they reach the year’s maximum pensionable earnings (YMPE).  Employee contributions would also be matched by employers, generating a combined total contribution of 3.30 per cent of the YMPE.  Benefits would accrue at a rate of 0.5 per cent per year of service for a maximum total potential benefit of 28.5 per cent of credited earnings.  

Retirement income benefits would not be available until age 75.

For an individual earning the same amount as the YMPE (currently $51,100), the new pension’s contributions would amount to $843 per year.  His/her employer would also contribute that amount to the plan.  At age 75, he/she would earn a retirement income of $14,564 per year in addition to the OAS and QPP.  Payments would be indexed and guaranteed for life, with a minimum payment guarantee of at least five years.  

“The proposal means that the Quebec retirement system would have a new component, situated  on the second storey of the system’s structure, next to the Quebec Pension Plan.  As of age 75, all workers would have the benefits of a defined benefit pension.  It would allow all to better manage the longevity risk by concentrating the need to use personal savings in a period from retirement to
age 75,”
the report notes.

While the new regime would provide more realistic retirement income replacement levels than the current two-tiered arrangement, the openness of employers and employees to a new and significant payroll tax could be questionable.  Quebec is already the most heavily taxed jurisdiction in North America.

If adopted, the new pension plan would be administered by the Régie des rentes du Québec, similar to the Quebec Pension Plan.  Its assets would be managed by the Caisse de dépôt et placement du Québec.

The Expert Committee was established in 2011 and is chaired by Desjardins Group President Alban D’Amours.  Its mandate is to study and recommend supplementary defined benefit pension plans for the province.  

The Expert Committee’s report can be found at www.rrq.gouv.qc.ca

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