Quebec Moves Forward With PRPPs
With Quebec again introducing legislation to establish a mandatory pooled registered pension plan system, Joe Hornyak, executive editor of Benefits and Pensions Monitor, discussed this latest development with Robert Tellier, regional vice-president at Manulife Financial, its voluntary retirement savings plan spokesperson.
Are you feeling optimistic about pooled registered pension plans (PRPPs) based on what Quebec has done and with Ontario releasing a discussion paper?
I am very optimistic and I am delighted with what Quebec has done. I am hoping that it has a positive influence on other provinces to adopt similar legislation, specifically around mandatory requirements on offering a plan.
How important would you say it is that these be mandatory?
If we back up a little bit, plans have been available and plans have been offered to employers over the years and most have chosen not to go down that path consciously. They were doing it on their own behalf, not thinking about their employees.
This is pushing the envelope quite a bit further and actually helping their employees take better control of their retirement. I believe it is a complete game changer.
How is the Quebec plan, other than the fact that it is mandatory, different from what, for example, the federal government has in place?
Really, the biggest point is the mandatory aspect of Quebec’s voluntary retirement savings plans (VRSPs).
What sort of contributions are we looking at in terms of what employees have to put into, for example, the VRSPs?
The proposed legislation says for the first year it is two per cent and then, it is going to three per cent and then four per cent, stopping at four per cent.
Is that in three consecutive years?
It is. However, if a company waits until the end to put this in place, our understanding is that it would go in at the higher rate.
Whenever the company comes in, that is the rate they are going to come in at?
That is correct, but that is the minimum contribution for the employees is based on an auto-enrollment perspective. The employer is not required to contribute. The employees will automatically be enrolled in the plan and the deductions will start. The onus is on the employee to actually withdraw or opt out from contributing into the plan.
Where we have seen – and this is where we have examples in other parts of the world such as the U.S. with the 401k plan – is with the auto-enrollment feature the take-up rate is much greater than if members were asked to enroll in a plan.
What is the explanation for this?
It is inertia mostly. Employees just will not take the time to enroll in something, in a plan, especially if it is costing them money, albeit, it is money that belongs to them. It is mostly due to inertia and it is the same thing for opting out. So if you have auto-enrollment with inertia in the general population, they will not opt out, they will stay in the plan.
This is also confirmed by the experience with the National Employment Savings Trust (NEST) scheme underway in the UK. They are finding that the employees who are opting out are actually the older employees who, they suspect, have enough money put aside for retirement or feel that there is not enough time to save for retirement anyways so why bother at all.
So does a mandatory PRPP tap into that huge sector of the Canadian workplace where there was no vehicle that is cost effective for retirement savings?
There are vehicles, but there has been a lack of interest from employees and employers, notwithstanding the vehicle, I do not believe anybody had any sense of urgency that saving for retirement was something that was important. You can go further to financial literacy and so on but, for the most part, Canadians were not preoccupied with retirement saving regardless of whether there was an appropriate or cost-effective vehicle available.
Critics of PRPPs say they are just a Group RRSP. Are there differences?
I believe where you are seeing some difference is that you are, for the most part, talking about a lower cost model and lower cost in every sense of the way. From an absolute return perspective, employees are actually going to benefit from this. The auto-enrollment aspect of it is a big difference because that is something that historically has never been available in an RSP. That is one of the driving features.
To give you a little bit more information on the pricing, according to the legislation in Quebec, VRSPs are to be priced in line with what a 500-member group retirement plan would cost. So for that reason you are going to experience fees that are significantly lower.
Another statistic that I can share with you is 98 per cent of companies in Canada that have 50 employees or less do not have a retirement savings plan.
There is one point that I think is really important as a differentiator between RSPs and Group RSPs and VRSPs. It is around the simplicity of administering the plan, the simplicity of enrolling the members in the plan, and the simplicity of actually implementing a plan. What used to take days is going to take minutes. That is a big fundamental game changer which only requires light involvement from plan sponsors or small companies.
What do Manulife Financial and other institutions that plan to offer them have to do to get up and running in Quebec as of July 1?
First, the final legislation and the rules around the plan are not completed yet. So, we have to patiently wait until we have the final regulation so we can modify and adapt our products to the final touches in the legislation. We do not anticipate there are going to be large changes.
Then, we have to actually apply for a licence to be an administrator of a VRSP.
There is then going to be what I have understood as a type of blackout period to give other financial institutions the opportunity of obtaining this licence in time for a go live date on July 1.
There have been a lot of rumours and a lot of talk and some financial institutions and advisors had their wrists slapped because they have already been trying to market this. There have been different letters sent out to all advisors in the province to not start marketing a product that does not yet exist.
The other side of it is that our organization is prepared to go forward. We were prepared some time ago because we had been working on it before the election call saw the previous legislation die on the order paper. The new government put it back on to the table and so we are going to follow what we are allowed to do.
Is it the financial institutions that are supposed to take the lead in bringing possible new members up to speed on these or is it the employer’s obligation?
It is multi-part. What we have to bear in mind is that the employer has to sign an agreement or a contract to offer the plan. That is where the initial contact is made and that is where we receive the information on the numbers. It all funnels through the employer. We do not need to, technically, speak to the employees at this point.
Would there be a point in time where you do have to speak to the employees?
Well, we would like the opportunity to give them the information they need to actually make informed decisions around the investment choices that they have and also help them understand the contributions. One of the fallacies we have in this country is that just because you are a member of a retirement plan, you are set for retirement. We know that that is not entirely accurate.
In terms of marketing these to the employers, is this going to be driven through financial advisors?
We favour using the relationships we have with our advisors to distribute this product and I can tell you that that is not the same position as everybody. There are some financial institutions that plan on marketing this directly to the businesses.
Any final thoughts?
The big thing is I applaud the government for is actually making this bold move, in creating the framework to make a mandatory type of retirement system in the Quebec. This is a step in the right direction.
However, what we have to bear in mind that there are also a lot of lower income earners who will not necessarily contribute to CPP. They may never get the advantage of CPP. We are also not looking at, or recognizing, the number of people that are new to this country that also will not be eligible for CPP. So I find that really, this is a step in the best direction to reflect the changing demographic of this country.