Retirement Plans

Quebec slow to move on provincial fund enhancement

Expected to mirror CPP change, demographics and politics are working against it

A year after most of Canada gave the go-ahead for enhancement of the nation's retirement system, no decision has been made on any changes to Quebec's version of the plan.

The stumbling block, says a new academic paper, is added cost. A retirement-age population in Quebec that's growing faster than in the rest of the country will mean any enhancement of the C$62.2 billion ($49.4 billion) Quebec Pension Plan, Quebec City, to match the benefits offered by the C$316.7 billion Canada Pension Plan will cost Quebec residents more.

"For sure, (the overall contribution in Quebec) will be higher than the rest of Canada," said Daniel Beland, Canada research chair in public policy at the Johnson-Shoyama Graduate School of Public Policy, University of Saskatchewan, Saskatoon. Mr. Beland co-authored the paper, "Federalism, Policy Feedback, and the Politics of the Canada and Quebec Pension Plans," with R. Kent Weaver, professor of public policy and government at the McCourt School of Public Policy of Georgetown University, Washington. The paper has not yet been released.

The QPP was created in 1966, after the province opted out of the Canada Pension Plan to run an independent retirement plan generally with the same benefits as the CPP. Experts originally expected the QPP to take on the same enhancements as the Canada plan last year.

So far, the Quebec government has not decided whether to apply to the QPP the enhancements approved last year by other provinces to the Canada Pension Plan, Ottawa. The CPP does not cover Quebec residents. Those enhancements will raise benefits to CPP participants to one-third of pensionable earnings from 25% and increase the maximum annual earnings cap to C$82,700 by 2025 from the current C$54,900. To cover the costs, combined employer and employee contributions beginning in 2019 will be increased from the current 9.9% of pay by up to 0.1 percentage point each year to 10.9% by 2025. (Employers and employees split the contribution in both the CPP and QPP.)

But in Quebec, employers and employees have been contributing a combined 10.9% to the QPP since 2011, Mr. Beland said. Then, funding shortfalls forced the Quebec government to increase the contribution rate to maintain the ability to pay out the 25% earnings rate.

Any QPP enhancement now to raise the overall benefit would mean another increase in contributions — possibly matching the 2011 jump, Mr. Beland said. That would put the combined contribution rate in Quebec at about 11.8%. (In a 2016 consultation paper from the Quebec finance ministry, the agency proposed that with changes to retirement ages and other alterations to the QPP, including a temporary 15-year increase in contributions, the overall long-term contribution rate could be held at the current rate.)

Quebec did not immediately adopt the CPP expansion because the demographics in the province were not as favorable as elsewhere in the country, Mr. Beland said.

Data from the academic paper show Quebec's ratio of people ages 20 to 64 to those 65 and older was 3.5-to-1 in 2015 but is expected to decline to 2-to-1 by 2030, compared to 2.6-to-1 in the rest of Canada and 2.7-to-1 in the U.S.

"The debate about CPP was only about expansion," he said. "The debate on the QPP was dual — the adequacy of current benefits and the long-term sustainability of the QPP. It became clear that the contribution increase made by CPP was not enough to allow the QPP to maintain its 25% replacement rate. Should the QPP further increase its contribution rate and expand like the CPP?"

The issue of QPP enhancement is particularly tricky for the government of Quebec Premier Phillippe Couillard, Mr. Beland said. Mr. Couillard's Liberal Party is more center-right-leaning than the left-leaning Liberals elsewhere in Canada, including the ruling party of Canadian Prime Minister Justin Trudeau that backed the CPP expansion. Mr. Couillard originally opposed the expansion of QPP — the province abstained from voting on the CPP enhancements — after small-business owners in the province complained about their cost of expansion. But pressure from Quebec labor unions — as well as a groundswell of support in Ontario and eventually all other provinces in the country for CPP expansion — has led the provincial government to take a more lenient view of expansion, while not yet officially endorsing it.

Quebec Finance Minister Carlos Leitao in December presented three options to the National Assembly for the future of QPP: matching the CPP enhancement; increasing QPP benefits only for middle-income individuals whose employment income exceeds C$27,450; and maintaining the QPP as now established. The ministry held public hearings on the options in January but has not announced a recommendation to bring a proposal before the assembly.

A spokeswoman for Mr. Leitao directed all questions to Frederic Lizotte, spokesman for the Quebec Pension Plan, who said Mr. Leitao would present a bill on the QPP in the fall. No bill will be introduced if the ministry decides to maintain the QPP as is, Mr. Lizotte said.

Julien Ranger, Montreal-based partner, pensions and benefits, at the law firm of Osler, Hoskin & Harcourt LLP, said he believes the Couillard government will ultimately move ahead with enhancement paralleling that of the CPP because "the optics would not be good" if it didn't.

"I think (the Quebec government) had to present options," Mr. Ranger said. "They didn't want to look like they were going to automatically impose higher contributions. … I think overwhelmingly there's support in Quebec for matching benefits" with the CPP. "Some small business groups said they were opposed to it, but it's not like those opponents got together and organized against it."

Mr. Beland said he thinks the Couillard government will wait to decide on QPP until closer to the next provincial election, tentatively scheduled for Oct. 1, 2018. "They want to show they're both fiscally conservative and also care about social issues," Mr. Beland said. "But if they don't expand the plan, it will not be politically popular. The funding problem was already addressed by the (90-basis-point) hike in 2011, but they will need additional contributions if they are to enhance the plan. (Mr.) Leitao was originally opposed to the expansion, but because CPP enhancement was accepted elsewhere in the country, it would not look good for Quebec not to make benefits at 33%, the same as the CPP. It's not overall popular with the Quebec Liberal base, but for the larger electorate, it is."

One Quebec government observer who asked not to be identified said the QPP is now paying for its original desire to stay separate from the Canada Pension Plan, saying it left them unable to pool their risk with the rest of Canada.

"The desire for QPP independence is actually hurting Quebeckers," he said. "If we were part of the CPP, we'd be pooled and other Canadians would be helping us. But now because our demographics are different, our assets and our risk are ours to deal with."

However, he added, "At this point, it would be politically impossible" to combined the Quebec plan with the CPP.