Major issue on pensions – The foundations of the QPP are solid

Large pension file - The foundations of the QPP are solid

BETTING À DAY

It's no doubt through discussions with financial planners and actuaries, the fact remains that I have never hidden here my favorable opinion of the Quebec Pension Plan (QPP).  

On the contrary, so much so that I have already been called “naïve”. Just recently, a reader described the plan as a real  scam . 

Why? 

Because in view of the contributions, the pensions did not seem to him not high enough.

Another related complaint: the returns do not measure up to those of the markets. I am often served the comparison between the RRQ and the S&P 500. However, it's like comparing a foolproof bus with a capricious sports car with which we risk finding ourselves in the background at any time.

The idea here is not to learn how to drive the tank, but to understand the mechanics of the bus.

Incomparable

First, let's clear up a misunderstanding right away: our contributions do not go to the Caisse de dépôt et placement du Québec (CDPQ) to be invested. The QPP is a “partially funded” plan. Most of our contributions are used to pay the beneficiaries' benefits.

Yes, it's a social security scheme, not a poolinvestment where everyone recovers their marbles and their added value at the end. Only a small part of the contributions goes to a reserve managed by the CDPQ. And it's over. 

In 2019, contributions for all workers reached $15.7 billion and benefits for beneficiaries reached $15.2 billion, the difference having been paid into the cushion.

Last year, things changed: the benefits paid out by the scheme exceeded the contributions of workers. In 2022, the difference will be around $1 billion, which will be made up by the income generated in the reserve, which currently stands at around $90 billion. Until then, returns from the pool were fully reinvested. From now on, part of it will be used to pay pensions.  

“We can say that the plan then contributes $1 billion to Quebec's GDP,” says the QPP's chief actuary, Jean-François Therrien. And this amount will increase, without curbing the growth of the reserve, which is now growing without the contribution of contributors. 

According to the actuary, over a 50-year horizon, the situation of the basic plan does not cause any concern. With the current contribution rate of 10.8% of salary (separated between employee and employer) maintained, the fund is able to fulfill its promise. What promise? Pay an annuity, fully indexed to inflation, equivalent to 25% of career earnings.

Contributions and benefits are capped at what is known as the “Maximum Allowable Earnings”, or “MPE”. ($64 900 in 2022, indexed to salaries).

More than honest returns

How do you compare that to the stock market or an RRSP? Even the parallel with an employer defined benefit plan seems lame. The participants pay the pension of their predecessors, and for a time, they stuck to it more to build up a kitty which today produces dividends, without which it will be necessary to increase the contributions or reduce the pensions. 

It's a stable and 100% guaranteed source of income until death (indexed, let's insist) that has nothing to do with a stock market asset. Still, the returns offered by the scheme are more than fair.

Take me, for example. If I asked for my “RRQ” at age 65 and received the benefit over a period equivalent to my life expectancy (then 22 years), my real return (after inflation) will be 2%. As I intend to live a long time, it will be better. If I die before?

Bah, I'll be dead!  

AN IMPROVED, CHEAPER DIET

It Five years ago, the QPP announced a new component, the supplementary plan, gradually implemented from 2019 to 2025. By “implementation”, I mean “pay more”. The full effect will be felt when people born in 2000 retire.

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