October 1, 2015 – The experience of the Quebec Pension Plan (QPP) offers serious lessons for new public pension plan options, in particular the pending Ontario Retirement Pension Plan (ORPP) and Canada Pension Plan (CPP) enhancements, according to a new C.D. Howe Institute report. In “The Benefits of Hindsight: Lessons from the QPP for Other Pension Plans,” authors Luc Godbout, Yves Trudel and Suzie St-Cerny show how these proposals and other public pension plans can avoid underfunding and intergenerational inequity, where one generation of participants receives more benefits than they contributed to the plan.
“From its inception, the QPP’s contribution rate was set too low, which resulted in the plan’s underfunding in the early years,” commented Yves Trudel. “Had policymakers listened to actuaries at the time by setting the contribution rate high enough, QPP assets would be worth almost 80 percent more today.”
Based on this experience, the authors draw lessons for other pension plans.
- First, evaluate the relevancy of creating or enhancing a public pension plan. Specific needs might not be addressed efficiently by imposing compulsory contributions on all workers. Improving financial literacy among workers might provide better results at a lower cost.
- Second, introduce full capitalization and gradually increase benefits. Benefits should be fully effective only once the plan has reached full maturity. Plans need to be fully funded in order to be equitable among cohorts.
- Third, implement automatic adjustment mechanisms. Adjustments should be triggered once certain levels of funding ratios are attained. Certain parameters of the proposed Ontario Retirement Pension Plan, such as retirement benefits, earlier or later commencement of retirement benefits and indexation, should be flexible and prone to automatic mechanisms if underfunding or returns discrepancies are expected. Additionally, parameters of the mechanism should be set by experts independent of political influence.
- Fourth, assess the performance of the plan. A performance evaluation of any public pension plan should be mandatory. Surprisingly, however, public plans do not seem to be subject to any such evaluation. A critical aspect of public pension plans is not measured – namely, the ability of the fund to deliver homogeneous real expected returns to various cohorts of retirees, and thus to provide equitable net asset values to all its members.
Yves Trudel concludes: “These measures would allow a public pension plan to be a true insurance system in which capitalized contributions equate to actuarial benefits. The QPP, in contrast, has come to be both a pension plan and an implicit wealth-transfer system among cohorts of retirees.”
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. It is Canada’s trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review. It is considered by many to be Canada’s most influential think tank.
For more information contact: Luc Godbout, Professor, Faculty of Business Administration and Senior Fellow in Public Finance at the Research Chair in Taxation and Public Finance, Yves Trudel, Professor, Faculty of Business Administration and Member of the Research Group in Applied Finance, and Suzie St-Cerny researcher at the Research Chair in Taxation and Public Finance, Université de Sherbrooke: 416-865-1904 or email: email@example.com.