Province ready to try experiment in savings
Lower fees than RRSPS a target
“There is worry the VSRP will make money for banks, not consumers.”
Amajor feature of this week’s Quebec budget was the decision to launch a Voluntary Retirement Savings Plan that would be the first of its kind among Canadian provinces.
It amounts to a lab experiment on changing investor behaviour. Can Quebecers be enticed to save more for their retirement by offering them a voluntary savings plan administered by a financial institution?
There’s no shortage of savings and investment vehicles already out there. So the jury is out on whether Quebec’s initiative can make a difference – especially since we don’t know important details like the fees and costs investors would pay.
There’s already a fair bit of cynicism that the VRSP will make money for banks and insurance companies but not necessarily for consumers.
That’s a legitimate concern. Costs have to be low if Quebecers are going to jump on board.
What we do know is that the VRSP comes at a time when the retirement savings system is stressed. Many companies are closing their defined-benefit pension plans to new members and many private pension plans are underwater on their funding obligations, with liabilities that exceed current assets.
Meanwhile, some 2 million Quebecers don’t have access to a company pension plan of any kind.
Survey after survey shows that Quebecers aren’t saving enough for retirement, if you go by the traditional yardstick that they will need to replace 70 per cent of their income to fund a comfortable retirement.
Michel St. Germain, an actuary at Mercer Consulting in Montreal, is restraining his enthusiasm for the VRSP, which would be launched in Quebec by 2015 and would apply to companies with five employees or more, as well as the self-employed.
A contribution rate of four per cent of earned income would eventually apply.
He sees this as just another option in a crowded financial marketplace. “Whether or not, because we are adding another option, people will suddenly change their behaviour remains to be seen.”
One area where he sees potential success is among employees of small businesses who may not be saving enough right now and who might find the new product attractive.
“But in my mind it will have an impact only for those people. I am not expecting a huge difference in the way people save.”
For most low-income employees, contributing up to four per cent a year to such a plan would be too much, he says. Such people are already well taken care of in basic government plans for old age. As he points out, there are lots of Registered Retirement Savings Plans around that are easily accessible, but people aren’t taking advantage of them for a variety of reasons.
They may have a mortgage to pay off and children to raise, or they may simply not have enough money to contribute, and Quebec’s plan won’t change that.
The other question is whether it will be a good deal for savers and investors. “We don’t have the details of the product, we’ll see when financial institutions like insurance companies launch them,” St. Germain said.
The hope is that fees would be lower than existing RRSPS. Some have suggested the goal should be a fee of 0.50 per cent on the assets in the account, “but I’m a bit skeptical they come up with fees as low as this,” he said.
One question is whether the VRSP will be an administrative burden for employers. St. Germain says that for very small companies setting up such a plan could be a headache although larger firms shouldn’t find it a problem.
Another issue is how many investment options will be available. Quebec is talking about a default option that would be based on the age of the participant, where the risk level of the investments would be adjusted as the person ages.
In addition, it proposes to permit five other investment options that could offer varying degrees of risk or safety.
The key is that “you don’t want too many options in that sort of plan, most people are not able to make those kinds of choices,” St. Germain says.