Efforts to spur Canadians to save for retirement may also deliver a new pool of capital for real estate investment. Recently proposed schemes to capture workers not formally enrolled in company pension or group retirement savings plans would presumably also generate more opportunity for various asset classes.
Notably, the government of Quebec’s prescription for voluntary retirement savings plans (VRSPs) comes with mandatory requirements for employers. As of early May, affected parties are waiting for draft legislation to flesh out statements in this spring’s provincial budget, which targeted Jan. 1, 2013, for the roll-out of the program.
As proposed, employers will have until Jan. 1, 2015, to offer VRSPs in designated workplaces – for example, those with at least five employees who have one year of uninterrupted service and where no pension/group retirement savings plan currently exists.
Employer contributions to VRSPs will not be compulsory but they will have to choose a fund administrator, implement the process for enrolling their workers, calculate and withhold salary-based contributions for all who opt to participate and remit that money to the VRSP administrator.
“The result is a pool of money,” explains Daniel Hayhurst, a partner who heads up the pension department at Gowling Lafleur Henderson LLP. “It’s not going to be a single employer’s plan. There will be a large number of employers enrolling many people into larger plans.”
The discussion paper released on March 20, in conjunction with the Quebec budget, envisions potential participation of nearly two million workers, or approximately 50 per cent of the provincial labour force, who are not currently part of a company-sponsored plan. This includes about 950,000 prospective enrollees from the designated business sector, whose contributions will be deducted from their pay by default unless they officially withdraw from the VRSP program. Up to one million other self-employed workers or personnel in companies with fewer than five employees would also be eligible to opt in.
Meanwhile, the Canadian government is attempting to encourage a similar retirement savings instrument, known as pooled registered pension plans (PRPPs). Bill C-25, the pooled registered pension plans act, introduced in November 2011, would apply only in federally regulated workplaces but also provides a framework that other provincial governments could adopt.
Automatic enrollment and scoped options
“In concept, it’s the same product but, assuming it becomes law as proposed, we will see a different outcome in Quebec than we may see in other jurisdictions because it will be mandatory for employers to offer it,” says Hayhurst.
All eligible workers will be automatically enrolled in a VRSP by their employers and will then have 60 days to formally withdraw. After that period, they would be deemed automatic contributors at an established rate, which the discussion paper pegs at four per cent in January 2017, after yearly phased increases from the two per cent launch rate in 2015.
Employers will also have the option of contributing to their employees’ VRSPs, and will receive applicable federal and provincial tax deductions for doing so.
As with any other registered retirement savings plan, contributors will be able to withdraw funds at any time but will be subject to provincial and federal tax on the amount withdrawn. They’ll also have some flexibility to revise their contribution rate, temporarily halt contributions or choose from a small range of alternatives to the default VRSP.
Only entities licensed by Quebec’s Autorité des marchés financiers will be able to administer VRSPs, which are essentially the same financial institutions and investment fund managers already overseeing other existing retirement savings plans. The discussion paper indicates they will be expected to keep management fees in line with those charged for institutional pension plans of comparable size.
The funds, themselves, are to be life cycle or target-date funds, which reduce exposure to risk as the contributor ages. This would be the default option or the fund to which contributions would be automatically remitted unless the participant instructs otherwise. However, the discussion paper proposes that VRSP administrators should offer up to five other investment options from which contributors may choose.
“In terms of the financial institutions that will be offering these products, they are struggling with it because they don’t have the draft legislation yet to give them direction, and Jan. 1 of next year is really soon,” says Hayhurst.
Risk-reducing trajectory
Many Quebec-based corporate owners and managers of real estate will not be affected by the pending legislation since they typically already provide pension or group retirement savings plans for their employees; however, many contractors who provide services to the real estate industry will likely be required to establish VRSPs. Cleaning and security personnel, for example, rarely have such work-related benefits.
“With the mandated aspect of it, it will increase retirement savings overall in the province,” predicts Hayhurst. “There would be a lot of money going into a particular plan over a course a time.”
Barbara Carss is editor-in-chief of Canadian Property Management magazine.
