The Benefits of Hindsight: Lessons from the QPP for Other Pension Plans

The Quebec Pension Plan was born of a compromise. The contribution rate set at inception was too low, which resulted in the plan’s being undercapitalized in the early years. The demographic outlook came as no surprise: it was long known that there would be weak growth in the number of contributors and a sharp increase in beneficiaries in the years ahead, and these factors are particularly acute in Quebec. Adjustments to the contribution rate were too late in coming, and the plan was therefore insufficiently capitalized. Our retrospective analysis shows the gains that would have been realized by listening to actuaries and other experts sooner. The plan’s assets react strongly to a change in the contribution rate. Had the initial rate been 4 percent (as an interministerial committee proposed) instead of 3.6 percent from 1966 to 1987, the plan’s assets at the end of 2011 would have been almost 80 percent higher. The paper underscores basic policy questions for public pension schemes, such as whether these plans are needed, how to avoid inter-generational subsidies and how to minimize political risk. Based on the QPP 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. 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.