On January 26, 2016, additional design details of the Ontario Retirement Pension Plan (ORPP) were released by the Ontario government. The government reconfirmed its commitment to implement the ORPP beginning January 1, 2017, ensuring that by 2020, every eligible employee in Ontario will be part of the ORPP or a comparable workplace pension plan.
The following is a summary of the additional design details. Stay tuned for further postings which will put the details into context and discuss the implications for employers.
What employers should know:
- Contributions: ORPP contributions will be based on an employee’s pensionable earnings between $3,500 and $90,000, and will include cash and non-cash earnings and amounts beyond base salary such as bonuses and commissions.
- Definition of employment in Ontario: A person will be considered employed in Ontario for ORPP membership purposes if he or she:
- is required to report to work at an establishment of the employer in Ontario, or
- is not required to report to work at an employer’s Ontario establishment but is paid by the employing establishment in Ontario.
- Comparability test: Employers and employees in Ontario will be required to participate in the ORPP unless they participate in a comparable pension plan, subject to certain exceptions. For information on the comparability tests, please see our August 12, 2015 posting. The government has since released the following additional details relating to the comparability test:
- Subset level: For pension plans with more than one group of employees (e.g. full- and part-time, union and non-union, etc.) and different benefit formulas for groups or “subsets” of employees, the comparability test will apply at the group or “subset” level.
- Voluntary contributions: Voluntary contributions to a defined contribution pension plan will not be taken into account when determining if the plan is comparable to the ORPP. Contributions to a defined contribution pension plan must be mandatory in order for them to be included in the comparability test.
- Multi-Employer Pension Plans (MEPPs): The comparability test for a MEPP will be applied separately for each participating employer based on the employer’s collective bargaining agreements or employee agreements at the subset level, as defined by plan governing documents. Employers will have the option to assess comparability using the defined benefit accrual or defined contribution rate threshold.
- Waiting periods: Employees waiting to join their employer’s comparable pension plan will be required to participate in the ORPP during the waiting period.
- Employer opt-in: Employers with a “comparable workplace pension plan” can opt-in to the ORPP on or after January 1, 2020.
- Non-resident workers: Non-resident workers (for tax purposes) earning income over $3,500 that is subject to Canadian and Ontario income tax will be included in the ORPP. However, if a non-resident worker is exempt from tax under an applicable tax treaty between Canada and another country, they will be exempt from participating in the ORPP.
- Other workers: Individuals in receipt of ORPP benefits may opt-in to the ORPP if they return to eligible employment. There will also be religious exemptions for certain workers, similar to the Canada Pension Plan (CPP).
ORPP benefits for employees:
- Benefit formula: ORPP benefits will accrue at a rate of 0.375% of annual earnings per year and will be calculated using members’ average earnings over their career. The ORPP is designed to provide a 15% income replacement rate to members who participate for over 40 years.
- Payment of benefits: The ORPP will begin paying benefits starting in 2022. Members will be eligible for retirement under the ORPP as early as age 60, and may postpone retirement until age 71.
- Indexation: Benefits will be indexed according to average growth of wages and salaries as outlined by Statistics Canada pre-retirement, and indexed according to the Consumer Price Index post-retirement.
- Pre-retirement survivor benefits: If a member dies before retirement, a lump sum based on the actuarial equivalent value of his/her pension will be paid to an eligible spouse, the member’s beneficiary or estate.
- Post-retirement survivor benefits: If a member dies after retirement with an eligible spouse, the spouse will receive a survivor benefit equal to 60% of the member’s actuarially adjusted pension. If the spouse waives his or her right to a survivor pension prior to the member’s retirement, or the member retires without an eligible spouse, the member would receive his or her full retirement pension with a 10-year guarantee period. If the member dies within that guarantee period, the remaining value of his/her full retirement pension will be paid to his/her spouse, beneficiary or estate as an actuarially equivalent lump sum.
- Plan sustainability: A funding policy has been established for the ORPP to ensure that the plan is sustainable over the long-term. In addition, the government will establish an Office of the Chief Actuary to conduct triennial valuations of the ORPP and to provide advice and analysis.
- Plan review and changes: The ORPP will be reviewed five years after its full implementation and subsequent reviews will occur every ten years. Fundamental changes to the ORPP that would substantially impact member benefits and are not resulting from funding policy adjustments would require the consent of at least 60% of ORPP members.
The Ontario government will set out these and other details about the ORPP in forthcoming legislation.