Bill 56, An Act to require the establishment of the Ontario Retirement Pension Plan, 2015 (the “Act”) passed its Third Reading in the Ontario Legislature on April 29, 2015, and will come into force on the day it receives Royal Assent. The Act states that the Ontario Retirement Pension Plan (the “ORPP”) will be established by January 1, 2017.
The Ontario government’s plan to establish the ORPP was announced in the Ontario Budget in July 2014. The ORPP was developed due to concerns that middle-income earners in Ontario are not saving enough for their retirement. Participation in the ORPP will be mandatory for most employers and employees. The government has indicated that the enrolment of employers and employees will occur in stages, beginning with the largest employers in the province. Contribution rates will be phased in over a period of two years.
The stated goals and key features of the ORPP are to:
- offer a predictable stream of income in retirement for life, and index benefits to inflation;
- pool longevity and investment risk to help ensure that members do not outlive their savings, and to lessen the impact of volatility on investment returns;
- require equal contributions to be shared between employers and employees to a combined maximum of 3.8% of eligible earnings between minimum and maximum earnings thresholds;
- aim to replace 15% of an individual’s earnings, up to a maximum earnings threshold of $90,000 per annum (in 2014 dollars);
- require benefits to be earned as contributions are made; and
- require “locked-in” contributions and accumulated benefits, to prevent individuals from withdrawing retirement income to meet short-term financial needs.
Like the Canada Pension Plan (“CPP”), the ORPP will be a “defined benefit type of plan”, which will be administered by an entity that will operate at arm’s length from the government. The maximum earnings threshold for 2017 will be $90,000 (in 2014 dollars), which will be adjusted to reflect increases in the Year’s Maximum Pensionable Earnings under the CPP. Employers and employees will contribute at an equal rate, and the maximum combined rate will not exceed 3.8%. The exemptions for employment under the ORPP will be similar in nature to the exemptions for employment under the CPP.
The most significant exemptions to mandatory participation will be for employees who earn below the minimum threshold for contribution, and for employees and employers who contribute to a “comparable” workplace pension plan. However, these important elements of the ORPP have not been set out in the Act, which merely provides that legislation will be introduced that will establish the minimum threshold for contributions and define “comparable workplace pension plan”. This is a significant area of concern for employers who offer workplace pension or retirement savings plans that may not be comparable to the ORPP. These employers could find themselves required to contribute to both the ORPP and whatever workplace pension plan is already in place.
Although the government has not yet made a definitive statement regarding what types of pension arrangements will be considered “comparable” to the ORPP, some insight into its plans is available. On December 17, 2014, the government released a consultation paper on the ORPP, and solicited public comments and feedback on some of the outstanding questions related to its implementation and design. This paper discussed the types of arrangements that may qualify as comparable workplace pension plans, and indicated that the government’s preferred approach was to limit the definition of “comparable” plans to defined benefit (DB) pension plans and target benefit multi-employer pension-plans (TB MEPPs). Therefore, employers and employees who participated in defined contribution (DC) pension plans, as well as group registered retirement savings plans (group RRSPs) and deferred profit sharing plans (DPSP), may not be exempt from mandatory participation in the ORPP.
The Ontario government has indicated that DB pension plans and TB MEPPs possess many of the key characteristics of the CPP in that they provide a greater level of predictability of retirement income, can be indexed to inflation, pool investment risk, involve mandatory employer contributions, and “lock in” retirement funds to ensure that they will be available in retirement. While DB plans and TB MEPP plans contain most of the key features of the ORPP, DC plans, DPSPs, Pooled Registered Pension Plans, and group RRSPs may not contain several important features, such as mandatory employer contributions, indexing to inflation, locking in savings and providing savings for life.
Mandatory participation in the ORPP is a great concern for employers currently sponsoring DC plans for their employees, as it will represent a significant additional payroll cost. Employers who sponsor DC plans, or other retirement arrangements that the government has indicated may not be considered comparable should consider and plan for the potential impact of mandatory participation in the ORPP. Advance planning will be particularly important for unionized employers whose retirement arrangements have been negotiated with a trade union.