On January 26, 2016, the Ontario Government released additional design details of the Ontario Retirement Pension Plan (the “ORPP”). The ORPP, which was developed due to concerns that middle-income earners in Ontario are not saving enough for their retirement, is set to launch on January 1, 2017. The ORPP will be implemented in four waves between 2017 and 2020. By 2020, the ORPP will be mandatory for every eligible worker in Ontario who is not covered by a comparable workplace pension plan. The government has indicated that a person will be considered to be “employed in Ontario” for the purposes of the ORPP if they “report to work, full- or part-time, at an employer’s establishment in Ontario”, and will also apply to workers who are paid by an Ontario-based employer but work outside of the employer’s place of business.
Although the federal government has committed to working with provincial and territorial premiers to improve CPP benefits, Premier Kathleen Wynne has indicated that the ORPP will continue to move forward unless the proposed enhancements to CPP are comparable to the features of the ORPP. 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;
- require equal contributions to be shared between employers and employees to a combined maximum of 3.8% of eligible earnings (including amounts beyond base salary, such as bonuses and commissions) between minimum and maximum earnings thresholds;
- aim to replace 15% of an individual’s earnings after approximately 40 years of contributions, up to a maximum earnings threshold of $90,000 per annum; and
- require “locked-in” contributions and accumulated benefits, to prevent individuals from withdrawing retirement income to meet short-term financial needs.
The government has indicated that the ORPP will be implemented in in the following waves:
- Wave 1: Large employers (500 or more employees) without registered workplace pension plans. Contributions to start on January 1, 2017 at a rate of 0.8 per cent for both employees and employers. In 2018, the contribution rate will rise to 1.6 per cent, and will reach 1.9 per cent in 2019.
- Wave 2: Medium employers (approximately 50-499 employees) without registered workplace pension plans. Contributions to start January 1, 2018 at a rate of 0.8 per cent for employees and employers. The contribution rate will rise to 1.6 per cent in 2019, and in 2020 will reach 1.9 per cent.
- Wave 3: Small employers (50 or fewer employees) without registered workplace pension plans. Contributions to start January 1, 2019 at a rate of 0.8 per cent. The contribution rate will increase to 1.6 per cent in 2020, and will reach 1.9 per cent in 2021.
- Wave 4: Employers with a workplace pension plan that is not modified or adjusted to meet the comparability test, as well as employees who are not members of their workplace’s comparable plan. Contributions to start January 1, 2020 at the maximum contribution rate of 1.9 per cent for employers and employees.
The Ontario Retirement Pension Plan Administration Corporation will begin contacting Ontario employers in early 2016 to verify their existing pension plans and assess the coverage offered to employees.
As noted above, employers with registered workplace pension plans will not be affected by the ORPP until January 1, 2020, even if those plans are not comparable to the ORPP. However, in January 2020, those employers will be required to participate in the ORPP unless they have implemented plan design changes to meet the comparability tests set out below. Employers should therefore consider whether it is in their best interests to amend their defined benefit (DB) or defined contribution (DC) plans as required in order to avoid the possibility of being required to contribute to both a workplace pension plan and the ORPP.
Comparable Workplace Pension Plans
A comparable pension plan will be a provincially or federally regulated pension plan with contribution levels that ensure similar benefit levels to those provided by the ORPP. Only registered pension plans may be considered comparable. Group RRSPs, and Deferred Profit Sharing Plans will not be considered comparable. A comparable pension plan may be either a DB or a DC plan , provided that it meets the established comparability threshold. For pension plans that provide different benefits to different subsets or classes of employees, the comparability test will apply at the level of a subset of employees.
In order to be considered comparable, a DB plan must equal or exceed the benefits being offered through the ORPP, and must therefore meet a minimum benefit accrual rate of 0.50 per cent. An accrual rate is the rate at which retirement income is built up in a pension over time. The rate is multiplied by earnings to calculate the amount the employee will eventually be entitled to receive as a pension.
In order to be considered comparable, a DC plan must require at least 50 per cent matching of the minimum rate from employers (i.e. 4 per cent), and have a minimum annual contribution rate of 8 per cent. Employer contributions will not be required on amounts above the 8 per cent minimum combined contribution rate. Voluntary workplace pension plan contributions will not be applicable when determining if a DC plan is comparable to the ORPP; in order to be comparable, employee contributions and employer matching must be mandatory.
Multi-Employer Pension Plans (MEPPs)
For employers that participate in a MEPP, employers will have the option to be evaluated using the Defined Benefit or Defined Contribution threshold. The ORPP will apply either the DB or DC comparability test to the employer’s collective bargaining or employee agreements at the subset level.
The government has indicated that it has also developed means to convert its comparable threshold tests to determine the comparability of DB-DC hybrid plans, flat-benefit DB plans and flat-dollar DC plans.
At this time, employers should examine their existing workplace pension plans to determine whether they are likely to meet the relevant comparability test, or whether they may wish to either make changes to their existing plans or implement new plans in order to meet the comparability threshold. For example, an employer who offers a DB plan to only some employees may wish to amend its plan to include all employees. Alternatively, a DC plan may be in place, but participation for employees may be voluntary. In that case, the employer may wish to consider whether comparability could be achieved by making participation mandatory. Employers who sponsor group RRSPs but not registered pension plans will need to consider the implications of the ORPP. Employers will also need to consider waiting periods, as participation in the ORPP will be mandatory at any time an employee is not covered by a comparable workplace pension plan. Employers may also need to consider how they wish to treat part-time or casual employees with respect to pension benefits.
Of course, pension entitlements are an important part of employees’ overall compensation, such that changes to existing pension plans may give rise to significant legal issues. This is true for both unionized and non-unionized employers. It will be important for employers to determine what pension arrangements are best suited to their workplace well in advance of the applicable ORPP implementation date, and to consult with legal counsel when considering implementing changes to plan design.