On August 11, 2015, the Ontario government made additional announcements regarding the Ontario Retirement Pension Plan (ORPP), which is expected to be introduced in 2017. Ontario continues to move forward with its commitment to introduce the ORPP in order to provide a predictable source of retirement income for Ontarians. The announcement indicates that “subject to legislative approval, by 2020, every employee in Ontario will be part of either the ORPP or a comparable workplace pension plan.” This announcement is worthy of immediate consideration, given that the introduction of the ORPP could impact your organization as early as January 1, 2017 (more on this below).
The ORPP is intended to generate a predictable source of retirement income for life, based upon an employee/employer contribution rate of up to 1.9% each, with mandatory participation subject to exemptions for employees in Ontario who already participate in a “comparable” workplace pension plan.
The announcement focussed on two key items: (i) what will be a “comparable” workplace pension plan, and (ii) when do employers have to enrol in the ORPP. The ORPP enrolment schedule indicates that the process of verifying comparable workplace pension plans and enrolling employers will commence in 2016. So, employers can expect to be contacted in 2016 to determine whether they will be required to enroll in the ORPP. What does that mean for you?
Enrolment in the ORPP will be phased in, and will vary based upon two key factors: (a) the size of an employer; and (b) whether or not the employer maintains a registered pension plan (or has begun the process of registering a pension plan) as of August 11, 2015.
Wave 1 is directed towards large employers (500 or more employees) without a pension plan. For these employers, contributions will commence January 1, 2017. At that time, the contribution rate will be 0.8% for both employees and employers. In 2018, the contribution rate will be 1.6%, and in 2019 will reach 1.9% for both employees and employers.
Wave 2 is directed towards medium employers (50 – 499 employees) without a pension plan. For these employers, contributions will commence January 1, 2018. At that time, the contribution rate will be 0.8% for both employees and employers. In 2019, the contribution rate will be 1.6%, and in 2020 will reach 1.9% for both employees and employers.
Wave 3 is directed towards small employers (50 or fewer employees) without a pension plan. For these employers, contributions will commence January 1, 2019. At that time, the contribution rate will be 0.8% for both employees and employers. In 2020, the contribution rate will be 1.6%, and in 2021 will reach 1.9% for both employees and employers.
Wave 4 is directed towards employers (of any size) with a workplace pension plan that does not currently meet the applicable comparability test (more on this below). For these employers, contributions will commence January 1, 2020 (at the maximum contribution rate of 1.9% for both employers and employees), unless the workplace pension plan is modified or adjusted to meet the comparability test prior to January 1, 2020.
Where all employees of an employer participate in a “comparable” workplace pension plan, the employer will not be required to participate in the ORPP.
How Does the ORPP Impact Your Organization?
(i) Employers sponsoring Defined Benefit or Defined Contribution plans that cover all employees in Ontario
For employers that sponsor defined benefit (DB) pension plans, the annual benefit accrual rate under any earnings-based DB plan must be at least 0.5% in order for the DB plan to be comparable. Comparability for flat-benefit DB plans will also be required to meet a 0.5% accrual rate minimum comparability threshold (a Technical Bulletin released by the Ministry of Finance identifies how comparability will be determined for flat-benefit DB plans). If the plan has a formula that qualifies, and all employees participate in the plan, then the employer will not be required to participate in the ORPP.
For employers sponsoring defined contribution (DC) pension plans, in order to be “comparable” the plan must have a minimum total contribution of 8% of base salary earnings. In addition, the employer must contribute at least half of the total minimum contribution (at least 4%). The Technical Bulletin addresses comparability requirements for flat-dollar DC plans (again, comparability is to be based upon the 8% minimum contribution comparability threshold). If an employer sponsors a DC plan in which all employees participate, the employer will not be required to participate in the ORPP, provided the DC plan meets the comparability thresholds identified above.
As noted above, if the employer sponsoring a DB or DC pension plan does not meet the comparability threshold for every employee, then the employer will fall within the “Wave 4” class of employers (i.e., employers with registered plans that do not meet the comparability test). Employers in this category will have until January 1, 2020 to implement plan design changes in order to be exempt from having to participate in the ORPP. If the DB or DC plan is not amended so as to qualify as a “comparable” plan, ORPP contributions would be required on and after January 1, 2020 at the 1.9% matched rate (i.e., the maximum employer/employee contribution rate).
(ii) Employers sponsoring a DB or DC plan that covers some employees in Ontario
Bill 56, the Ontario Retirement Pension Plan Act, 2015 indicates that each individual who does not participate in a comparable workplace pension plan will be eligible to participate in the ORPP. Where an employer sponsors a DB or DC plan that covers only some employees in Ontario, it would therefore appear that the employer could be exempt from participation in the ORPP in respect of the pension plan participants (where the applicable comparability requirements noted above are satisfied), while being required to participate in the ORPP in respect of Ontario employees who are not covered under the pension plan at all or in respect of whom the pension plan does not satisfy the comparability threshold.
Employers that fall within this category will need to consider whether they want to make plan design changes prior to January 1, 2020 such that all employees would be covered by the plan (and to ensure the pension plan qualifies as “comparable” in respect of all participants, if applicable). Assuming that the comparability test is met in respect of all of the employer’s employees by January 1, 2020, ORPP participation would not be required and no contribution costs under the ORPP will be incurred. Alternatively, ORPP contributions would be required on and after January 1, 2020 at the 1.9% matched rate (i.e., the maximum employer/employee contribution rate) for each employee that is not covered under the pension plan at all or in respect of whom the pension plan does not satisfy the comparability threshold.
(iii) Employers sponsoring a Group RRSP or DPSP
Group registered retirement savings plans (RRSPs) and deferred profit sharing plans (DPSPs) will not be considered to be comparable plans under the ORPP. Accordingly, employers that sponsor only a Group RRSP or DPSP for their employees will have to participate in the ORPP unless they put in place a comparable pension plan prior to the commencement of contribution requirements for their applicable entrance wave. The entrance waves (and related contribution requirements) for large, medium and small employers are discussed above.
(iv) Employers not sponsoring any plans
These employers will have to participate in the ORPP unless they put in place a comparable pension plan for all employees prior to the commencement of contribution requirements for their applicable entrance wave. The entrance waves (and related contribution requirements) for large, medium and small employers are discussed above.
(v) Participation in a Multi-employer Pension Plan (MEPP) or Pooled Registered Pension Plan (PRPP)
For both these types of plans, the government has indicated that it is working to develop an appropriate comparability threshold.
(vi) Participation in a Hybrid Plan
A hybrid pension plan is a registered pension plan with two components, a DB component and a DC component. The Technical Bulletin provides further details as to how comparability will be determined for hybrid pension plan designs.
What Should Employers be Doing Now?
Employers should examine their existing retirement savings plans to first determine whether they will be subject to the ORPP and, if so, whether it makes sense to make changes to their plans and/or implement new comparable pension plans. For example, for an employer that sponsors a DC plan where not all employees participate in a “comparable” plan under the ORPP legislation, consider whether comparability for all employees could be achieved by making DC participation mandatory, or by plan design changes to make voluntary contributions and employer matching contributions mandatory. Similarly, if an employer offers a DB plan for some, but not all, employees, the employer may wish to amend its plan to include all employees. Employers that sponsor pension plans that include waiting periods to join the plan and/or employers that employ part-time or casual employees may also wish to consider the potential impact of this announcement on their plan design.
As noted above, any employers falling within Wave 4 (employers with registered plans that do not meet the comparability test) will have an opportunity to modify plan design prior to January 1, 2020 in order to meet the comparability test and/or ensure coverage for all employees. We note that there will be potential employment law considerations to be considered. In addition, where employees and pension plans are subject to collective bargaining, there will be additional complexities. Legal counsel should be engaged at an early stage if plan design changes are contemplated.