The Ontario government is continuing to move forward with its plan to implement an Ontario Retirement Pension Plan (ORPP) for Ontario workers, introducing “framework” legislation and a series of consultation papers late last fall.
The ORPP would be a “defined benefit (DB) type of plan” with an employee/employer contribution rate of up to 1.9% each, requiring mandatory participation, subject to exemptions for workers who already participate in a “comparable” workplace pension plan.
While the meaning of comparable workplace pension plan is yet to be finalized, the Ontario government has indicated that its preference is for only DB plans and target benefit multi-employer pension plans (TB MEPP) to be considered comparable. Thereby, employers with defined contribution (DC) plans and/or group registered retirement savings plans (RRSP) would not be exempt.
If you are concerned about this, and think DC plans and group RRSPs with employer contributions that match or exceed those proposed in the ORPP should also be exempt, you should make your views known to the government by February 13, 2015.
The Ontario government originally raised the idea of an ORPP in its pre- and post-election budgets in 2014. In its first consultation paper, released on November 25, 2014, the government outlined the following key features of the ORPP:
- benefits indexed to inflation;
- pooling of longevity risk (the risk that a member may outlive his or her savings) and investment risk (the risk that lower-than-expected investment returns may result in insufficient savings for retirement);
- equal contributions to be shared between employers and employees, not exceeding 1.9% each on earnings up to an annual maximum of $90,000 (in 2014 dollars);
- goal to replace 15% of an individual’s earnings, up to a maximum annual earnings threshold of $90,000 (in 2014 dollars);
- administration by an entity that is arm’s length from the government; and
- mandatory participation, subject to exemptions for workers who already participate in a “comparable” workplace pension plan and lower income workers (i.e., workers with earnings below a certain threshold).
The government then introduced Bill 56, Ontario Retirement Pension Plan Act, 2014, for first reading on December 8, 2014. If passed, the Bill will establish the basic framework for the Ontario Retirement Pension Plan (ORPP), including requiring the government to set up the ORPP no later than January 1, 2017.
On December 17, 2014, the government released its second consultation paper (the December Paper) regarding the ORPP. The paper identifies three key policy areas for discussion: (i) meaning of comparable plan; (ii) minimum earnings threshold; and (iii) supporting the self-employed. As noted above, the key issue for employers is the first question – i.e., will your current retirement plan qualify as a comparable pension plan and thereby exempt your organization from participating in the ORPP?
Meaning of Comparable Workplace Pension Plan
In seeking a clear definition of what constitutes a comparable plan, the December Paper identifies the following characteristics of DC plans, pooled registered pension plans (PRPP) and group RRSPs:
- a lack of inflation adjustments;
- individual longevity risk; and
- individual investment risk.
The December Paper also states that PRPPs and group RRSPs do not necessarily require employer contributions.
The December Paper goes on to specify that the features of DB plans and TB MEPPs most “closely align” with the ORPP and restricting the definition of comparable pension plan to these types of plans “would have many advantages for ORPP members.” For example, such an approach would expand the number of employers required to offer the ORPP to employees, giving more Ontarians the opportunity to participate in the plan and enabling the ORPP to spread investment and longevity risks across a greater number of individuals.
The December Paper includes a series of questions aimed at determining circumstances where a DC plan could be considered comparable. For example, the December Paper queries whether establishing a minimum employee/employer contribution rate and/or requiring members to convert a portion of their savings in a DC plan to an annuity upon retirement would be sufficient to make DC plans comparable. That being said, there is clearly a preference for specifying that only DB plans and TB MEPPs would constitute comparable plans.
Integration of Non-Comparable Plans
Recognizing that many Ontario employers may have a non-comparable pension plan (given the above noted preference for DB and TB MEPPs), the December Paper queries:
- How would employers currently offering non-comparable plans expect their plans to work alongside the ORPP?
- How much time would employers need to take stock of their current approaches and make decisions about the right compensation mix going forward?
A further question could very well be: Will employers continue to offer non-comparable plans (i.e., DC plans and group RRSPs) at all if required to participate in the ORPP?
Clearly, if implemented, the ORPP could have significant implications for Ontario employers who currently sponsor retirement plans deemed to be non-comparable. In particular, based on the preferences indicated in the December Paper, it would appear that the Ontario government will notconsider DC plans comparable workplace pension plans under the ORPP regime. (The impact of such an approach will be considerable as the December Paper itself notes that “[i]n 2013, almost 400,000 Ontarians participated in a DC plan.”)
Employers who currently sponsor a DC plan or group RRSP should consider the implications of such a regime change for their workplace and their current compensation structures. Comments on the ORPP initiative, which may be submitted to ORPP@ontario.ca, are due by February 13, 2015.