Enhancing the Canada Pension Plan (CPP) is expected to be an issue in October’s federal election, but in the meantime Ontario is moving forward with an effort to create its own Ontario Retirement Pension Plan (ORPP).
The Ontario Ministry of Finance released a consultation paper, Ontario Retirement Pension Plan: Key Design Questions, late last year. Bill 56, called the Ontario Retirement Pension Plan Act, was tabled for the first reading in December.
The government has held meetings seeking input on the paper and accepted comments online through February 13. Bill 56 reached second reading and debate February 17 in the Legislative Assembly of Ontario.
Stay tuned for future developments, but here are the basics on ORPP.
The Ontario government said its preference is enhancing CPP, but “the federal government has unilaterally shut down discussions on this issue.”
“The ORPP is intended to provide a predictable source of retirement income for those most at risk of under-saving, particularly middle-income earners without workplace pensions,” the consultation paper states.
The Ontario government is concerned that many workers are not saving and will have a lower living standard in retirement. Only 34% of workers in Ontario are covered by a workplace pension plan, and about 50% of Ontarians did not contribute to either a workplace pension plan or a registered retirement savings plan in 2012.
CPP, with an average yearly benefit of $6,800 and a maximum of $12,500, and Old Age Security (OAS) benefits that pay a maximum of $6,800 a year provide too little income to middle-income earners to cover the gap between savings and need, the government states. (Those who qualify for the Guaranteed Income Supplement (GIS) may receive more income from government plans.)
[Related: Canadian Legal and Legislative Update, May 12-13, 2016, Fairmont Chateau Laurier, Ottawa]
How Would ORPP Work?
According to the consultation paper:
- The plan would be phased in beginning in 2017 with the largest employers. Contribution rates would be phased in over two years.
- Employees and employers would contribute an equal amount, capped at 1.9% each on an employee’s annual earnings up to $90,000. Earnings above $90,000 would be exempt from ORPP contributions.
- Earnings below a certain threshold would be exempted to reduce the burden on lower income workers.
- Contributions would be invested at arm’s length from the government. ORPP would pool investment and longevity risk and aim to replace 15% of an individual’s earnings.
- Participation would be mandatory, but workers who already participate in a “comparable workplace pension plan” would not be enrolled in ORPP. The government says its preferred definition of a comparable plan includes defined benefit and target benefit multi-employer pension plans.
- Additional conversations will be held on the best way to assist the self-employed.
[Related: Benefit Bits Video—CPP Expansion]
Impact on Employee Benefit Plans
The ORPP proposal has raised concerns among many plan sponsors of defined contribution (DC) plans because the government is proposing that they may not be considered comparable workplace pension plans. Many DC plan sponsors say they already provide adequate contributions. If those plans are not considered comparable, some question whether employers will continue them and/or lower their contributions in order to fund both ORPP and a DC plan.
Another concern is that mandatory contributions will reduce take-home pay and may result in the reduction of other workplace benefits. In the paper, the government said “ . . . some employers may take stock of their current approaches and make decisions about the right compensation mix going forward . . . ”
Two surveys released last week just before the consultation paper comment deadline expressed concerns about ORPP:
- A survey of Human Resources Professionals Association (HRPA) members showed that 55% oppose ORPP and 58% believe the Ontario government should continue negotiating with the federal government for CPP enhancement. According to HRPA, 75% of its members’ organizations offer a workplace savings plan—more than half of which are DC plans.
- A Canadian Life and Health Insurance Association survey of Ontario companies that offer a DC or group registered retirement savings plan found that 78% would be very or somewhat likely to reduce contributions under their existing workplace plan if ORPP is introduced. In addition, 66% said they would or may consider eliminating their existing plans.
Keep an eye on our Canadian Pension Reform—Ontario page for ORPP developments.