New Developments Relating to the Ontario Retirement Pension Plan (ORPP)

In our August 2015  bulletin, we informed you about the latest developments concerning the design of the Ontario Retirement Pension Plan (ORPP), i.e. the phased enrolment of employers beginning in 2017 as well as the definition of a comparable workplace pension plan that determines whether or not an employer will be required to participate in the ORPP.

On January 26, 2016, the Ontario government took another step toward the implementation of the ORPP by releasing additional details on the design of the plan:

• The ORPP provides a 15% income replacement rate to plan members after they have contributed to the plan for 40 years, which corresponds to an annual benefit accrual rate of 0.375%.
• The ORPP will begin paying benefits in 2022.
• ORPP benefits will be calculated on the average of earnings received for the years during which contributions will have been made. Earnings will be indexed according to the average growth of wages and salaries in Canada up to retirement. Earnings received consist of cash income, including other amounts such as premiums and commissions.
• During retirement, benefits paid will be indexed according to the increase in the Consumer Price Index.
• In the event of the death of an ORPP member, survivor benefits will be payable to the surviving spouse or to the member’s beneficiaries or estate:
  • Pre-retirement death: The equivalent actuarial value of the pension accrued under the ORPP will be paid.
  • Post-retirement death: By default, the benefit will be guaranteed for a period of 10 years after pension payments begin. If the member has a spouse when he or she retires, the benefit will be adjusted to take into account the fact that 60% of the member’s adjusted pension will continue to be paid to the spouse after the member’s death.
• Some Ontarians will be exempt from participating in the ORPP, namely for religious reasons and for on-reserve employees of First Nations employers in Ontario.
• Non-resident workers whose income is taxable for the purposes of Canadian and Ontario income tax must join the ORPP, while those whose income is not taxable pursuant to a treaty will not be required to contribute to the ORPP.

In November 2015, the Ontario government also confirmed that the minimum earnings threshold, above which a contribution to the ORPP will be required, would mirror the Canada Pension Plan’s annual basic exemption at $3,500.

Employers that offer their employees a comparable pension plan will not be required to participate in the ORPP. The Ontario government has provided the following details to clarify the definition of comparable workplace pension plan published in August 2015:

• Employers providing different retirement benefits depending on job category will need to apply the comparability test to the plan provisions at the level of a subset of employees. This means that an employer’s plan could be deemed comparable for some employees and not for others, in which case these employees would be required to join the ORPP unless the plan provisions for their category are amended.
• The comparability test by job category also applies for multi-employer pension plans, which will have the option of applying the exemption criteria according to a defined benefit or a defined contribution plan.
• Voluntary contributions to a pension plan must not be considered for comparability test purposes.
• Employees for which a waiting period applies before they can join their employer’s plan will be required to participate in the ORPP for the duration of this period. Amendments must be made to the provisions of the employer’s plan should he wants to avoid this type of situation.

Although they are not required to do so, employers that offer a comparable pension plan will be able to join the ORPP as of the fourth wave of enrolment, i.e. on or after January 1, 2020.

Members of the Board of Directors of the ORPP Administration Corporation were appointed in November 2015. These members will be responsible for implementing and overseeing the ORPP. To ensure the plan’s sustainability, an Office of the Chief Actuary will be established to prepare triennial actuarial valuations of the ORPP.

A funding policy has already been established to set out the measures to be taken should the ORPP become underfunded.

For example, in the case of a future funding deficit, indexation could be partially reduced for members and, if necessary their contributions could be increased by up to a maximum of 0.2%. If significant reductions to benefits were to prove necessary to ensure the sustainability of the plan, the consent of at least 60% of ORPP members would be required for these amendments to be implemented. 

As promised by the Ontario government, a cost-benefit analysis of the ORPP was published in late December 2015 by the Conference Board of Canada, an independent, not-for-profit research organization. The report analyzes the impact of the ORPP over an extended horizon, from its implementation in 2017 up to 2093, to assess its impact on the Ontario economy.

According to the analysis, the long-term impacts of the ORPP will be positive since economic benefits arising from the plan would outweigh losses incurred from the reduction in the disposable income of Ontarians following the mandatory payment of contributions to the ORPP. By 2045, the disposable income of Ontarians will be higher than it would have been without the ORPP. Consequently, expenses for retirees receiving a pension from the ORPP will increase, which will stimulate the economy.

Finally, it should be noted that, on January 22, 2016, the Association of Canadian Pension Management (ACPM) sent a letter to the Ontario government requesting that the implementation of the ORPP be delayed for one year. According to the ACPM, this would allow the federal government and the provinces to agree on a common solution that could be applied across Canada. On February 3^rd, 2016, the Canadian Institute of Actuaries (CIA) released a similar opinion, which also requests a one-year deferral of the ORPP implementation in order to continue further discussions on potential Canada Pension Plan expansion.

Normandin Beaudry consultants will continue to closely monitor the progress of the work on the ORPP and will keep you informed of future developments.

Please feel free to contact us for additional information.