Ontario Retirement Pension Plan (ORPP)

Public consultations on Bill 56, An Act to require the establishment of the Ontario Retirement Pension Plan (ORPP), were recently held and ended in late March 2015. The purpose of this major bill is to create an additional savings instrument that will strengthen the current retirement income system for working Ontarians.

The ORPP would be a mandatory defined benefit (DB) pension plan in which more than three million Ontarians would be required to participate. The plan would target in particular individuals most at risk of not saving enough for retirement and those for which benefits provided by current public plans are not sufficient, i.e. middle-income workers.

The idea of increasing retirement benefits provided by public plans is not new. The Ontario government has been advocating for the enhancement of the Canada Pension Plan (CPP) since 2010, a proposal to which the federal government has always closed the door. Despite this, the Ontario government remains intent on potentially integrating the ORPP with the CPP in the future.

The key objectives and features of the ORPP, which would be administered by an independent government entity, are as follows:

• Offer a predictable source of lifetime retirement income that is indexed to inflation.
• Pool longevity and investment risk.
• Provide for the mandatory enrolment of all eligible working Ontarians starting in 2017, excluding federally regulated workers and self-employed workers.
• Allow Ontarians already enrolled in a comparable workplace pension plan to be exempt from participation.
• Aim for a replacement rate equivalent to 15% of income before retirement up to a maximum annual threshold of $90,000 (in 2014 dollars).
• Require equal employee and employer contributions of 1.9% of income.
• Require benefits to be earned as contributions are paid to prevent the intergenerational transfer of funding costs.

On December 17, 2014, the Ontario government released a consultation paper entitled “Ontario Retirement Pension Plan: Key Design Questions“. The goal of this paper is to elicit feedback from business, labour, associations, experts and individuals on design aspects of the ORPP. In addition to the feedback obtained in relation to this document, public hearings were recently held (up to the end of March 2015) to gather additional feedback.

The consultation paper aimed to discuss three key issues concerning the implementation of the ORPP, while presenting the approach advocated by the government for each issue.

Working Ontarians already participating in a workplace pension plan comparable to the ORPP would not be required to enrol in the ORPP. The Ontario government’s preferred approach would be to define as a comparable plan “a DB pension plan or target benefit multi-employer pension plan”.

The consultation paper asked stakeholders to determine whether or not other retirement savings instruments should be considered comparable. For example, the government wanted to know whether, under certain conditions, a defined contribution (DC) pension plan with a minimum contribution rate that would provide benefits similar to those provided under the ORPP should be considered a comparable plan.

This aspect is probably the element sparking the most debate. Several stakeholders indicated that a DC plan with total contributions at least equal to those required by the ORPP should be considered comparable. Other capital accumulation plans, such as group RRSPs and deferred profit sharing plans (DPSPs) could also be considered. However, could the fact that contributions to these plans are not locked-in (unlike contributions to traditional DC plans) prevent these plans from being considered to be comparable plans?

If capital accumulation plans, including DC plans, should not be considered comparable, sponsors of these plans will need to question the level of contributions paid to their plans, given the additional contribution of 1.9% that would be required of the employer and the employee by the ORPP.

Ontarians whose income is below an established threshold would not be required to contribute to the ORPP. The Ontario government’s preferred approach is to align the ORPP’s annual lower-income threshold with that of the CPP at $3,500. The government believes that this approach would be beneficial because it would simplify administration for employers and would facilitate the ORPP’s future integration with the CPP.

The consultation paper asked stakeholders to provide their views on the minimum earnings threshold. The government acknowledged that an earnings threshold above its preferred threshold would allow for a reduction in contributions for low-income workers and for which the benefits from existing public pension plans already replace a significant portion of income before retirement. However, for low-income individuals, eligibility for benefits from the ORPP could have an impact on future benefits from the Guaranteed Income Supplement.

The Ontario government stipulated that self-employed workers would not be able to participate in the ORPP under the current rules set forth by the Income Tax Act. The government is, however, searching for the best way to assist self-employed workers as they are often less well prepared financially at retirement than salaried workers.

Several other issues must still be clarified, including the applicable treatment for temporary or part-time employees, or for employees subject to a waiting period for a comparable plan. Even though several details concerning the design of the ORPP need to be confirmed, the most important issue is without a doubt the definition of the concept of comparable workplace pension plan.

We must now await the conclusions of the Ontario government following the feedback received on the consultation paper and the opinions shared during the public hearing sessions that have just been completed.

The Normandin Beaudry consultants will continue to monitor closely 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.