Controversial proposal aims to address retirement income concerns not addressed by CPP, but leaves many unanswered questions for employers
It has been vilified by some as a job killer. Others have hailed it as a historic win for workers. Ontario Finance Minister Charles Sousa calls it “the first of its kind in Canada.”
The proposed Ontario Retirement Pension Plan (ORPP) has caught the attention of business leaders, union heads and politicians.
At this point, the plan is only a proposal and, with a looming election in Ontario, there is no guarantee it will ever be implemented. Still, the plan highlights an interest that exists to find ways to ensure Canadians have enough money to live on when they retire.
Sousa says two-thirds of workers in Ontario do not belong to workplace pension plans and individuals are not saving enough on their own for retirement. He adds that Canada Pension Plan (CPP) benefits are too low to meet the needs of middle-income earners and something more is needed.
That is where the ORPP comes in. Ontario introduced the plan in its 2014 budget after failing, along with other provinces, to get the federal government to make changes to the CPP that would see contribution rates and retirement benefits increase.
The ORPP would be structured much like the CPP. It would be funded by mandatory contributions from employers and employees. The contributions would be invested by a board operating at arm’s length from the government. Individuals covered under the plan could start collecting pension benefits at age 65.
The benefits would replace about 15 per cent of earnings, up to an annual maximum. Individuals would earn benefits as they contribute. The government says the plan could be integrated with the CPP at a later point if there is an agreement to enhance the CPP.
The ORPP would not be mandatory for everyone. It would not apply to employers or workers in federally regulated industries in Ontario. Enrolment in the plan would not be required for employers with a comparable workplace pension plan or for the employees who work for them.
For other employers and workers, mandatory enrolment would occur in stages, beginning in 2017. The contribution rate would be 1.9 per cent for both employers and employees, for a combined rate of 3.8 per cent, up to an annual maximum earnings threshold of $90,000. The contribution rates would be phased in over two years. There would be an exemption threshold for lower-income workers similar to the $3,500 CPP exemption.
Business groups have expressed concerns about the ORPP. The Ontario Chamber of Commerce says it worries that, “the plan will create administrative duplication with the CPP, further fragment Canada’s pension landscape and potentially deter job creation.”
Dan Kelly, the president of the Canadian Federation of Independent Business (CFIB), took to Twitter to call the plan “one of the largest, most unnecessary provincial payroll tax hikes on small (business) in history.”
Some labour leaders have applauded the government for proposing it. Sid Ryan, the president of the Ontario Federation of Labour (OFL), calls the plan a bold move that “would be a historic gain for millions of Ontarians without a workplace pension.”
The reality of the ORPP may be somewhere in the middle.
“It’s not perfect. I’m not sure there is a perfect plan, but there are a number of good design elements,” says Scott Clausen, a partner in the Retirement Risk and Finance group at the consulting firm Mercer.
“It looks towards professionally managed investments. It talks about the pooling of longevity protection. It will be administered arm’s length from the government. It’s designed (so that) benefits will accrue as contributions are made so that there is no intended generational transfer of costs. So, there are some very good design elements there.”
Clausen cautions, however, that the plan could be complex to administer, depending on how it is implemented, and there are still many unanswered questions about it.
One detail missing is a definition of “comparable” when talking about company pension plans, he says. Information released so far does not specify which types of company plans would exempt employers from the ORPP. Would only registered pension plans be exempt or would group registered retirement savings plans (RRSPs) also qualify?
The initial outline for the ORPP does not address tax issues.
“The tax treatment is really not described. Will contributions be tax deductible like a pension plan or an RRSP or a tax credit like the CPP?” Clausen says. “The same thing with benefits. If you are going to cover low-income individuals, will it result in offsets of other income-tested benefits?”
There are also questions around the mandatory nature of the plan and how it could impact employees who switch jobs within Ontario or who move to another province.
“That will add to the complexity because you will have individuals who are in or out if they change employment between somebody who is in (and somebody who’s) out,” he says.
Another unknown is whether employees would be allowed to opt out.
“If there is ability for a company to opt out if they have a comparable plan, is there ability for an individual to opt out if they prefer something else?” Clausen asks.
Enhanced CPP a better move?
He says the ORPP has potential, but his first choice would be for the federal and provincial governments to agree to a modest enhancement to the CPP.
“It definitely would be better on a national basis without a doubt,” Clausen says. “If that’s not achievable, do you do nothing or do you do the best you can achieve?”
Ontario is not the only jurisdiction interested in a provincially run plan. Manitoba and Prince Edward Island have taken part in an advisory group Ontario set up to design the ORPP. There are reports other provinces are discussing the issue with Ontario, although it is not known whether other jurisdictions would continue with the plan on their own if a new Ontario government opted not to pursue it.
Clausen says it would be better to have more than one province implementing a pension plan like this as long as all of the provincial plans are similar.
“The CPP is meant to cover everybody, all employees, all workers. That doesn’t mean there isn’t an offering or an opportunity or a plan design that could be targeted to employees without a pension plan as a supplement to the CPP. Again, the more consistent you could have a plan, the better. If you are going to have this type of plan, you wouldn’t really want to see a completely different plan design in every single province.”
Whether or not the ORPP is implemented, Clausen says it is important that governments are discussing pension issues and considering options to help meet retirement income needs.
Clausen says Canada has a strong retirement income system with programs such as the CPP/QPP, Old Age Security, Guaranteed Income Supplement, employer pension plans and individual savings.
“We have a good selection of different tools that work to help people meet different needs,” he says. “Having a discussion about expansion of CPP or (the) Ontario plan is a positive. There is room for all of these things. We are not in a retirement savings crisis today, but that also doesn’t mean we don’t do anything. Being proactive helps make sure that we don’t end up with one.”