Key details are still sketchy but employers need to be prepared
With an inception date of Jan. 1, 2017, for certain employers and employees, little is known about the Ontario Retirement Pension Plan (ORPP). Many of the features of the plan have been set out in non-binding background papers, meaning employers will not have certainty about the plan until additional legislation is tabled and passed.
It was worrying that the government had no details on the ORPP when it was first announced. Even now, a bit more than a year before its launch, we still don’t know what benefits it will provide, whether those benefits will be affordable relative to the contribution rates, whether the benefits will be guaranteed, whether multi-employer participants are in or out, or whether the principal objective of the ORPP is to provide pensions or to be an infrastructure fund that also happens to pay pensions.
It is necessary to view the ORPP in the context of the Canada Pension Plan (CPP). Since its 1966 inception, there have been discussions about what the CPP benefits should be and at what contribution rate. Those discussions reached a peak in the 1990s when the CPP was substantially reformed to require higher contributions — currently 9.9 per cent of covered payroll up to $53,600 — and to freeze the level of earnings on which contributions are not required at $3,500.
Much of the subsequent political discussion has shifted to the possibility of a higher CPP earnings base. That discussion came to a halt in 2012 when the federal government stated it would no longer participate.
The Ontario government announced in its 2014 budget that, absent federal government participation, it would proceed on its own to establish the ORPP. Its expressed concern is that those people who earn up to $90,000 per year are at risk of under-saving for retirement. The government also stated the ORPP would be structured to allow it to be bolted onto the CPP later.
Participation in the CPP has no impact on a person’s ability to contribute to other retirement plans. By comparison, the ORPP will directly affect participants’ ability to save on a tax-deferred basis because contributions by and on behalf of an employee will result in a pension adjustment that, in turn, will directly reduce the employee’s registered retirement savings plan (RRSP) deduction limit. The ORPP will be established as a multi-employer pension plan under the Income Tax Act.
Unlike the CPP, which applies to all employed and self-employed individuals, the ORPP will apply only to employees and will not apply to the self-employed. Even among the employed, it will apply to a subset of employees in Ontario.
Federally regulated employees (such as banks, airlines and telecoms) will be exempt, as will those who participate in a “comparable workplace pension plan.” The government has said comparable workplace pension plans will be defined benefit plans that have an accrual rate of 0.5 per cent or more and defined contribution pension plans with total contributions of at least eight per cent of earnings, of which at least four per cent are paid by the employer.
Participation in a group RRSP, a deferred profit sharing plan, a group tax-free savings account (TFSA) or an after-tax savings program will not be recognized. The government is considering how participation in a multi-employer pension plan will be treated.
The result of the various exclusions is the ORPP will apply largely to the private sector, as many public sector employees participate in plans that will qualify as comparable workplace pension plans.
Even if a comparable workplace pension plan is available to an employee, she must participate in the plan in order to be exempt from the ORPP. The potential for administrative complexity abounds due to waiting periods and optional membership in many plans. If an employee is in a waiting period to join a comparable workplace plan or chooses not to join a comparable workplace plan, he will be required to participate in the ORPP.
Contributions will be paid equally by employers and employees, with each contributing 1.9 per cent of earnings up to $90,000 (expressed in 2014 dollars). Contributions will not be required on the first $3,500 of earnings. Contributions will be collected using a mechanism that is separate from the CPP, as the federal government has refused to facilitate collections.
The absence of co-ordination with the CPP contribution mechanism may mean significant administration costs both for the ORPP and for employers.
Despite the passage of framework legislation, the Ontario Retirement Pension Plan Act 2015, there is no benefit level set out in it. The government has stated it is aiming for the ORPP to replace 15 per cent of the earnings up to $90,000 (in 2014 dollars) and that both retirement benefits and survivor benefits will be indexed to inflation.
It is not clear whether 15 per cent is a target that can be adjusted depending on the funded position of the ORPP or whether it is a guaranteed amount (and, if guaranteed, how the guarantee is to operate).
The ORPP will be administered by the ORPP Administration Corporation, established by the ORPP act. The corporation is to be arm’s length from the government. It will be responsible for enrolment, collection of contributions, investment and administration.
The CPP is invested in public and private markets. The ORPP act states contributions will be invested for the benefit of the member and other beneficiaries. Other pension statutes state variously that pension funds must be invested for the “best interest” or “sole benefit” of the members, which leaves a question as to what is intended by investment merely for the “benefit” of members.
In that respect, no mention has been made of the investment mandate for the ORPP.
In the 2015 budget, the government noted “greater investments in Ontario’s people, equipment and infrastructure” are needed and “an effective way to finance these investments would be through an expeditious and sustained increase in the household savings of the current working age population.”
Does that mean the ORPP will be a vehicle for investing in Ontario infrastructure? If so, what does that mean for the potential returns of the fund?
Enrolment will occur over four phases, depending on the number of employees and whether the employer had a registered pension plan as of Aug. 11, 2015. It seems that even if a pension plan does not qualify as a “comparable workplace pension plan” or does not apply to all of the employer’s employees, the employer will start participating on Jan. 1, 2020.
Employers without a workplace pension plan and with at least 500 employees will start contributing on Jan. 1, 2017. Employers with 50 to 499 employees and without a workplace pension plan will start contributing on Jan. 1, 2018. Employers with 50 or fewer employees and no workplace pension plan will start contributing on Jan. 1, 2019.
Contributions will be phased in, starting with 0.8 per cent of earnings in 2015, increasing to 1.8 per cent of earnings and finally to 1.9 per cent of earnings in 2019.
On Jan. 1, 2020, the ORPP will apply to employers with a workplace pension plan that is or could be a comparable plan but may require modifications.
On that date, employers that have employees who are not members of a comparable plan will also be required to contribute to the ORPP.
Ontario has not stated whether the number of employees will be based on employees in Ontario or whether it will look to the number of employees in Canada. Employers that operate in multiple provinces will want to follow that point closely.
The Ontario government has stated its preferred alternative is an expansion of the CPP and it is proceeding with the ORPP due to the intransigence of the federal government. The historic role of public pensions such as the CPP has been to address poverty among seniors. The introduction of the ORPP marks a significant incursion by government into what had previously been left to individuals and employers.
Individuals have been reminded repeatedly and from many corners that they must save more for retirement. That some have chosen not to do so has emboldened Ontario to step in and require that they do so. Having determined a lack of retirement saving in the private sector, Ontario is going to force additional retirement saving under the guise of a universal plan.
For employers, the ORPP promises cost, confusion and complexity. A separate mechanism for collecting contributions that is not integrated with other payroll remittances seems particularly fraught. For those employers that offer a comparable workplace plan, any period of non-participation in the plan will mean enrolling and contributing on behalf of those employees.
The ORPP will likely trigger many plan design reviews. Those employers that provide any combination of group RRSPs, deferred profit sharing plans (DPSPs) and group TFSAs will want to consider if the same expenditure on retirement plans could be reconfigured such that the plan is a comparable workplace plan.
Employers that provide pension plans that do not currently qualify as comparable will want to reassess the design to determine if incremental changes will permit avoiding participation in the ORPP for less than the ORPP contribution rate.
Ross Gascho is a partner at Fasken Martineau in Toronto. This article reflects the views of the author and not his law firm or Canadian HR Reporter.
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