The Ontario Retirement Pension Plan – What is it? What will it mean?

With the Ontario Legislature returning this week, the government will face a number of challenges. But they also have an ambitious mandate to implement. One of the biggest promises of Kathleen Wynne’s government may well be on its way to becoming a reality. The Ontario Retirement Pension Plan (ORPP) is now moving into the design stage, with the aim of implementation by 2017. Yet according to an H+K Perspectives survey, Ontarians are divided on the subject, with nearly as many being in support (34 per cent) of a plan like the ORPP as are opposed (29 per cent).

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Background:

The ORPP arose in reaction to the federal government’s opposition to expanding the CPP in December 2013.

A solution to expand the CPP was proposed by PEI Finance Minister Wes Sheridan in the fall of 2013. It called for changes that would increase the maximum CPP contribution to $4,681.20 a year from $2,356.20 starting in 2016, and increase the maximum annual benefit to $23,400 from $12,150. It would also increase the maximum insurable earnings up from $51,000 to $102,000 – a measure that Sheridan said would be necessary to boost the flagging retirement savings of middle-income Canadians. The PEI solution would increase the current payroll contribution from 9.9 per cent (split evenly between employer and employee) to 13 per cent for insurable earnings from $25,000 to $51,000, and a combined contribution rate of 3.1 per cent for earnings between $51,000 and $102,000.

The proposal reignited a national conversation about the need for additional public savings vehicles for Canadians among first ministers and in the press. Conversation about an expanded CPP began during the last recession in 2008-9, but at that time, the first ministers decided it was too soon to risk any economic upset, and instead created the PRPP (Pooled Registered Pension Plan), an employer-based pension savings vehicle that would be treated more favourably than RRSPs under our tax system. Unlike the CPP, the PRPP is voluntary and does not mandate employer contributions.

In December 2013, the federal government restated its belief that the economy was too fragile to add this burden to businesses at the time, while some provinces pointed a number of studies and reports[1],[2],[3] as proof positive that there was a need for increased public saving. Key proponents of CPP expansion argued that it was a viable solution that would not overburden the economy – rather, it would increase economic growth through the spending of future retirees, and large-scale investments by the CPPIB (Canadian Pension Plan Investment Board). Implementation could also take several years, which would provide additional time for any needed economic recovery. Canadians appear to be split on the issue. Currently, the H+K Perspectives survey shows that only slightly more than half of Canadians agree that there is a need for a plan like the ORPP, with Ontario evenly split on the question, and BC showing the highest support, at 60 per cent. However, nearly one-third (32 per cent) of Canadians report not having personal savings for retirement, and just 14 per cent of Canadians who are not yet retired say that they are saving enough for retirement.

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After the demise of the PEI proposal, Ontario made the first move to develop a provincial solution to retirement undersaving, targeting middle-income Ontarians without a pension plan. Manitoba and PEI have indicated that they may not be far behind, while the other provinces are watching and waiting to see how the design and implementation plays out.

What is the ORPP?

What we know:

The ORPP is one of the biggest proposed changes to social programs in years but our H+K Perspectives reveals only 41 per cent of Ontarians are aware of it. The ORPP is a mandatory savings vehicle structured similarly to the Canada Pension Plan that aims to replace 15 per cent of income up to a maximum of $90,000 in earnings.  Equal contributions would be shared by employer and employee, up to a maximum of 1.9 per cent each or 3.8 per cent combined of pensionable pre-tax earnings. ORPP and CPP combined would aim to replace a maximum of 40 per cent of income, up from the CPP’s current 25 per cent.

Like the CPP, it will be publicly-administered at arms-length from government. Implementation is promised for 2017, with large employers – that do not provide work place pensions or acceptable alternatives – beginning enrolment first, and contribution rates phased in over two years. The timing coincides with expected reductions in Employment Insurance premiums, which could reduce the overall financial impact on employers, as the cost of employee benefits overall may not change very much.

Mitzie Hunter, a relative newcomer to Legislature, was tasked with oversight of the ORPP’s design and implementation, and she will have her work cut out for her in getting up to speed on a complex topic. In January 2014, a Technical Advisory Group on Retirement Security was convened, chaired by Keith Ambachtsheer, director of the Rotman International Centre for Pension Management.

What we don’t know:

The ORPP is meant to help address the problem of undersaving, and as such, the ORPP won’t be mandatory for those participating in a comparable workplace pension plan – but it is not known at this stage what “comparable” will mean. For example, will it be measured by outcomes such as replacement of an additional 15 per cent of income similar to the ORPP?

Though the plan will be managed at arms-length, it isn’t known who will manage the fund.  It also isn’t known if the plan can be folded into an expanded CPP, should the federal government choose to revisit the issue in the future. Although some are advocating for a plan designed to keep the door open to the potential of a federal government willing to implement an enhanced CPP down the road, others argue for a separate provincial plan to ensure that risk is diversified. The Ontario government has continued to state that it would prefer a national option, but will press ahead with the ORPP in the absence of federal action.

The plan also needs to flesh out how it will deal with the issue of low-income working Canadians, who arguably need the disposable income that will be contributed to the ORPP now, not at retirement, in order to make ends meet.

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Context:

The vast majority of stakeholders, including provincial governments, think tanks, seniors’ organizations and large pension plan managers, are in agreement that some form of intervention is needed to address the issue of retirement undersaving. However, the ORPP continues to receive criticism from the Canadian Federation of Independent Businesses and both federal and provincial Conservatives, including federal Finance Minister Joe Oliver and Minister of State for Finance Kevin Sorenson, as well as PC finance critic Vic Fedeli, but there are also a number of prominent public voices that dispute whether there is an undersaving crisis to begin withH+K Perspectives found that among Ontarians, those with higher incomes ($100K+) show the highest level of support for the ORPP (50 per cent) of all income groups.Interestingly, respondents who indicate not having any retirement savings have an overall lower level of support (20 per cent) for the ORPP. These counterintuitive findings underscore the complexity of the issue and how the public is still wrestling with it. There is a lot of public education still required.

There is also a common public narrative that an alternative to the ORPP is the PRPP – Pooled Registered Pension Plans. PRPPs are meant to be low-cost group savings plans that are treated more favourably under our tax system than RRSPs – they are not designed to expand public savings vehicles, but rather provide a more efficient option for employers wishing to provide a pension plan through their businesses. They are based on voluntary participation and contributions by employer.

Although proponents of private saving have voiced their Pooled Registered Pension Plan as an option to improve retirement security, and the public narrative has often been framed as CCP expansion/ORPP vs. PRPPs, it’s not an either/or scenario. Certainly, one of the key reasons for business support of PRPPs is because employers are not obliged to contribute.

PRPPs are employer-based pensions, and they could replace existing, less efficient plans of the same kind, such as group RRSPs or individual account DC plans. The rationale for a public expansion is based on the lack of employer-sponsored plans (two-thirds of Ontarians do not have access to employer plans).

Certainly, there is no guarantee PRPPs will address the issue of undersaving that precipitated the ORPP given their voluntary nature – RRSP contribution statistics support that concern. In 2011, only 4.5% of the total RRSP room available to eligible tax-filers was used – the median contribution was $2,380 out of the maximum individual RRSP room of $22,450.

Ontario made reference to PRPPs in Budget 2014 as part of the solution to improve the retirement income system in Canada, and signaled its intention to introduce legislation to enact PRPPs as a legal savings vehicle in the fall of 2014.

Analysis:

Despite the very public commitments by the government to create the ORPP, it is entirely possible that the ORPP could never come to fruition. If a federal Liberal or NDP government is elected in 2015 it could reintroduce the CPP expansion, and render the ORPP redundant – and that’s what Kathleen Wynne has asked for. So do not expect an immediate rush by the Ontario government to iron out the details before the next federal election. There have also been some rumblings about the federal Liberal party supporting a voluntary, British-style system, but whether that becomes a party plank remains to be seen.  It is worth noting that in the 2011 election, the federal Liberals supported a modest enhancement of the CPP, and the creation of a national voluntary supplementary plan.

There will be an emerging market for PRPPs if legislation is passed in the fall, but who will be selling the product and who will be buying remains to be seen. The lack of experience on the ground in Quebec, Alberta, BC and Saskatchewan, where PRPPs are legislated, or in the legislative process, means that there’s a lack of information on the uptake of PRPPs by employers, or on PRPP performance. PRPPs are federally legislated however, and the federal government licensed the first five insurance companies who will be able to provide PRPPs to federally regulated industries just the other week. In Ontario, the impending implementation of the ORPP may give pause for thought for employers as they wait to determine the full economic impact of their ORPP obligations on their bottom lines.

For Canadian businesses, large and small, and for all of their employees, the public policy issues related to retirement savings are important and complex.

Here are a few considerations based on the information we have (and the information we do not have):

  • Does the ORPP present a risk or opportunity for your business and employees?
  • What information, proposals or models could your business provide to government to inform their decision-making?
  • How can business and government create solutions that serve the needs and expectations of Canadians?

[1] Wolfson, Michael C.  “Projecting the Adequacy of Canadians’ Retirement Incomes: Current Prospects and Possible Reform Options” IRPP. 2013

[2] Ambachtsheer, Keith. “Pension Reform: How Canada Can Lead the World. Benefactors Lecture,” CD Howe Institute. 2009.

[3] Moore, Kevin; Robson, William; Laurin, Alexandre. “Canada’s looming retirement challenge: will future retirees be able to maintain their living standards upon retirement?” CD Howe Institute. 2010.

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