Fewer than 35 percent of workers in Ontario currently have a workplace pension plan. Coverage for workers in the private sector is even lower—only 28 percent are members of a plan. Several studies have shown that, due to the limited benefits provided by the Canada Pension Plan (CPP) and Old Age Security (OAS), significant numbers of Ontarians will not have sufficient savings to maintain similar living standards throughout their retirement years.
As a result, the Ontario government has decided to establish a made-in-Ontario pension plan and to implement the federal government’s Pooled Registered Pension Plan.
Provincial pension plan
On December 8, 2014, Bill 56, Ontario Retirement Pension Plan Act, 2014, received first reading in the Ontario legislature to create a mandatory Ontario Retirement Pension Plan (ORPP) by January 1, 2017. The goal is to strengthen Ontario’s retirement income system by helping people save for retirement. If passed, the Act comes into force on royal assent.
This made-in-Ontario pension plan would:
- Offer retirees a predictable stream of income in retirement for life, and index benefits to inflation, similar to the CPP’s retirement benefit
- Require contributions to be shared equally between employers and employees, not exceeding 1.9 percent each on earnings up to a maximum annual threshold of $90,000 (in 2014 dollars), plus a further adjustment at the same percentage rate of increase between 2014 and 2017 as is set out in the Canada Pension Plan
- Aim to replace 15 percent of an individual’s earnings up to a maximum annual earnings threshold (contributions would not be required below a low-earnings threshold in order to reduce the impact on lower-income workers)
- Require benefits to be earned as contributions are made to ensure that the system is fair and younger generations are not burdened with additional costs associated with older workers’ benefits
- Offer portability, giving younger workers who are expected to change employers multiple times in their working lives a single place to accumulate savings over the course of their careers
- Be administered by an arm’s length entity with a strong governance structure and investment strategy to ensure efficient management, accountability, transparency and fairness
Enrolment of “eligible” employees and employers would be mandatory. Eligible employers would have to contribute to the plan and deduct plan contributions from salary and wages of eligible employees (using applicable contribution rates that must not exceed 3.8 percent).
The current combined employer and employee contribution rates into the Canada Pension Plan are 9.9 percent with a maximum total contribution of $4,712.40. If the Ontario plan was immediately in place, with maximum pensionable income of $90,000 and a maximum combined contribution rate of 3.8 percent, the total combined contribution would be $3,420 with equal employee and employer contributions of $1,710.
The proposal would cost an individual earning $90,000 a year about $133 a month in premiums, or about $1,600 a year. The retirement benefit—assuming this person worked for 40 years and earned $90,000 a year for the entire time—would be more than $1,200 a month, similar to the maximum Canada Pension Plan benefit.
Eligible employers are employers of eligible employees. It is important to know who an eligible employee is, namely an individual who satisfies the following criteria and any other criteria specified under the legislation referred to in the Act:
- The individual is 18 years of age or older and under 70 years of age
- The individual is employed in Ontario and their employment is eligible employment (all employment except exempted employment)
- The individual’s annual salary and wages are above the minimum threshold referred to in subsection 1(4) of the Schedule
- The individual is not in receipt of a retirement benefit from the Ontario Retirement Pension Plan
- The individual does not participate in a comparable workplace pension plan as determined under the legislation
Retirement benefits under the Ontario Retirement Pension Plan would have to be paid for the life of a plan member beginning at 65 years of age. That said, retirement benefits under the Ontario Retirement Pension Plan would be able to begin to be paid as early as 60 years of age or as late as 70 years of age, but such benefits would have to be actuarially adjusted as specified under the Act.
Additionally, retirement benefits under the Ontario Retirement Pension Plan would have to be indexed to inflation based on the formula set out under the legislation. Survivor benefits would have to be payable to the surviving spouse of an Ontario Retirement Pension Plan member in accordance with the legislation.
The plan would not apply to employees who participate in a “comparable workplace pension plan.” This term is not defined in the Bill; and clarification will need to be found in Regulation or policy.
On December 17, 2014, the Ontario government released a consultation paper inviting feedback on key design details and essential components of the ORPP, including:
- Defining a “comparable workplace pension plan,” to clarify membership in the ORPP
- A minimum earnings threshold below which low-income workers would be exempt from contributions
- Retirement support for self-employed individuals, who are exempt from the ORPP due to their unique status
Comments on the paper are due by February 13, 2015. More information can be found here.
Pooled registered pension plan
On December 8, 2014, Bill 57, Pooled Registered Pension Plans Act, 2014, received first reading in the Ontario legislature to provide a legal framework for the establishment and administration of a voluntary type of pension plan called a pooled registered pension plan that is accessible to employees and self-employed persons and that pools the funds in members’ accounts to achieve lower costs in relation to investment management and plan administration.
The proposed changes would:
- Mirror existing legislation regarding pooled pension plans that exist at the federal level so there is a similar opportunity for persons employed (or self-employed) at the provincial level (read about the federal plans here (login may be required))
- Incorporate many of the rules contained in the federal pooled pension legislation concerning the registration and administration of pooled pension plans, which would apply as if they were enacted as part of this statute (the provisions that would not apply are listed in the Schedule)
- Establish rules for dealing with funds in a pooled pension account for certain family law purposes and establish rules respecting the entitlement of a surviving spouse when the holder of an account dies
- Appoint the Superintendent of Financial Services under the Financial Services Commission of Ontario Act, 1997 as having the regulatory authority over pooled pension plans, and set out a process for objecting to or appealing certain decisions of the superintendent
Participation in a PRPP would be voluntary for both employers and employees. If an employer decides to offer a PRPP, all of its employees will be enrolled, but individual employees will be able to opt out.
If passed, the changes would come into force on a day to be named by proclamation of the lieutenant-governor.
Charles Sousa, Minister of Finance, stated:
“The retirement savings challenge is complex and requires collaboration from all sectors, as well as a range of tools to ensure a strong and stable retirement income system. That is why encouraging investment in voluntary retirement savings tools such as pooled registered pension plans is an important part of the government’s strategy to enhance retirement savings for all Ontarians.”
If it is adopted, Ontario will join Alberta, British Columbia, Nova Scotia, Quebec (VRSP) and Saskatchewan, which have already passed legislation to implement PRPPs.
Nobody really understands how the above made-in-Ontario pension plan will simultaneously work with the CPP, as it does not seem to work like the Quebec pension plan.
The Canada Pension Plan operates throughout Canada, although the province of Quebec has its own similar program, the Quebec Pension Plan. The Canada Pension Plan and the Quebec Pension Plan (although they operate with different contribution rates) work together to ensure that all contributors are protected. Thus, employees who live and work outside of Quebec contribute to the CPP and employees who live and work in Quebec contribute to the QPP. Although workers do not contribute to both the CPP and QPP, in reality what they contribute to the QPP will be transferred to the CPP if they move outside of Quebec to live and work, and vice a versa.
What Ontario is planning is that an Ontario employee would have to contribute to both the CPP and ORPP simultaneously since they are both mandatory. And they would in turn receive retirement benefits from both the CPP and ORPP. It is built on key features of the CPP but is not integrated with the CPP like the QPP is. Negotiations between the Ontario and federal governments would have to occur for this to happen.
Moreover, if the mandatory Ontario pension plan passes, a voluntary pooled registered pension plan may complicate the issue. That is, if employees are required by law to contribute to the provincial plan (as well as the CPP), why would anybody want to reduce their pay even further my adding another payroll contribution to a voluntary plan?
I’m not sure I see the sense. If the ORPP worked like the QPP (integrated with the CPP) with an increased contribution rate, I would understand and would be all for it. But it does not. Some have suggested that the Ontario government has delayed the implementation of its mandatory pension plan until 2017 in the hope that the federal government will simply increase CPP contributions and make the Ontario plan unnecessary.
In any case, if passed, the PRPP would still offer additional flexibility to employers and employees that wish to increase their registered pension contributions without having to think too much about it—which seems to be an awful lot of us!