With the Ontario Retirement Pension Plan Act, 2015 now in force, the Ontario government is moving ahead to establish the ORPP by January 1, 2017. The ORPP is a made-in-Ontario alternative to a Canada Pension Plan (CPP) enhancement.
The plan is needed according to the government because many Ontarians, including middle- and higher-income earners, may not be saving enough to ensure comparable standards of living in retirement.
The ORPP is mandatory for employers without a comparable workplace pension plan. Employers who already offer a comparable workplace pension plan will not be required to participate in the ORPP. All workers must participate in the plan if their employer is required to participate.
The ORPP will start to be phased in to ensure the ORPP is focused on employees without access to a plan and to give employers time to adapt, beginning with,
- Large employers-500 or more employees-without registered workplace pension plans on January 1, 2017.
- Medium employers with 50 to 499 employees without registered workplace pension plans will start to contribute on January 1, 2018.
- Small employers-50 and fewer-without comparable pension plans on January 1, 2019.
Employers with a workplace pension plan that is not modified or adjusted to meet the comparability test, as well as employees who are not members of their workplace’s comparable plan will start contributing January 1, 2020.
As a result, full implementation of the plan should be expected by 2020.
Key elements of the plan were finalized and published on January 26, 2016, and include some of the following, as explained by the government:
Funding and contributions
Like the CPP, the ORPP would be funded by equal co-contributions from both employers and employees.
Contributions would also be phased in, reaching 1.9 percent each from employers and employees by 2021 to a total of 3.8 percent, or a combined total of $3,420 a year. According to pension analysts, this would means that an individual making $45,000 a year will pay out $2.16 a day to $4.50 a day for someone making the maximum of $90,000 annually.
Workers, whether part-time or full-time, will start contributing at age 18 and can do so until they turn 70. The ORPP exempts workers who make less than $3,500 a year. An employer would be required to pay contributions on behalf of workers employed in Ontario, as well as collect and remit contributions from those workers.
An individual would be considered employed in Ontario if they report to work, full or part-time, at an employer’s establishment in Ontario. This is also applicable to a worker whose salary or hourly wages are paid from an Ontario-based employer, but who is not required to work at an employer’s place of business.
The ORPP would include non-resident workers who earn above the minimum earnings threshold of $3,500 and have income that is taxable for the purposes of Canadian and Ontario income tax. In the case of a non-resident employee working in Ontario who is exempt from tax under a tax treaty, they would also be exempt from contributing to the ORPP.
The federal Income Tax Act (ITA) does not currently allow self-employed individuals to participate in registered pension plans. The Ontario government has asked the federal government to amend the ITA to allow for the self-employed to participate in the ORPP. The province will continue to explore options to enable the participation of the self-employed in the ORPP at some point in time.
The ORPP establishes a religious exemption for individuals who are employed as a member of a religious order, have taken a vow of perpetual poverty and whose wage is paid to the religious order. There is also an exemption for individuals who have self-employed earnings and are members of a religious sect that oppose the acceptance of any public/private benefits and makes provisions for the support of dependent members.
On-reserve First Nation employers and their employees can voluntarily participate in the ORPP as long as both the employer and employee opt-in. If an on-reserve employer voluntarily opts-in to participate in the ORPP, all of its on-reserve employees would be eligible to participate in the plan. The employer or employee would be able to opt-out of the ORPP at any time.
Consistent with other pension plans in Ontario, the costs of administering the ORPP would be covered by the plan, not taxpayers. Contributions and investment funds would be held in trust for ORPP beneficiaries and would not form part of general government revenues.
Pensionable earnings would include both cash and non-cash earnings, which include amounts beyond base salary, such as bonuses and commissions.
The Ontario government designed ORPP benefits to be sustainable over the next 100 years. A funding policy has been established that requires appropriate adjustments to be made in the event that the plan becomes underfunded.
ORPP retirement benefits
Benefits would be paid starting in 2022. They would be earned as contributions are made, ensuring that the system is fair and younger generations are not burdened with additional costs related to benefits for older workers. Participants must be 65 years old before they can collect. The ORPP is designed to provide plan members a 15 percent income replacement rate after they contribute to the plan over 40 years. When a plan member retires, their pension benefit would be calculated using their average earnings over the years they contributed to the plan.
Pre-retirement indexation would allow benefits to be indexed according to the average growth of wages and salaries as outlined by Statistics Canada. This means the benefits that a plan member has earned in the past will be given present-day value upon retirement.
Benefits paid over the course of a plan member’s retirement would be indexed according to the Consumer Price Index (CPI) to account for inflation. This means that the retiree maintains the purchasing power of their benefits throughout their retirement.
Survivor benefits will be payable to the surviving spouse of an ORPP member or their beneficiary or estate. The plan member may choose to waive the survivor benefit and receive their full retirement pension with a 10-year guarantee period.
Comparable pension plan
The ORPP would not apply to those currently in a comparable workplace pension plan. The government has defined a comparable plan to be “one that provides a predictable stream of replacement income and an adequate standard of living in retirement similar to the benefit that would be provided by the ORPP.” Qualifying plans-including defined contribution plans-would need to meet a minimum contribution threshold, be locked in and be regulated by existing provincial pension standards. Companies whose pension plans are currently optional for employees or who don’t meet that threshold will have until 2020 to bring their plans up to par. Or, they will have to implement the ORPP before there compliance due date (depending on the size of their company). Note that Group RRSP are not considered comparable workplace pension plan.
In order to be considered comparable,
DB plans must equal or exceed the benefits being offered through the ORPP. For this reason, comparable DB plans in Ontario must meet a minimum benefit accrual rate of 0.50 per cent. An accrual rate is the rate at which you build up retirement income in a pension over time. The rate is multiplied by your earnings to calculate how much money you will eventually be entitled to. This rate can be expressed as a fraction — the bigger the fraction, the greater the amount of retirement income.
DC plans do not require employer matching. They also do not allow for the pooled longevity and investment risk that provide people the assurance they will not outlive their savings, and protect them from market volatility. For this reason, to be considered comparable, a DC plan must: Have a minimum annual contribution rate of 8 per cent and require at least 50 per cent matching of the minimum rate from employers.
The government has indicated that some employers have different benefits for part-time and full-time employees (subsets or classes of employees). The comparability test of the ORRP will apply at the level of a subset of employees. “This approach would streamline the administrative process of assessing plan comparability.” In order to be recognized, a subset must be clearly identifiable in an employer’s registered pension plan or collective bargaining agreement.
Comparable tests are also established for hybrid, multi-employer and pooled retirement pension plans.
If a worker is employed in a workplace with a comparable plan, but they are not a member of that plan because it has a waiting period, they would be required to be a member of the ORPP until the waiting period has ended.
Voluntary workplace pension plan contributions will not be applicable when determining if a defined contribution plan is comparable to the ORPP. Employers who offer such plans will have until January 1, 2020 to make any necessary changes to enable them to meet the minimum total mandatory contribution rate of 8 percent for defined contribution plans under the comparability test.
An employer who has a comparable workplace pension plan has the option of opting-in to the ORPP. However, such enrollment would be in wave four of the ORPP enrolment schedule or at any time thereafter.
Administration of the plan
The plan will be overseen by an arm’s-length administration corporation with a strong governance structure. The Ontario Retirement Pension Plan Administration Corporation (ORPP AC) will begin contacting all Ontario employers in early 2016 to verify their existing pension plans and assess the coverage offered to employees. The administrative entity will be responsible for enrolling eligible employees and employers into the ORPP; collecting, holding and investing contributions; and paying out retirement benefits. More information will be forthcoming from the ORPP AC. In addition, the province is establishing a Nominating Council to provide advice and recommendations to the government on the appointment of the initial board of directors for the Ontario Retirement Pension Plan Administration Corporation (ORPP AC).
The government intends to establish an Office of the Chief Actuary to conduct actuarial valuations of the ORPP and to provide advice and analysis. As part of its accountability measures, the ORPP AC would be required to file an actuarial valuation of the ORPP with the Canada Revenue Agency every three years, and to publish the valuation.
Employers will need to start preparing for the implementation of the ORPP, beginning on January 1, 2017. The government has prepared a guide that may be useful to employers. To access the guide, click here.
Employers that offer a registered workplace plan that is not comparable to the ORPP will have until 2020 to decide whether they want to adjust their plans or enrol their employees in the ORPP.