Paul Litner, Jana Steele
Dec 9, 2015
Recently, there has been significant debate and discussion regarding retirement savings adequacy and coverage in Canada. Are we saving enough? Should there be expanded mandatory government sponsored plans, such as the Canada Pension Plan (CPP)? What role should employers and/or governments play in improving pension coverage in Canada? These important social questions have thrust pensions into the media and political spotlight. Consequently, politicians are now paying attention to pension matters – so much so that pensions have become an election issue – with the result that legislators are introducing new laws across the country that will affect employers and the Canadian retirement income system in general.
This renewed focus on pensions has led to ongoing reforms to pension standards legislation, including the creation of new innovative plan designs like Pooled Registered Pension Plans, Voluntary Retirement Savings Plans and Target Benefit Plans. However, perhaps the most significant and innovative development yet is the Ontario government’s proposal to implement the Ontario Retirement Pension Plan (ORPP), which will cover all employers/employees in Ontario who are not in a comparable workplace pension plan. While there is considerable uncertainty at this time regarding any potential CPP expansion at the federal level, we do know that the Ontario government is currently proceeding with the ORPP.
What is the ORPP?
The ORPP is intended to close the retirement savings gap for Ontarians without a secure workplace pension plan. Because of the unwillingness of the former federal government to consider mandatory expansion of the CPP, the Ontario government has taken steps to implement the ORPP and has passed two bills providing certain details regarding the ORPP thus far.
The ORPP is intended to be supplemental to the CPP. The plan aims to provide a predictable source of retirement income based on an employee/employer contribution rate of up to 1.9% each. The Ontario government is committed to ensuring that by 2020 every employer will participate in the ORPP or a comparable workplace pension plan for all employees in Ontario.
Who Will the ORPP Cover and Who is Exempt?
As discussed in more detail below, the ORPP will be phased in to apply to employers that do not provide a comparable workplace pension plan to all their employees. In 2016, employers will be canvassed to determine whether they provide a registered pension plan and to establish their phase-in timing for participation in the ORPP where applicable.
The Ontario government defines a comparable workplace pension plan as a registered pension plan that meets certain minimum thresholds. Defined benefit (DB) pension plans will be comparable plans where the plan provides a minimum annual benefit accrual rate of 0.5%. Defined contribution (DC) pension plans must have a minimum annual contribution rate of 8% of pay and require at least 50% of that minimum to be contributions by the employer to be considered a comparable plan. It is important to note that only “registered pension plans” may qualify. Accordingly, a group RRSP or deferred profit-sharing plan (DPSP) would not qualify as a comparable workplace pension plan, regardless of the contribution rates.
Phase-in Schedule for the ORPP
The Ontario government plans to phase in the ORPP in four waves, with the first wave being in January 2017. Employers first need to determine what wave they fall within. If the employer does not currently offer a registered pension plan, the employer will fall within wave 1, 2 or 3, depending on the size of the employer. Employers that do offer a registered pension plan will fall within wave 4.
Wave 1: Large employers (500 or more employees) without registered workplace pension plans – ORPP contributions to start January 1, 2017
Wave 2: Medium employers (50–499 employees) without registered workplace pension plans – ORPP contributions to start January 1, 2018
Wave 3: Small employers (49 or fewer employees) without registered workplace pension plans – ORPP contributions to start January 1, 2019
- Wave 4: Employers with non-comparable registered workplace pension plans or comparable workplace pension plans that do not apply to all Ontario employees – ORPP contributions to start January 1, 2020
Wave 4 employers will have until 2020 to determine whether to amend their registered pension plan to cover all employees in a comparable plan or to participate in the ORPP for employees who are not so covered. By 2020, employers of all sizes will be required to provide a comparable workplace pension plan or participate in the ORPP. Where all employees of an employer participate in a comparable workplace pension plan, the employer will not be required to participate in the ORPP.
For the first three waves, the contribution rate for both employers and employees will start at 0.8% for the first year and 1.6% for the second year, and will reach the fully phased-in rate of 1.9% each by 2019, 2020 and 2021, respectively. The fourth wave will start at the fully phased-in contribution rate of 1.9% in 2020. By 2021, the fully phased-in contribution rate will be 3.8% split equally between the employer and the employee.
What Should Employers Be Doing Now?
The ORPP will be implemented in Ontario effective January 1, 2017. Accordingly, employers need to get ready for the change.
Employers need to examine their existing workforce, pension and retirement savings plans to determine if they will be subject to the ORPP. If an employer currently has a registered pension plan in place that would not be a comparable plan, the employer should consider whether it is advisable to change its plan to a comparable plan. If an employer currently sponsors a group RRSP or DPSP or does not have any retirement plan in place, the employer should consider whether to implement or commence participation in a new comparable plan. Any employer considering plan amendments to make their plan comparable for purposes of the ORPP or establishing a new comparable plan should seek legal advice on the implementation of the plan amendment or new registered pension plan.
Employers also need to examine their existing employment contracts and collective agreements. An employer that will participate in the ORPP may wish to consult labour counsel and potentially take this into consideration in collective bargaining, as it will be an additional benefit cost for the employer. It will also come into account in total projected compensation costs, unless the employer makes other benefits or compensation changes. Again, any such proposed changes should be discussed with legal counsel.
What About CPP Expansion?
The recent federal election created uncertainty surrounding pension reform in Canada at both the federal and provincial levels. Will there be CPP expansion? How would it impact the ORPP? With the recent change of the federal government, the Ontario government has stated that Premier Kathleen Wynne and Prime Minister Justin Trudeau will be “active partners” in a national discussion regarding pension enhancement, including the CPP and the ORPP.
The CPP is a joint pension program between the federal government and the provinces, and CPP expansion would therefore require the support of the federal government, as well as two-thirds of the provinces, representing two-thirds of citizens. Accordingly, a key component of any CPP expansion would be strong federal backing, as well as obtaining the requisite support of the provinces, which is potentially daunting.
At this stage, whether CPP expansion will proceed and what any such expansion would look like is unclear. If the CPP were to be sufficiently expanded it is possible that the ORPP would be incorporated in some manner into the CPP expansion. What remains clear is that some mandatory expansion of public plans will occur to improve the pension plight of Ontarians, and perhaps Canadians, and employers will have to determine how to change their plan designs so as to integrate with these plans.