The Ontario government has recently introduced legislation to provide employees who do not have sufficient workplace pension plans with additional income at retirement. Its goal is to ensure that every employee in Ontario will be part of either its new Ontario Retirement Pension Plan (ORPP) or a comparable workplace pension plan.
There are many reasons the government has invested in this new pension program. First, the ORPP is meant to be a supplement to the Canadian Pension Plan (CPP) and Old Age Security, which many believe do not provide nearly enough income for retirees. Second, few workplaces provide employees with a pension plan, and many individuals do not adequately prepare themselves for retirement. This puts increased pressure on social programs designed to assist seniors and workers who do not have adequate finances to retire.
While the Ontario government has not yet legislated many of the details of the ORPP, there is already a lot of information on the Government of Ontario’s website. The following list is a summary of the five things that every employee and employer in Ontario should know before the ORPP comes into force:
Employees and employers are going to be mandatorily enrolled in the ORPP if the employer does not provide for a “comparable workplace pension plan” (see #2 below). The plan will require both employees and employers to make an equal contribution of up to 1.9% of the employee’s income on their first $90,000 of income within a given calendar year.
Employers and employees will begin contributing to the plan somewhere between 2017 and 2020, depending on the size of the employer and whether it has some kind of registered plan in place. More information on the enrollment schedule can be found here.
2. Comparable workplace pension plans
As stated above, employers and employees with “comparable pension plans” will not be required to contribute to the ORPP. A “comparable plan” is one that:
- Provides a predictable stream of income for life;
- Provides people with security that they will not outlive their savings;
- Requires the employer to contribute;
- Aims to replace at least 15% of a person’s pre-retirement income; and
- Matches or exceeds the benefits that the ORPP offers.
A defined benefit plan, which offers a specific monthly benefit upon retirement based on a predetermined formula, will likely be considered “comparable”, assuming it meets the criteria set out above. An earnings-based defined benefit plan, which is like a defined benefit plan except that an employee’s earnings history affects the benefit the employee will receive, will be treated in the same way. It will be considered a comparable plan if the annual benefit accrual rate is at least 0.5% (the percentage of an employee’s income that he or she contributes into a pension plan).
This is in contrast to a defined contribution plan, where an employee’s cash stream in retirement fluctuates based on how much money the employee contributed and the strength of the pension’s investments. The government has suggested that in order for a defined contribution plan to deliver the same level of income as the ORPP, an employee would need to contribute 8% of his or her base earnings to the plan.
The government has also set out formulas for determining whether a hybrid defined contribution/defined benefit plan will be considered comparable, which can be found here.
Other retirement income plans, like group RRSPs or Deferred Profit Sharing Plans will not be considered comparable.
The Ontario Government has not yet set out the precise formula for what benefits the ORPP will provide on retirement. However, it will be based on the number of years the individual contributed to the plan, how much the individual contributed over those years, and the individual’s salary throughout those years. The ORPP will provide individuals with payments at age 65, but options for early and late payment start dates (as early as age 60 or as late as age 70) will be available. Payments will start in 2022.
4. Self-employed individuals
Long-term, the Ontario Government is looking for ways to ensure predictable retirement income for self-employed individuals. However, in its first iteration, the ORPP will not cover self-employed individuals.
5. Administration of the ORPP
One of the most important aspects of any pension plan is how the money will be collected and invested. For the ORPP, the Ontario Government has already created the Ontario Retirement Pension Plan Administration Corporation (the “ORPP AC”). The ORPP AC will set up the ORPP, register plan members, and collect and invest contributions. Importantly, the money it collects will not form part of the Ontario government’s revenues. Instead, the ORPP AC will hold the funds in trust for plan members. The contributions will also cover the cost of administering the ORPP.
Most of the above information has not been legislated; therefore, it is subject to change. However, with ORPP payments set to become due as early as 2017 for some individuals, it is important for employees and employers to start planning ahead.