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Rhetoric shifts, but pension plans stay on course

Industry Spotlight
|Written By Stefan Dubowski
Rhetoric shifts, but pension plans stay on course

This time last year, the Conservative federal government was entirely deaf to calls from unions and certain provincial governments to boost the Canada Pension Plan and increase benefits for retirees. How things change. Now that the Liberals are back in power, CPP enhancement is back on the table. So what’s in store for the national pension plan? And what does the change in government mean for the one and only provincial system, the soon-to-be-implemented Ontario Registered Pension Plan?

By now, many people know the story behind the ORPP, a pension born of frustration. The Ontario government had been one of those parties asking the federal government to enhance the CPP. The province was worried about the significant proportion of workers (about 35 per cent in Ontario and 40 per cent nationally) without workplace pensions. The government also knew that broadly, many Canadians aren’t saving enough for retirement — a situation that could land the country in serious trouble in future years, when a large segment of the senior population may sink below the poverty level. The province argued that the feds should beef up the CPP to help ensure Canadians have adequate retirement incomes.

But the federal government under the former prime minister, Stephen Harper, refused. Then-finance minister Jim Flaherty said in 2014 that expanding the CPP would be a payroll tax on businesses. In effect, CPP enhancement would hurt the country’s fragile economy, which was still feeling the effects of the global financial downturn of 2007 and 2008.

Find out when your company must begin its ORPP contributions

The Ontario Registered Pension Plan comes into effect in 2017 for large employers that don’t have comparable workplace plans.

Other types of employers have to start contributing at different times. Check this chart for the rollout dates and rates from 2017 to 2021.

TYPE OF EMPLOYER 2017 2018 2019 2020 2021
Employers with 500+
employees with no plans
.8% 1.6% 1.9% 1.9% 1.9%
Employers with 50-499
employees with no plans
0% .8% 1.6% 1.9% 1.9%
Employers with 49 or fewer
employees with no plans
0% 0% .8% 1.6% 1.9%
Employers with
non-comparable plans
0% 0% 0% 1.9% 1.9%

                                                                                                Source: Province of Ontario

Ontario decided to go it alone and create its own pension plan. Throughout the development process, Premier Kathleen Wynne made it known that her government would still prefer to see a stronger CPP rather than the ORPP.

When the Liberals won the federal election on Oct. 19, it seemed Wynne would get her wish. Liberal leader Justin Trudeau had promised to improve the CPP, paving a way for the Ontario government to scrap the ORPP in favour of a nationwide solution.

So is that the end for the ORPP? Not even close. According to pension experts, even though the federal government now seems ready to amend the CPP, doing so will take a lot of time and effort. And there are no guarantees the changes will come about. That means Ontario employers still need to get ready for the ORPP — and companies still have plenty of questions about this impending provincial pension.

CPP enhancements will take time

Here’s why the federal government can’t enhance the CPP quickly: The feds need approval from two-thirds of the provinces — constituting two-thirds of the population as well — to make any amendments to the plan. It won’t be easy for the Trudeau team to get such a solid consensus; it could take years.

Meanwhile, the Ontario government is on track to implement the ORPP starting in 2017. And the province has invested heavily to make it a reality. “They have committed significant resources to it, including legislation, establishing the framework, studying the contribution levels that should be required, and deciding which existing plans should be considered comparable,” says Susan Seller, partner and head of the national pension and benefits practice at Bennett Jones LLP. She concludes that the Wynne government won’t abandon those ORPP implementation investments until it’s sure that the CPP will pick up the slack.

What might an enhanced CPP look like if the federal government did amend it? Well, look at the ORPP, says Stephanie Kalinowski, partner, Hicks Morley Hamilton Stewart Storie LLP. The Ontario plan might serve as the starting point for discussions about an expanded CPP. For instance, the cap on pensionable earnings in the CPP is $54,900 for 2016. The cap in the ORPP is $90,000. Perhaps the CPP could scale up to match.

Jana Steele, partner, pensions and benefits at Osler Hoskin & Harcourt LLP, predicts a straightforward increase in contributions and benefits. “In order to get more, someone’s going to have to pay more.

That’s just the way pensions work.” But beyond that, the government could make CPP enhancements voluntary for the provinces, such that some areas would participate and others not.

It’s impossible to say exactly what the CPP might look like if it’s amended. That fact makes it difficult to plan ahead. Steele’s advice: “There isn’t much to be done except having a strong understanding of your current benefit program agreements, collective agreements, and employment contracts so you can act in a timely and productive manner if and when — a big if and when — CPP enhancement ever becomes a reality.”

Get ready for the ORPP

Returning to the made-in-Ontario system, Seller points out that plan sponsors still have questions. How will the ORPP affect their companies’ costs and operations? Should their businesses throw out their current pension plans, or perhaps change those plans to make them comparable to the ORPP, which would exempt the organizations from participating in the provincial plan?

Answers to some of those questions are straightforward. Others are decidedly not.

With respect to the timeline, by 2020, every worker in Ontario must be enrolled in the ORPP or a comparable workplace plan. Participation in the ORPP involves employees paying 1.9 per cent of their annual earnings up to $90,000, and employers contributing a matching amount: 1.9 per cent. The first ORPP contributions are scheduled to begin in 2017, starting with large employers that don’t have pension plans. Those organizations and their employees will have to contribute just 0.8 per cent in the first year, but the contribution rates rise each year to 1.9 per cent by 2019. (See “Find out when . . . ” above for details.)

Throughout 2016, the province will be in sleuth mode assessing current workplace plans to decide whether or not they’re comparable to the ORPP. The government will assess direct-benefit plans as comparable if they have a minimum accrual rate of 0.5 per cent. Comparable DC plans must have a minimum contribution rate of eight per cent with at least 50 per cent contributed by the employer.

Note that comparable DC plans have significantly higher contribution requirements (eight per cent) compared to the ORPP (3.8 per cent). Why? According to an Ontario government backgrounder, DC plans “do not . . . provide people the assurance they will not outlive their savings, and protect them from market volatility. Actuarial analysis has been conducted to place a value on these differences, and determine a contribution rate that would be able to reliably deliver the same level of retirement income replacement as the ORPP.”

Seller is worried that the ORPP system will undermine the work that some companies have already done to create good workplace plans. For instance, many organizations sponsor generous and well-managed DC plans that let employees choose different contribution levels, “anywhere from one to five per cent or three to five per cent or higher — and the employer matches that. The minute the government says it will exempt DC plans with a combined contribution rate of eight per cent and a minimum employer contribution of four per cent, you would knock off a lot of those DC plans that are structured with employee-selected contribution levels with an employer match, and which could actually go even higher than eight per cent. You also lose the potential for those plans to be improved over time.”

Kalinowski notes that some companies might decide to continue with their non-comparable plans as is, rather than scrap them or change them to be comparable. “A plan that might not be considered comparable but has a contribution rate up to 14 per cent [in] total is not something you’re just going to ditch to save a 1.9-per-cent employer contribution,” she says. “And the ORPP benefit level may not be equivalent to what’s available through your plan. It’s not necessarily apples to apples.”

Steele suggests the ORPP could cause some companies to start offering workplace pensions — if an organization feels that it would prefer its own plan to meet specific goals or human-resources needs, for instance. That would be fine. After all, “ultimately, the goal of the ORPP is enhancing pension coverage and adequacy,” she says. “If that means a company putting in its own great plan, fantastic.”

  • Lawyer

    JP laporte
    Those wishing to exempt themselves from the ORPP should set up a personal pension plan through INTEGRIS Pension Management Corp.
  • Arrogance

    Albert OConnell
    Last week the provincial finance ministers met with their federal counterpart Bill Morneau. All agreed that now was not a good time to take money away from the taxpayers. All but one - the province of Ontario. Funny how it is that the province with one of the highest debt loads and one that has been involved in scandal after scandal wants to go ahead with their ORPP. Imagine they want to make sure that Ontarians have more money for their retirement. This from a government that has proven itself time and again that they are fiscally incompetent. Another fiasco in the making!

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