On May 1, 2014, Minister of Finance Charles Sousa tabled Ontario's 2014 Budget, Building Opportunity – Securing Our Future (the Budget). Among other things, the Budget made a number of significant announcements regarding pension reform, chief of which is the creation of a new, mandatory "made-in-Ontario" supplement to the Canada Pension Plan (CPP) called the "Ontario Retirement Pension Plan" (ORPP). The Budget also announced future legislation to introduce pooled registered pension plans (PRPPs) in Ontario, to amend the funding rules applicable to defined benefit (DB) pension plans, and to move forward with asset pooling for plans in the broader public sector.
The New Ontario Retirement Pension Plan
In recent years, Ontario led efforts by many provincial and territorial governments to expand CPP contributions and benefits. To date, the federal government has rejected any expansion of the CPP beyond its current benefit levels. The Budget identified the CPP as fundamental to retirement income security, but characterized its current benefit levels as "too low". The Budget accordingly announced the creation of a new mandatory workplace pension plan – the ORPP – for all Ontario employees. The ORPP will be specifically targeted at those with "middle pre-retirement incomes".
According to the government, the ORPP could be integrated with the CPP in the future should the federal government revisit its decision not to enhance the CPP.
While intended to supplement the CPP, the ORPP would contain many of the features of a large-scale private or public sector multi-employer pension plan. Highlights include:
- Phased implementation beginning in 2017.
- Shared employer and employee contributions, each up to 1.9% (3.8% combined) of an employee's earnings above a specified minimum threshold (to be determined following consultations) and up to a maximum earnings threshold of $90,000 (to be indexed each year).
- Retirement benefits targeted to replace 15 % of an individual's pre-retirement earnings (up to the maximum earnings threshold). These benefits would be indexed to inflation (as under the CPP).
- Exemptions for employers who offer a "comparable" pension plan.
- Inter-generational equity: Benefits would accrue only as contributions are made, and all employees would contribute at the same rate.
- Arm's length administration and centralized investment management.
For example, the Budget indicates that an employee with steady career earnings over 40 years of $52,500 would receive a combined CPP/ORPP annual benefit of approximately $19,935 – a 60 % increase over the maximum CPP benefit. An employee with steady career earnings over 40 years of $90,000 would receive a combined CPP/ORPP annual benefit of $25,275 – roughly double the benefits under the CPP alone.
Mandatory Participation with Exemptions
Employees who already participate in a "comparable workplace pension plan" would not be required to enrol in the ORPP. The Budget does not define "comparable workplace pension plan". It is therefore unclear whether all employers who offer a registered pension plan (whether defined benefit or defined contribution) to their employees will be exempt from contributing to the ORPP, or whether an existing pension plan will have to satisfy enumerated criteria before an employer may claim exemption.
To the extent that employers may be required to contribute to the ORPP in addition to their existing employee retirement plans (either because their pension plans are not "comparable" or because they sponsor other, non-pension arrangements like group registered retirement savings plans or deferred profit sharing plans), they may wish to consider amending those plans to offset their new ORPP contribution obligations – or terminate them altogether. Labour and employment laws may impose additional restrictions on such an approach.
Mandatory enrolment of employers and employees would begin in 2017 with the largest employers. Contribution rates would be phased in over two years.
As noted above, the ORPP will require equal employer and employee contributions above a minimum earnings threshold. The government will consult on what the minimum earnings threshold should be, and whether it should mirror the Year's Basic Exemption currently in place under the CPP (currently $3,500).
One or more arm's length bodies will administer the ORPP and invest its assets. The government is currently considering to what degree, if any, it may be possible to benefit from the expertise of Ontario's large public-sector pension funds with respect to the ORPP's governance and investment regimes.
Depending on the government's proposals, the ORPP could represent significant opportunity for Ontario's public-sector pension funds – already international models for governance and public and private investment expertise – to expand their mandates and assets under management.
The government will also consider how to involve Ontario's financial services sector and its proposed new asset pooling entity (more on this below) in the ORPP's administration and investments. Accordingly, the ORPP may present new opportunities for banks, insurers and others in the financial sector.
The government will continue to engage its Technical Advisory Group on Retirement Security, formed last year, to make recommendations on the ORPP's design details.
The government will consult business and labour groups in order to manage the ORPP's impact on business. Although the Budget does not mention specific business sectors, we expect that many small businesses and other businesses with large employee populations and thin margins will likely want to make their voices heard on the ORPP.
The government will also consult other provinces to determine whether the ORPP could or should expand beyond Ontario. The Budget does not name any specific jurisdiction, but it has been reported that the governments of Manitoba and Prince Edward Island are interested in working with Ontario in this regard.
Further technical details will be available later this year prior to the introduction of legislation.
What Does it Mean for Employers?
The ORPP's most significant ramification for employers will be its effect on payroll. Employers offering pension and retirement plans that do not exempt them from ORPP obligations may also need to consider integrating their plans with ORPP contributions and benefits in order to mitigate costs. Many employers undertook similar amendments when the CPP was first introduced. As always, employers are encouraged to consult their labour, employment and pension lawyers to determine whether such amendments are permissible or advisable in their circumstances.
Separately, the Budget does not contain details about sanctions under the ORPP, but, if the arrangement is structured to mirror the CPP, employers could be exposed to fines, penalties and interest for failure to withhold and remit ORPP contributions. More details on this and other regulatory and design elements can be expected if and when legislation is introduced.
Other Announcements Relating to Pension Plans
Pooled Registered Pension Plans
PRPPs are large-scale, multi-employer defined contribution (DC) savings plans administered by licensed third-party administrators. PRPPs allow employers to offer their employees participation in a DC plan where a third-party administrator assumes responsibility for most of the fiduciary risk that the employer would otherwise assume under a traditional DC plan.
Federal legislation, which came into force in late 2012, allows employers to offer PRPPs to federally-regulated employees on a voluntary basis. This legislation creates a legislative framework pursuant to which individual provinces can introduce parallel legislation to offer participation in PRPPs to employees in their own respective jurisdictions. To date, Alberta, British Columbia, Quebec and Saskatchewan have introduced or passed such legislation, but only Quebec's is in force.
The Budget indicates that Ontario will introduce legislation in fall 2014 to make PRPPs available to employees and the self-employed in Ontario. Like federal PRPPs, Ontario PRPPs would have the following features:
- Voluntary participation and contributions by employers.
- Automatic enrolment of employees, with the ability for an individual employee to opt out within a period to be specified in the legislation.
- "Low cost". Third-party administrators would be require to provide PRPPs at a "low cost". The Budget does not specify whether Ontario will follow the federal approach of defining "low cost" as "at or below costs incurred by members of defined contribution plans that provide investment options to groups of 500 or more members".
Some employers may wish to consider providing PRPPs, including in place of an existing DC plan, to the extent that PRPP legislation is expected to transfer most fiduciary risk from the employer-administrator to a third-party administrator. However, the employer will still need to monitor the particular PRPP provider and ensure that it remains appropriate for its employees.
It is also unclear how Ontario's proposed PRPP legislation will dovetail with the proposed ORPP, and, in particular, whether employers who offer and contribute to a PRPP would be exempt from having to contribute to the ORPP.
Target Benefit Pension Plans
"Target benefit pension plans" (TBPs) combine the features of traditional DB and DC pension plans. They offer a "target" benefit formula but provide for fixed employer, and in some cases, employee, contributions. If the fixed contributions cannot support the target level of benefits, the plan administrator must increase contributions, reduce future or previously accrued benefits, or some combination of these measures.
The Pension Benefit Act (Ontario) (PBA) currently permits multi-employer pension plans established pursuant to a collective agreement or trust agreement to provide target benefits.
Amendments to the PBA in 2010 introduced new target benefit provisions, available only to plans the contributions under which are collectively bargained, and subject to prescribed requirements. To date, those provisions have not been proclaimed in force, and no enabling regulations have been published.
The government will consult stakeholders on a regulatory framework for multi-employer target benefit plans with a view to introducing rules governing eligibility conditions, funding rules and governance requirements. The Budget is not clear whether this framework would supplant the PBA's current regime governing target benefit multi-employer plans established pursuant to a collective agreement or trust agreement, or whether it would replace the 2010 amendments that have never been proclaimed in force (or both).
It is also unclear if the government intends to eliminate the requirement under the 2010 amendments that contributions to a TBP be collectively bargained. This requirement limits availability of TBPs as a design solution for Ontario employers and employees and does not exist in many other jurisdictions.
The government will also develop a framework for single employer TBPs following its consultations on multi-employer TBPs. The government previously announced such a framework in its 2013 Budget.
Defined Benefit Plans
The Budget proposed the following amendments applicable to DB pension plans, including:
- New regulations defining the level at which a "contribution holiday" may be taken and its duration. There is no indication as to what this threshold may be.
- New regulations requiring accelerated funding of benefit improvements in underfunded pension plans.
- Additional rules to support the long-term sustainability of DB plans following stakeholder consultations. It is unclear what these additional rules may be.
- An extension (to December 31, 2017) of the temporary exemption on (i) multi-employer plans; and (ii) jointly-sponsored pension plans (JSPPs), that are not subject to solvency funding, from the requirement that plans with solvency ratios of less than 85 per cent file valuations annually rather than triennially. The government will consult on permanent rules for such plans.
- Amendments to the PBA to permit the conversion of single-employer pension plans (SEPPs) to JSPPs. Among other things, conversion would require: preserving beneficiaries' accrued benefit entitlements; providing advance notice to plan beneficiaries and trade unions; and obtaining the consent of the Superintendent of Financial Services and a requisite number of plan beneficiaries. New regulations would also permit employers to transfer SEPP liabilities to an existing JSPP.
In addition, as discussed above, the PBA currently exempts certain named JSPPs from solvency funding requirements. The Budget announced that the government may introduce broader solvency funding exemptions for JSPPs. If so, we expect this to be the primary reason for the sponsor of a SEPP to consider converting to a JSPP.
As previously announced, the government will introduce a framework to allow broader public sector pension plans to pool their assets with those of endowment and other public funds for investment purposes. The government will introduce legislation to establish a new arm's length asset pooling entity with a target date of spring 2015. The Budget indicates that the Ontario Pension Board and the Workplace Safety and Insurance Board are willing to be the initial participants in the new pooling entity.
The Budget's pension announcements have significant ramifications for employers, administrators, trustees and pension service providers.
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