On August 13, 2015 we released a blog outlining the initial details of Premier Wynne's plan to unveil the new Ontario Retirement Pension Plan ("ORPP") to complement the longstanding Federal Canadian Pension Plan ("CPP"). At the time, it was thought that an elected Federal Liberal government would see the ORPP disappear in favour of an enhanced CPP. However, the Federal government does not currently have the support to overhaul CPP and Premier Wynne has announced she will move forward to institute the new retirement security plan in Ontario.
As initially planned, contributions towards the ORPP will begin as early as January 1, 2017 and every eligible employee would be a part of the plan by 2020. Benefit pay-out is planned to begin in 2022.
On January 26, 2016 Premier Wynne unveiled new design details of the ORPP. Some of the new details that were released include the indexation of benefits, employee based religious exemptions, key definitions on employment and earnings, and how existing pension plans will be compared.
Indexation of Benefits
The ORPP is designed to provide a 15% income replacement if an employee has contributed to the fund for 40 years. Ultimately the amount of the retirement benefit will be a reflection of the plan member's average earnings during their contribution years. As described in a 2015 press release, benefits will be indexed with inflation for both pre and post-retirement. This means benefits earned in the past, based on average wages, will be indexed to reflect current value and benefits paid during retirement will be indexed to account for inflation.
An exemption will be offered to individuals employed within a religious order that have taken a vow of perpetual poverty, and receive wages from the religious order. A similar exemption will be available for self-employed individuals' part of a religious group that opposes acceptance of such benefits.
First Nation employers and their employees are exempt from participation in the ORPP but may opt-in with mutual agreement. Both parties would be permitted to opt-out at any time.
As we know, aside from a few exceptions, participation in the ORPP is mandatory for all Ontario employers. The definition of employment will include any person who reports to work on a full or part-time basis at an Ontario based establishment. However if you thought you could avoid remitting contributions by having employees work from home, think again. The plan includes those who work from a home office or elsewhere but are paid by an Ontario based employer. The plan will also include non-resident workers who earn above the earnings threshold and have taxable income.
The amount of remittances will be based on a global view of compensation. In other words, pensionable earnings will include non-salary benefits such as bonuses and commissions. The minimum earnings threshold for an employee to be included in the ORPP is $3,500. This amount mirrors the minimum threshold for CPP contributions, and sets the bar extremely low for contributing employees.
One of the key exemptions for employers will be the existence of a comparable workplace pension plan. The Government of Ontario recently released a few details on how comparability of plans will be examined. For workplaces that use a variety of pension options for employee (e.g. full-time vs. part-time), the government will examine each subset/class of employees that can be clearly identified. Each subset will be examined individually and could receive an exemption from participation in the ORPP. For those employees note yet eligible for a workplace plan (e.g. during a probationary phase at new employment), remittances/contributions must be made until they are a plan member.
Two of the most common types of pension plans are based on a "defined benefit" (DB) or a "defined contribution" (DC) and the government has previously stated that these types will be separated for comparability testing. However, for employers that contribute to the same global pension fund as other employers (commonly known as Multi-Employer Pension Plans), the separation between DB and DC can be difficult to distinguish. In these scenarios the employer will have the choice of which threshold to be evaluated against. This may sound opportunistic for employers, but it is easy to imagine this method actually hurting employers as the government attempts to compare apples and oranges.
Premier Wynne has also unveiled that voluntary DC pension plans will not suffice when comparing to the mandatory 8% contribution rate.
In addition to some of the plan details discussed above, Premier Wynne unveiled safeguards to ensure the ORPP remains solvent over the next 100 years. This includes establishing an Office of the Chief Actuary to monitor and analyse the fund and a Board of Directors with a set of powers able to remedy any shortfall (including reduction of benefit indexation and increasing contributions). While sustainability is typically a core feature of any public benefit, the costs of this plan will likely leave many employees and small to medium businesses pondering how to afford the contributions. Many employers may be faced with the tough decision of cutting staff or freezing wages to remain compliant.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.