As discussed in a previous Osler Update, the Ontario government continues to move forward with the Ontario Retirement Pension Plan (ORPP). In the 2016 Ontario Budget released on February 25, 2016, the government announced its intention to introduce proposed legislation setting out the requirements of the ORPP, including the rules related to plan funding, employer eligibility, benefit calculations, and the compliance and enforcement regime. The ORPP is a bold and ambitious pension innovation – arguably the most significant pension change in Canada in many years.
On February 16, 2016, the Ontario government announced its decision to delay the launch of the ORPP by starting enrolment in January 2017, one year later than the original start date, and by starting the first phase of contributions in January 2018, also one year later than originally planned. The 2016 Ontario Budget confirmed the new timetable for the commencement of contributions to the ORPP. The government explained that the reason for postponing the introduction of the ORPP is to provide more time for businesses to enrol in the new regime. In addition, the postponement will allow extra time for discussions between the federal and provincial governments about possible enhancements to the Canada Pension Plan (CPP). The Ontario and the federal governments announced their joint intent to work collaboratively with other jurisdictions to explore a range of potential CPP enhancements.
The new timetable for compliance for employers in Ontario is:
|Number of employees||Date of contribution commencement|
|Without a pension plan||Wave 1||500 or more (large)||January 1, 2018|
|Wave 2||50 to 499 (medium)||January 1, 2018|
|Wave 3||49 or fewer (small)||January 1, 2019|
|With a pension plan*||Wave 4||Any size||January 1, 2020|
*Pension plans that do not meet the applicable comparability test.
Prior to the recent announcements, the Ontario Ministry of Finance issued a technical bulletin which provides additional details regarding the ORPP framework. We outline some of the key features below and set out considerations for employers to help them prepare for the implementation of the ORPP.
What are the key details on contributions, benefit accrual and pensionable earnings?
The ORPP will mirror the CPP minimum earnings threshold of $3,500. Therefore, ORPP members and employers will make contributions to the ORPP based on individual annual earnings above $3,500. The maximum period during which a plan member may contribute to the ORPP will be 52 years. The benefit accrual rate for the ORPP will be 0.375% per year.
The ORPP is designed to provide plan members with a 15% income replacement rate after contributing to the plan over 40 years. Pensionable earnings for the purposes of the ORPP will include both cash and non-cash earnings, including amounts beyond base salary such as bonuses and commissions. When a plan member retires, the member's pension benefit would be calculated using the member's average earnings over their career.
Who is an "eligible employee" for membership in the ORPP?
An "eligible employee" is someone between the ages of 18 and 70 who is employed in Ontario. The recent technical bulletin explains that a person would be considered employed in Ontario if he or she works on a full- or part-time basis at the employer's establishment in Ontario, or is paid by the employer's establishment in Ontario. Therefore, employees who work from home but are paid by an employer in Ontario would qualify as "eligible employees." An example of an employee who wouldn't qualify as an "eligible employee" is a non-resident employee working in Ontario who is exempt from paying tax under a tax treaty.
How does the comparability threshold apply for each group or "subset" of employees belonging to the same pension plan?
If an employer provides a comparable plan, the employees covered under that plan will not be required to participate in the ORPP. In the recent technical bulletin the government advised that the comparability tests will be applied for each subset of an employer's employees, as opposed to for the plan itself.
A subset of employees could exist where a pension plan provides for differences in contribution rates or benefit structures based on factors such as the nature and terms of employment, years of service, whether the employee belongs to a union and any other objective distinctions. Also, subsets must be clearly identifiable in the governing documents of the pension plan or in the collective bargaining agreements (if any) to be recognized as a subset for ORPP comparability. For example, a subset may group all the unionized or hourly employees separately from the salaried employees.
How will the ORPP comparability test apply to multi-employer pension plans (MEPPs) or defined contribution (DC) pension plans with voluntary contributions?
MEPPs will have the ORPP comparability test applied to an employer's collective bargaining agreements and/or employee agreements at the subset level, as defined by the plan governing documents. Due to the unique nature of MEPPs, employers will have the option to assess the pension benefit comparability for the collective bargaining agreement, or for a subset of members in the collective bargaining agreement, using either the defined benefit (DB) accrual or DC contribution rate threshold. The DB accrual and DC contribution rate thresholds were discussed in our prior Osler Update.
DC plans that provide for voluntary employee contributions, which may include a matching contribution from the employer, will not be included in calculating the DC contribution for the purpose of the ORPP comparability test. For example, if a DC plan provides that the employees must contribute 2% of their earnings and the employer must contribute another 2%, but the plan allows employees to make additional voluntary contributions of up to 3% of their earnings (matched by the employer), the additional voluntary contributions of up to 3% employee/employer will not count for the purpose of the ORPP comparability test. Employers that have such plans will have until January 1, 2020 to make changes to their plans to meet the minimum contribution rate for DC plans under the ORPP comparability test, if desired.
If a workplace pension plan has a waiting period before an employee can commence participation in the plan, are contributions to the ORPP required during this waiting period?
Yes. If a pension plan provides for a waiting period for participation in the plan, both the employer and the employee would be required to participate in the ORPP for the duration of the waiting period.
How are benefits indexed under the ORPP?
A key feature of the ORPP is that pre-retirement benefits are indexed according to average wage-salary growth, and post-retirement benefits are indexed to the Consumer Price Index.
Do any special exemptions or opt-in provisions apply to participation in the ORPP?
By 2020, every Ontario employee will be required to participate in the ORPP or a comparable workplace pension plan. This means that the ORPP is generally mandatory for all Ontario employers and employees, with exceptions for: (1) employees who participate in a comparable workplace pension plan; (2) employees whose earnings fall below the minimum earnings threshold of $3,500 annually; and (3) self-employed individuals.
In addition, the recent technical bulletin indicates that there will be a religious exemption following an approach similar to the CPP. Individuals will be eligible to apply for a religious exemption under certain circumstances, including if they have taken a vow of perpetual poverty or are members of a religious sect that opposes the acceptance of any public benefits.
First Nations employers on a reserve and their employees will have the option to join the ORPP. Also, employers with existing comparable pension plans will be able to join the ORPP if they wish to offer additional pension coverage to their employees.
What should employers be doing now?
Contributions to the ORPP will start effective 2018 for some employers. Given the limited exemptions from the ORPP, the key issue for employers to consider is whether they currently have a comparable workplace plan in place for all employees. Employers that do not sponsor or participate in a registered pension plan or employers that currently sponsor a group registered retirement savings plan (RRSP) or deferred profit sharing plan (DPSP) should consider whether they will participate in the ORPP or establish a new workplace pension plan that would comply with the comparability criteria under the ORPP. An employer may also decide to integrate the ORPP with their existing group RRSP or DPSP. Integration is discussed in more detail below.
Employers that currently sponsor a registered pension plan that is not comparable to the ORPP at the subset level (or which has elements that are not comparable, such as a waiting period for eligibility) should consider their options. One option is to amend the registered pension plan to integrate the ORPP. In the context of a DC plan, this means that, to the extent that ORPP contributions are made by the employer, the employer's DC plan would be amended such that it would be required to make correspondingly less contributions to the registered pension plan. Another option is for the employer to amend the plan so that it is a comparable plan under the ORPP framework for all employees and thus avoid ORPP participation.
A third option is for the employer to make no changes to its plan and commence ORPP participation in addition to its existing plan, which would have clear cost implications. In making this determination, the employer would have to consider all relevant factors. Further, employers need to take into account any potential impediments to plan design change, such as collective bargaining agreements. Employers that are considering plan design changes or integration strategies should seek appropriate legal advice.
Employers that currently provide defined contribution pension plans to their workforce may wish to consider whether the ORPP is a preferable pension vehicle to deliver all or part of their employees' pensions. Specifically, due to the risk pooling, plan design factors (such as a benefit accrual formula and indexation) and projected size of the plan, the ORPP may be a better pension option for their employees (or at least for a portion of their employees' pensions). However, some employers may prefer to administer/control their pension benefits and not rely upon a third party. Each employer will have to assess and consider what is desirable for its workforce taking into account all relevant factors.
The bottom line is that the ORPP is coming and employers should be taking steps to evaluate their pension and retirement savings plans to determine ORPP comparability and to consider their workforce, culture and goals with regard to pension and retirement savings options for their employees.
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.