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The Ontario Registered Pension Plan – An Employer, Employee, and Election Issue

The Ontario Liberal Government has begun to unveil new details of the Ontario Registered Pension Plan (“ORPP”) – a plan that may impact voters as we approach another election and most certainly will affect employers throughout Ontario.

Premier Kathleen Wynne is the major driving force behind the new ORPP, but, ultimately, presents the idea is an alternative to enhancement of the CPP. Prime Minister Stephen Harper and the Conservative Federal government staunchly oppose the design and implementation of the ORPP. Basic requirements and features of the ORPP have been released through the passing of the Ontario Retirement Pension Plan Act, 2015 and a consultation paper titled “Key Design Questions” released in December, 2014. Since the consultation paper was released, the Ontario government has received feedback from thousands of key stakeholders on key design issues such as:

• How to define a comparable workplace pension plan;
• Where to set the minimum earnings threshold; and
• How to support the self-employed.

The Ontario government has recently released new information pertaining to the definition of a comparable plan, but the remaining issues have not been resolved.

Key design features of the ORPP

The ORPP was borne out of the Ontario Retirement Pension Plan Act, 2015 and will be mandatory for all eligible employees and employers in Ontario. Eligibility depends on the following factors:

• Employees must be between 18-70 years of age
• The employee does not participate in a comparable workplace pension plan
• The employee earns over a minimum earnings threshold (the threshold limit has not been determined)
• Federally regulated employees working in Ontario will not be included in the ORPP

The ORPP is designed such that employers and employees will contribute equally to a maximum of 1.9% each (3.8% combined) of salary. Some other key features include:

• Annual earnings above $90,000 will be exempt from taxation

• Investment of all contributions will be handled by the Ontario Retirement Pension Plan Administration Corporation

• ORPP benefits will be adjusted with inflation

• The benefit received on retirement will depend on the years of contribution and salary earned during contribution years

How would the ORPP impact employers?

The major impact on employers is financial in nature, as employers will be forced to contribute to the ORPP at the prescribed rates or design their own plan that is comparable. Whether your current pension plan is considered “comparable” depends on the specifics of the plan. Recently the government has adjusted their position and stated that some defined-contribution plans may be acceptable comparators, rather than only defined-benefit plans. A defined-contribution plan must have 50% matching by employers and have a minimum annual contribution rate of 8 per cent. Defined-benefit plans must have a minimum accrual rate of 0.50 percent. The accrual rate represents the rate at which benefits are built up in a pension over time.

An individual verification process to determine plan comparability is expected to begin as early as 2016.

Additionally, employers may have to re-think how they design overall compensation packages – a useful tool for attracting the most talented employees. Many employers currently utilize various tools to fund future income for employees in a manner that will not pass the comparable test of the ORPP. Plans that are not comparable include employer funded RRSPs, tax-free savings plans, and deferred profit sharing. Employers that currently offer these types of retirement savings plans will need to assess their affordability as implementation of the ORPP approaches.

How would the ORPP impact employees?

For some employees, the ORPP will provide an added boost to their retirement financial security. However, for others, the new plan could throw a wrench in an already established personal retirement plan. For example, the Income Tax Act contains thresholds related to Old Age Security (“OAS”) and any amount above these thresholds can trigger a repayment provision.  In 2015, if your net worldwide income exceeds $72,809, then you may be required to repay part or all of your OAS. For retirees drawing an income out of RRSPs that have been converted to Registered Income Funds, the ORPP could push those persons over the threshold and trigger repayment of some of the OAS pension.  For someone planning a decent retirement income through the use of RRSPs, that would almost certainly be the case.  The blanket exclusion of RRSPs as a comparable plan might end up defeating the value of the ORPP for many workers with that tax implication.  At this stage the Ontario government is relying on the assistance of the Federal government to amend the Income Tax Act, assistance which the current government is opposed to providing.

When will the ORPP commence?

The Government of Ontario has recently released a timeline that includes three distinct phases of implementation dependent on the size of the employer, and a fourth phase for those employers that have an existing, but deficient, retirement pension plan. Large employers (over 500 employees) will be required to begin contributing by January 1, 2017. Medium sized employers (50-499 employees) must begin contributing the ORPP by January 1, 2018, and smaller employers (less than 50 employees) will begin by January 1, 2019. Contribution amounts for small, medium, and large employers will be phased in over a 2-year period until the full combined rate of 3.8% is met. Employers with a non-comparable plan will be required to begin contributions by January 1, 2020 if the deficiency has not been rectified. Benefit payments from the ORPP is set to begin 2 years after commencement.

The lawyers at CCPartners will continue to review and monitor new information regarding the implementation of the ORPP and how it affects employers. If you have questions regarding the ORPP or require advice with respect to your own employee pension and retirement plans please contacts one of our lawyers.