Canadian HR Reporter

CANADIAN HR REPORTER October 5, 2015 14 FEATURES PENSIONS The latest details on Ontario's pension plan Key details are still sketchy but employers need to be prepared By Ross Gascho W ith an inception date of Jan. 1, 2017, for cer- tain employers and employees, little is known about the Ontario Retirement Pension Plan (ORPP). Many of the fea- tures of the plan have been set out in non-binding background papers, meaning employers will not have certainty about the plan until additional legislation is ta- bled and passed. It was worrying that the govern- ment had no details on the ORPP when it was first announced. Even now, a bit more than a year before its launch, we still don't know what benefits it will provide, whether those benefits will be affordable relative to the contribution rates, whether the benefits will be guar- anteed, whether multi-employer participants are in or out, or whether the principal objective of the ORPP is to provide pensions or to be an infrastructure fund that also happens to pay pensions. Background It is necessary to view the ORPP in the context of the Canada Pen- sion Plan (CPP). Since its 1966 inception, there have been dis- cussions about what the CPP benefits should be and at what contribution rate. ose discus- sions reached a peak in the 1990s when the CPP was substantially reformed to require higher contri- butions — currently 9.9 per cent of covered payroll up to $53,600 — and to freeze the level of earn- ings on which contributions are not required at $3,500. Much of the subsequent politi- cal discussion has shifted to the possibility of a higher CPP earn- ings base. at discussion came to a halt in 2012 when the federal government stated it would no longer participate. e Ontario government an- nounced in its 2014 budget that, absent federal government par- ticipation, it would proceed on its own to establish the ORPP. Its expressed concern is that those people who earn up to $90,000 per year are at risk of under-saving for retirement. e government also stated the ORPP would be struc- tured to allow it to be bolted onto the CPP later. Participation in the CPP has no impact on a person's ability to con- tribute to other retirement plans. By comparison, the ORPP will directly affect participants' abil- ity to save on a tax-deferred basis because contributions by and on behalf of an employee will result in a pension adjustment that, in turn, will directly reduce the em- ployee's registered retirement sav- ings plan (RRSP) deduction limit. e ORPP will be established as a multi-employer pension plan un- der the Income Tax Act. Application Unlike the CPP, which applies to all employed and self-employed individuals, the ORPP will apply only to employees and will not apply to the self-employed. Even among the employed, it will ap- ply to a subset of employees in Ontario. Federally regulated employ- ees (such as banks, airlines and telecoms) will be exempt, as will those who participate in a "com- parable workplace pension plan." e government has said com- parable workplace pension plans will be defined benefit plans that have an accrual rate of 0.5 per cent or more and defined contri- bution pension plans with total contributions of at least eight per cent of earnings, of which at least four per cent are paid by the employer. Participation in a group RRSP, a deferred profit sharing plan, a group tax-free savings account (TFSA) or an after-tax savings program will not be recognized. e government is considering how participation in a multi- employer pension plan will be treated. e result of the various exclu- sions is the ORPP will apply large- ly to the private sector, as many public sector employees partici- pate in plans that will qualify as comparable workplace pension plans. Even if a comparable workplace pension plan is available to an em- ployee, she must participate in the plan in order to be exempt from the ORPP. e potential for ad- ministrative complexity abounds due to waiting periods and op- tional membership in many plans. If an employee is in a waiting pe- riod to join a comparable work- place plan or chooses not to join a comparable workplace plan, he will be required to participate in the ORPP. Contributions will be paid equally by employers and em- ployees, with each contributing 1.9 per cent of earnings up to $90,000 (expressed in 2014 dol- lars). Contributions will not be required on the first $3,500 of earnings. Contributions will be collected using a mechanism that is separate from the CPP, as the federal government has refused to facilitate collections. e absence of co-ordination with the CPP contribution mech- anism may mean significant ad- ministration costs both for the ORPP and for employers. Despite the passage of frame- work legislation, the Ontario Re- tirement Pension Plan Act 2015, there is no benefit level set out in it. e government has stated it is aiming for the ORPP to replace 15 per cent of the earnings up to $90,000 (in 2014 dollars) and that both retirement benefits and sur- vivor benefits will be indexed to inflation. It is not clear whether 15 per cent is a target that can be ad- justed depending on the funded position of the ORPP or whether it is a guaranteed amount (and, if guaranteed, how the guarantee is to operate). e ORPP will be administered by the ORPP Administration Cor- poration, established by the ORPP act. e corporation is to be arm's length from the government. It will be responsible for enrolment, collection of contributions, in- vestment and administration. Investment The CPP is invested in public and private markets. e ORPP act states contributions will be invested for the benefit of the member and other beneficiaries. Other pension statutes state vari- ously that pension funds must be invested for the "best interest" or "sole benefit" of the members, which leaves a question as to what is intended by investment merely for the "benefit" of members. In that respect, no mention has been made of the investment mandate for the ORPP. In the 2015 budget, the govern- ment noted "greater investments in Ontario's people, equipment and infrastructure" are needed and "an effective way to finance these investments would be through an expeditious and sus- tained increase in the household savings of the current working age population." Does that mean the ORPP will be a vehicle for investing in On- tario infrastructure? If so, what does that mean for the potential returns of the fund? Phase-in Enrolment will occur over four phases, depending on the num- ber of employees and whether the employer had a registered pension plan as of Aug. 11, 2015. It seems that even if a pension plan does not qualify as a "comparable workplace pension plan" or does With the various exclusions, the ORPP will apply largely to the private sector. ORPP > pg. 15 Ontario premier Kathleen Wynne speaks to the media at the Council of the Federation summit in Charlottetown, P.E.I., in 2014. Credit: Christinne Muschi (Reuters)

• Cover