Ontario’s Liberal government hopes to give workers a financial boost in retirement with the proposed introduction of a provincial pension plan and pooled registered pension plans (PRPP) in Thursday’s provincial budget.
As the federal government is no longer discussing a possible expansion of the Canada Pension Plan (CPP), the Ontario government has introduced the Ontario Retirement Pension Plan (ORPP) to supplement the CPP.
“The Province is not prepared to wait for the federal government to step up to address the retirement income challenge currently faced by today’s working Canadians,” the budget documents state. “Unless action is taken now, there is a risk that the retirement savings problem will worsen over time.”
The ORPP will be a mandatory program very much in line with the current structure of the CPP, according to budget documents. The new pension plan would come into effect in 2017.
According to budget documents, the new pension plan would include the following features:
- Provide a predictable stream of income in retirement by pooling longevity and investment risk, and indexing benefits to inflation, similar to the CPP’s retirement benefit.
- Require equal contributions to be shared between employers and employees, not exceeding 1.9 per cent each (3.8 per cent combined) on earnings up to a maximum annual earnings threshold of $90,000. The ORPP maximum earnings threshold would increase each year, consistent with increases to the CPP maximum earnings threshold.
- Aim to provide a replacement rate of 15 per cent of an individual’s earnings, up to a maximum annual earnings threshold of $90,000.
The plan would be administered at arm’s length from the government, according to budget documents, and include a strong governance model which would oversee investments associated with roughly $3.5 billion in annual contributions.
While mandatory, some Ontarians will be exempt from the ORPP. People who are already enrolled in a comparable workplace pension will not have to enroll in the ORPP. As well, people with earnings below a certain threshold would not have to make contributions — as is the case with the CPP.
“In terms of saving for retirement they’ve targeted [the ORPP] at people that don’t have workplace pension, which will cut in half the number of people that get it but that makes a lot of sense when you’re trying to increase savings,” says Paul Forestell, retirement practice leader, Canada, with Toronto-based Mercer LLC. “I think from a design perspective they’ve done a very good job with it.”
Enrollment of employers and employees into the ORPP would happen in stages, with the largest employers enrolling first, according to the budget. Contribution rates will be phased in over a two-year period.
The provincial government also announced its intention to create a framework for PRPP, which would be implemented in the fall of 2014. PRPPs were first introduced by the federal government in 2012 and have been adopted in Saskatchewan and Alberta. Quebec has a similar program called the voluntary retirement savings plans (VRSP).
The Ontario PRPP framework would include the following:
- Voluntary participation and contributions by employers — Employers would choose whether to offer their employees a PRPP and whether to contribute to their employees’ PRPP;
- Automatic enrolment of employees — Where an employer elects to offer a PRPP, enrolment of employees would be automatic unless an employee chooses to opt out within a specified period; and
- Low cost — Administrators would be required to provide PRPPs at a low cost to plan members.