The Ontario government has gone ahead and established an Ontario Retirement Pension Plan (ORPP); this plan is for employees with no pension plans or for those who have pension plans that the provincial government considers inadequate.
The new ORPP is a mandatory pension that forces workers to contribute 1.9% of their annual pay (to a maximum of $1,643/year) which employers will have to match.
The plan will be phased in over 2 years. Larger companies will be required to join by January 1, 2017; smaller operations like convenience stores will be required to contribute a year later.
The Canadian Federation of Independent Businesses and the Ontario Chamber of Commerce have warned the provincial government that forcing workers and employees to contribute to a provincial plan will only drive up the cost of running a business and result in fewer jobs.
Only 26% of Ontario businesses believe they can shoulder the financial burden that will result from the ORPP. An additional 44% of employers say they will immediately reduce their current payroll or hire fewer employees when the Ontario Register Pension Plan comes into effect.
Contributions to the plan will be “locked in,” prohibiting people from accessing these funds before retirement. One important note is that the age at which these funds can be accessed has not yet been set in stone (will it start at age 65? 67? Or age 72?). This will not be determined until after the plan is in place.
Unfortunately, employers that have implemented a Defined Contribution Pension Plan (DC plan) for their employees will also be required to enroll in the ORPP scheme. The provincial government has deemed DC pension plans and group RRSPs as inadequate.
A poll conducted by the Canadian Life and Health Industry found that just under 80% of the companies with a DC plan or a group RRSP will likely reduce their contributions or consider eliminating their plans completely.
So who really wins?
The exceptions to the new ORPP are those individuals who already participate in defined benefit pension plan. A Defined Benefit Pension Plan (DBPP) is set up so that the income you receive upon retirement is predetermined and is usually based on a formula involving your years of service and earnings. You receive annual statements clearly indicating the benefit on your retirement date. In these types of programs, your company manages the assets – you have no active involvement. The Ontario government has exempted these such plans from the ORPP.
The other registered pension plan is the Defined Contribution Pension Plan (DCPP), which is set up so that the income you receive upon retirement is not predetermined. It is based on the assets within your individual retirement plan account at the time you actually retire. In DCPPs, your company makes a contribution based on a formula, which may or may not require you to make some type of matching contribution. These contributions are usually based on a fixed percentage of your salary or on a specific dollar amount and are deposited into an account in your name. DCPPs are popular because they offer you choice and flexibility. DCPPS – and Group RSPs – have been deemed by the Ontario government as not being exempt from the newly mandated ORPP. Food for thought: Consider the implications of ORPP on a company or business owner who currently has this plan is place: Can they reasonably shoulder this added business cost? What benefits will be cut to accommodate this newly mandated pension plan?
Usually pension plans have a $3,500.00 minimum earnings threshold. The Ontario Budget noted that no minimum has been set and further analysis is required on this issue.
Lastly, the ORPP fails to provide for the self-employed, which is troublesome as more manufacturing plants leave Ontario (e.g. General Motors just announced it is going ahead with plans to close operations in Oshawa, and will eliminate 2,000 jobs).
Investment Executive, April 2015
Ann Macaulay and Keith Leslie, Hamilton Spectator April 3, 2015