Retirement Income Security for Ontario Workers
Ontarians want and deserve income security in retirement. However, workplace pension plan coverage is low, the workplace is changing, and experts agree that people aren’t able to save enough. Ontario has taken action because retirement savings challenges will worsen without a strong plan for the future.
Subject to legislative approval, the Ontario Retirement Pension Plan (ORPP) would provide working Ontarians with a predictable stream of income in retirement. By 2020, every employee in Ontario will be part of either the ORPP or a comparable workplace pension plan.
The ORPP is designed to help workers without a workplace pension plan and those who are at risk of not being able to save enough. It will complement existing workplace plans and other voluntary retirement savings arrangements for Ontarians to maintain their standard of living in retirement.
The goal of the ORPP is to strengthen Ontario’s retirement income system by creating a pension plan with a lifetime benefit and locked-in funds. It is built on the principle of fairness with mandatory matching employer contributions, emulating the Canada Pension Plan (CPP). The implementation of the plan also takes into account the needs of employers.
Comparable Workplace Pension Plans under the The Ontario Retirement Pension Plan
Employers and employees who participate in a comparable pension plan will not be required to participate in the ORPP.
Ontario is defining a “comparable plan” as a registered pension plan subject to federal and provincial regulation — that meets certain minimum thresholds. The government consulted widely on this approach, receiving over 1,000 submissions from business, workers, labour, associations and pension experts.
The following features were assessed in terms of what constitutes a comparable workplace pension plan:
- Predictable stream of income in retirement for life
- Pooled longevity and investment risk to help ensure people do not outlive their savings and to lessen the impact of market volatility
- Required contributions by employers
- Target replacement rate of up to 15 per cent of an individual’s earnings over their career
- Required “locked-in” contributions
A comparable plan will be defined as certain types of provincially and federally regulated pension plans with contribution levels that ensure similar benefit levels to those provided by the ORPP.
Such plans include:
- Defined benefit (DB) pension plans
- Defined contribution (DC) pension plans
Comparability Test – Defined Benefit (DB) Pension Plans
In order to be considered comparable, DB plans must equal or exceed the benefits being offered through the ORPP. For this reason, comparable DB plans in Ontario must meet a minimum benefit accrual rate of 0.50 per cent.
An accrual rate is the rate at which you build up retirement income in a pension over time.
The rate is multiplied by your earnings to calculate how much money you will eventually be entitled to. This rate can be expressed as a fraction — the bigger the fraction, the greater the amount of retirement income.
Comparability Test – Defined Contribution (DC) Pension Plans
There are considerable differences between DB and DC pension plans. For example, DC plans do not require employer matching. They also do not allow for the pooled longevity and investment risk that provide people the assurance they will not outlive their savings, and protect them from market volatility.
Actuarial analysis has been conducted to place a value on these differences, and determine a contribution rate that would be able to reliably deliver the same level of retirement income replacement as the ORPP. For this reason, to be considered comparable, a DC plan must:
- Have a minimum annual contribution rate of 8 per cent
- Require at least 50 per cent matching of the minimum rate from employers.
Most workers will likely have multiple employers over the course of their careers. As such, ensuring the ORPP is designed with portability in mind is essential.
The government is committed to developing a buy-back mechanism for employees in which workers can purchase service credits for periods when they were unable to contribute to the ORPP.
Similarly, the government is examining options to allow Ontario employers with comparable plans to opt-in and participate in the ORPP.
Further details will be made available once finalized.
Supporting the Self-employed
Our goal is for every employee in Ontario to be part of the ORPP or a comparable workplace pension plan by 2020. That includes the self-employed.
Unfortunately, the federal Income Tax Act (ITA) does not currently allow self-employed individuals to participate in registered pension plans. We have asked the federal government to amend the ITA to allow for the self-employed to participate in the ORPP. The province will continue to explore options to enable the participation of the self-employed in the ORPP.
What will Employers Need to Do?
We know that business needs time to adjust and certainty in order to begin planning. In order to help with this adjustment, we will be enrolling employers in stages, starting with the largest first and phasing in contribution rates over time.
Employer Enrolment and Contribution Phase-In
Enrolment in the ORPP will be staged in four waves between 2017 and 2020. These waves are:
- Wave 1: Large employers (500 or more employees) without registered workplace pension plans. Contributions to start January 1, 2017.
- Wave 2: Medium employers (approximately 50- 499 employees) without registered workplace pension plans. Contributions to start January 1, 2018.
- Wave 3: Small employers (50 or fewer employees) without workplace pension plans. Contributions to start January 1, 2019.
- Wave 4: Employers with a workplace pension plan that is not modified or adjusted to meet the comparability test, as well as employees who are not members of their workplace’s comparable plan. Contributions to start January 1, 2020.
Registration of Workplaces
The Ontario Retirement Pension Plan Administration Corporation (ORPP AC) will begin contacting all Ontario employers in early 2016 to verify their existing pension plans and assess the coverage offered to employees. More information will be forthcoming from the ORPP AC.
The Ontario Retirement Pension Plan Benefits
The amount of money you receive after you retire will depend on:
- how many years you contribute to the pension plan
- how much you contribute to the pension plan and
- your salary throughout those years.
The ORPP will offer inflation-protected benefits, consistent with the sustainability of the plan, in order to provide a predictable source of retirement income for life. Benefits will start to be paid out to plan members beginning in 2022.
Ministry of Finance, August 11, 2015