By most accounts, the Ontario Liberal Party’s majority election victory was unexpected, particularly for the opposition parties that defeated the then-minority government’s budget to force the election. Regardless, the budget has now been reintroduced, and probably will be passed by the legislature pretty much intact.
A centrepiece of the budget is the proposed Ontario Retirement Pension Plan (ORPP). Beyond the implications for Ontarians, this initiative could tip the balance on retirement income security discussions elsewhere in the country. Arguably, that’s what it was intended to do, at least in part.
Somewhat provocatively in the pre-election budget, the proposal was cast against “the federal government’s decision to shut down discussions on an enhancement to the CPP [Canada Pension Plan]” In response, the ORPP is positioned to “build on the key features of the CPP, and could later be integrated with the CPP should negotiations on an enhancement be successful in the future.”
So what does this made-in-Ontario alternative look like?
ORPP design features
In structure, the ORPP appears to parallel the key features of the CPP.
Employers and employees will be required to share the burden of premium payments equally. The premium rate will be 1.9% (3.8% combined) up to a maximum annual earnings threshold of $90,000. (This threshold is expressed in 2014 dollars, to be indexed annually.) Premiums will not be required below a low-income threshold. Subject to further consultation, that may in fact end up mirroring the (non-indexed) CPP annual basic exemption of $3,500.
Total annual contributions are projected to be approximately $3.5 billion. Administration and investment management would be in the hands of a publicly run body operating at arm’s length from the government. At the same time, the budget text intimates some kind of coordination with the private sector, mentioning the desire to “leverage” the expertise of pension fund managers and the strong financial services sector in Ontario.
Like the CPP, ORPP pensions will essentially fall within the defined-benefit category, allowing individuals to plan based on a predicable retirement income stream. The aim is to achieve a 15% replacement rate up to the maximum earnings threshold mentioned above. By comparison, the CPP uses a 25% replacement rate, with the current upper threshold being $52,500 (again indexed annually).
Examples of the combined effect of the CPP and ORPP are provided in the budget, though caution should be exercised as to the applicability in real life. In principle, someone with career earnings over 40 years of $52,500 (2014 dollars) could see a 60% increase over the CPP alone, and someone with a $90,000 annual income over those years could see a doubling over CPP alone.
Importantly, benefits are to be earned as contributions are made. In effect, a person will not be grandfathered into a larger pension (as a burden on younger generations) than what the person’s own premiums have paid for.
Implementation
The government plans to consult with employers and labour in the coming months to gauge and minimize the impact on businesses in Ontario. In addition, coordination with federal counterparts will be necessary to get the ORPP operational.
There is a commitment to release “further technical details later this year prior to introducing legislation.” Without splitting hairs too much, there is no more specific date for when the legislation may be introduced. Still, this should proceed at a reasonable pace, as the planned introduction is 2017, to coincide with expected reductions in Employment Insurance premiums.
Employer implementation is to apply on a staged basis, beginning with the largest employers. No details are given on how large that is, how many size categories there may be or the length of time that will be staggered among them. As well, ORPP enrolment would not be required for “those already participating in a comparable workplace pension plan.” Again, clarification is required on this issue.
Once those details are ironed out, a given employer will still have a two-year phase-in period for contribution rates. Presumably this means that the contribution rate will begin at a lower level that escalates to plateau at 1.9% over two years.
Cross-country dialogue?
The ORPP is explicitly premised on the CPP, both in terms of the rationale for its introduction and the foundation for its operation. Additionally, the budget makes numerous references to the potential for collaborating with the federal government and other provinces and territories.
With the ORPP having been an election issue and a newly elected majority government in place, there is little question as to the path Ontario is taking. The question now is whether it will have company.
