What you need to know about ORPP.
On January 1, 2017, a new mandatory Ontario pension plan will be taking effect. Designed to supplement the retirement income of Ontario’s workers, the Ontario Retirement Pension Plan (ORPP) will eventually cover more than three million people who do not have a workplace pension plan. By 2020, subject to legislative and Canada Revenue Agency approval, every employee in Ontario would be part of either the ORPP or a comparable workplace pension plan. Under the new legislation, employers will either have to have a company pension plan in place or contribute to the ORPP.
With less than a year until the plan is enacted, Ontario companies must familiarize themselves with the specifics of the pension legislation, the ramifications for their organization and the actions needed to avoid any negative repercussions.
The Ontario government has concluded that individuals are not saving enough for retirement. Reasons cited:
The first of its kind in Canada, the ORPP is designed to provide a predictable source of retirement income by:
Any company with any number of employees is affected. Even companies with existing plans are affected: any existing corporate pension plan must be considered “comparable” to exempt the employer from the ORPP, and comparable plans must cover 100% of the employee population. Otherwise, employers will need to contribute to the ORPP for the employees not covered.
Under the proposed legislation, workers and their employers would each pay premiums of 1.9% of salary, up to a maximum annual earnings threshold of $90,000. The maximum annual pension payout would be 15% of a worker's salary. Benefits at retirement will depend on the number of years of contribution to the ORPP and earnings during the contribution years. The first benefits are expected to be paid in 2022.
The ORPP is effectively a provincial supplement to the CPP. However, unlike the CPP, if a contributing employee dies before retirement, his/her surviving spouse or beneficiary will receive a lump-sum payment equal to the value of the pension.
Exemption from enrolment will be made for companies with an existing workplace plan if it is “comparable” and for employees with earnings below $3,500 (consistent with the CPP’s minimum earnings threshold). However, if companies have a plan that is not “comparable”, it is equivalent to having no plan. That is why companies with existing plans must take the time now to determine their plan’s comparability.
A “comparable plan” is a registered plan that meets certain minimum thresholds. Specifically, it must:
To qualify as a “comparable plan", for defined benefit (DB) plans, a minimum accrual rate of at least 0.5% per year of service is required, and for defined contribution (DC) plans, a minimum total contribution rate of 8% of base salary earnings is required with at least 50% of the total contribution coming from the employer.
Companies with no pension plan will either need to set up a comparable pension plan or pay into the ORPP for all employees. Companies with an existing plan must ensure it is comparable, or modify it to make it comparable. Companies with an existing comparable plan that does not cover all employees will need to either modify the plan to include all employees or pay into the ORPP for excluded employees.
In advance of the ORPP coming into effect, Ontario’s companies should take steps to understand how this legislation will affect them, assess if their current pension plan is comparable, and/or conduct an analysis to determine if it makes better financial sense to set up their own pension plan or pay into the ORPP. One thing is certain—doing nothing is not an option.
Notably, the ORPP may have a disproportionate effect on small employers as it may ultimately represent a 1.9% increase in employee costs—which could create cash flow issues for companies that will be contributing to a pension plan for the first time.
Enrolment into the ORPP will be phased in as follows (table indicates percentage of pay):
|Type of employer||2018||2019||2020||2021|
|Wave 1: large employers without registered workplace plans||1.6%||1.9%||1.9%||1.9%|
|Wave 2: medium employers without registered workplace plans||0.8%||1.6%||1.9%||1.9%|
|Wave 3: small employers without registered workplace plans||0%||0.8%||1.6%||1.9%|
|Wave 4: employers with registered plans that do not meet comparability test||0%||0%||1.9%||1.9%|
In advance of the ORPP coming into effect, companies should review the consultation package prepared by the Ontario government. Some questions remain. Actual benefit design has yet to be finalized. In addition, the integration of non-comparable workplace pensions plans is not yet defined.
For more information about how this new legislation will affect your company, how to set up a new pension plan or how to modify your existing plan to make it comparable, contact one of our pension specialists.