Note: This article appeared in our July/August issue, which was published before the recent announcement that some defined contribution plans would be exempt from the ORPP.
At one time, funding your retirement was straightforward. Most Canadians could count on a decent standard of living in retirement from the three pillars of our retirement income system: the Canada Pension Plan, old-age security and guaranteed income supplement; employer-sponsored pension plans; and their own private savings. Most employer plans were defined benefit, which guaranteed a consistent stream of income for as long as a retiree lived.
Today, those pillars have eroded and cracks are beginning to show. Canadians have had to endure shocks such as the 2008 financial crisis, prolonged low interest rates, the widespread conversion from defined benefit to defined contribution in the private sector and the increasing weight of greater need across the board. Many Canadians are worried about the future — and the likely outcome that their standard of living in retirement will be lower than what their parents enjoyed.
Read: ORPP: Good in theory, bad in practice
The time is right to shore up our retirement system, and the Ontario Retirement Pension Plan is a step in the right direction. With no clear direction federally to expand the CPP, and the pooled registered pension plan remaining a voluntary option, the best path to improving retirement security for the greatest number of Ontarians is the ORPP — as long as it’s defined benefit and mandatory for those without a comparable employer plan.
Although we know the ORPP is coming, many questions remain. Chief among them is the issue of comparability. Should an employer offering any type or level of plan be exempt? My view is, only workplaces offering a defined benefit plan or participating in a multi-employer pension plan should be considered comparable, since the point of the ORPP is to enhance Ontarians’ retirement income security.
Read: Opinions divided over DC plan exemption from ORPP
Some companies do offer generous defined contribution plans — but even if they allow participants to save large sums of money, these plans can’t be considered comparable to defined benefit. Defined contribution plan members can’t pool timing and longevity risks. And, as 2008 showed, Canadians’ retirement savings can be vulnerable to a market event. People lost years of personal savings overnight. For those who were close to retirement age, there simply wasn’t enough time to recover and earn back what they’d lost, through either employment income or investment.
Defined contribution plan members who make it to retirement with their nest egg intact are then left with limited, often expensive options to annuitize their savings or the potential that they may outlive their money. The key advantage of the defined benefit model is, it provides a predictable stream of income for the rest of a retiree’s life, independent of market conditions on an individual’s retirement date.
The impact of financial losses or inadequate savings continues to reverberate through our society. Sun Life Financial’s 2015 Canadian Unretirement Index Report finds almost 60 per cent of respondents expect to continue working in some capacity after age 65, with 32 per cent expecting to work full time — more than those who expect to be fully retired, for the first time in the survey’s history. And of those who intend to work after age 65, 59 per cent said they’d be working because they’d need to.
Read: Mixed reaction to ORPP announcement
If Ontario’s workers are so well served by existing savings vehicles and employer-sponsored plans, why do they have so little confidence they will be able to fully support themselves with those savings in retirement?
This is where the ORPP comes in.
Do we really want saving for retirement to be like playing a dangerous lottery in which you hope timing will be on your side? Or do we want a future where most people can depend on a secure basic level of income in retirement — one they’ve helped to fund?
Read: ORPP design details announced
On its own, the ORPP won’t provide enough income to fund an individual’s retirement, nor does it intend to. What it will do is increase the amount of secure income retired Ontarians have overall. It shores up one pillar and takes pressure off the other two.
Businesses are concerned about increased costs, but we need to ask what the cost will be to future generations — and to our economy — if we sit back, do nothing and hope for the best. It will be unfortunate and short-sighted if employers choose to scale back or eliminate their existing plans when the ORPP is in place: there’s a reason we have more than one pillar in our retirement system. Ensuring retirees have incomes that allow them to participate meaningfully in the economy is good for everyone.
The ORPP could be implemented in a very cost-effective way for Ontario taxpayers. For administration, a highly effective and tested system already exists for the CPP — a system Ontarians have already paid for. My view is that Ontario should, for a fee, be given access to and allowed to use the existing CPP administration platform.
I also believe the ORPP doesn’t need to have a full bricks-and-mortar structure. There are ways to design it to be more virtual, as it draws upon the expertise already existing in some Ontario plans.
Read: What you need to know about the ORPP
Developing a full internal investment capability is not necessary for the ORPP Administration Corp. This cost can be avoided by using the investment expertise of some of Ontario’s jointly sponsored pension plans. Ontario’s large defined benefit jointly-sponsored public sector plans are global leaders in what they do, both as investors and as pension administrators. Pension plans around the world look to our model for an example of how to get pensions right, and we can bring that expertise to the ORPP for the benefit of everyone in Ontario.
Kicking the retirement can down the road to another generation isn’t an option. With the ORPP, we’re taking bold steps into uncharted territory, but I’m confident they’re the right steps. The ORPP will improve retirement income security and give a broader universe of Ontarians the means and confidence to retire with dignity. These are worthy goals — and worth the cost and effort it will take to make them reality.
Hugh O’Reilly is president and chief executive officer of OPTrust.
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