The current version of the Ontario Retirement Pension Plan (ORPP) is problematical in its benefit design and how it’s targeted, Keith Ambachtsheer writes in a KPA Advisory Services paper.
The paper, Making the Ontario Retirement Pension Plan Work for Janet and John: What it Will Take, suggests four features to make the ORPP better.
1. A design that aims for (but does not guarantee) a post-work income replacement rate based on sensible contribution rate/investment return assumptions. The goal could be the 15% income replacement rate and the 3.8% contribution rate in the ORPP proposal, but it would have to be clear to participants that underlying these numbers are plausible work-period length and net investment return assumptions. The design is lifecycle-based. This means they need to have access to a cost-effective, long-term, return-compounding investment instrument, and to a cost-effective, guaranteed income-for-life instrument, as they travel through their financial life journey.
He suggests there should be an auto-pilot transition mechanism to guide the weightings of their exposure to each instrument based on their age and participants should be able to override these auto-pilot rules if they so choose.
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2. Auto-enrolment into the ORPP of all Ontario workers without a qualifying employment-based pension plan: this would be a mandatory employer requirement. However, there would be an opt-out clause.
“The opt-out feature is especially important to Ontario’s workers with permanently low incomes,” he writes. “They would be subjected to [Guaranteed Income Supplement (GIS)] clawbacks if they eventually collected ORPP benefits.”
3. The qualifying pension plan definition: to qualify as an alternative to the ORPP, an employment-based pension or retirement savings plan should have a contribution rate at least as high as that of the ORPP.
“In my view, it is important that employers can choose an alternative provider to the ORPP, as long as it has the same (or superior) design features to those of the ORPP,” he writes, adding that fair, transparent competition will lead to better outcomes for participants.
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4. Open architecture: this feature would allow participants to move any retirement savings they have already accumulated on their own into the ORPP if they so choose.
He also suggests another requirement to make the ORPP work: set up as an arms-length institution with a stakeholder value-creating mindset.
“Ontario did this in 1990 when it, together with the Ontario Teachers Federation, created the Ontario Teachers’ Pension Plan, he concludes. “Today, OTPP ranks No. 1 in the world in long-term investment performance and benefit administration quality.”
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