While the Ontario Retirement Pension Plan has provoked some apprehension about a potentially negative impact on defined contribution pension plans, a Benefits Canada survey of plan sponsors suggests many of them are planning to maintain and even enhance their own offerings.
In February and March, Benefits Canada, through the Canadian Institutional Investment Network, surveyed plan sponsors based in Ontario, as well as those based elsewhere that have employees in the province, to see what they’re doing about the ORPP as the government looks to start enrolling employers in 2017. The results reflect some of the concerns raised when the Ontario government released the comparability criteria for defined contribution pension plans last year.
Under the criteria, employers must contribute at least 50 per cent to a plan that provides for a total contribution of eight per cent of base salary earnings. The criteria set the bar high given the ORPP’s requirement of 1.9 per cent each from employers and employees. And according to the Benefits Canada survey, only 29 per cent of 107 respondents have found their plans to be comparable. The remaining 71 per cent said their plans don’t meet the test.
So what will plan sponsors in that position do? Will they boost their plans to make them comparable, close them and move their employees into the ORPP or maintain their own offering in addition to the new government scheme? According to the rules, plan sponsors that already have a pension plan will have until 2020 to either boost it to the threshold or enrol employees who aren’t in a comparable workplace offering into the ORPP.
The rules create a lot of different scenarios for plan sponsors. Eve Leyerle, the director of finance at the Toronto School of Theology, an organization affiliated with the University of Toronto, thought its small defined contribution pension plan would be comparable with a five-per-cent contribution matched by the employer. But the issue turned out not to be so straightforward given the waiting period to join that applies to some employees. “We do have some employees on contract,” she says.
“That would mean we have a decision to make,” she adds, noting her instinct is to maintain the organization’s pension plan as is while considering what will happen to those not in a comparable scheme by 2020 given the lack of immediate enrolment.
“Even after having read the technical bulletin, it’s not clear we could use the ORPP to take care of those situations,” she says, noting she still has a lot of questions about the new public plan. But whatever the decision on that issue, she feels keeping the school’s own plan would be better.
“I feel if we have our own plan, at least we have more control over what’s going on with it,” says Leyerle, who wonders what would happen if the ORPP ran into funding difficulties.
“I don’t really want to give up on my own pension plan because it meets certain objectives that we have.”
Leyerle isn’t alone in having a lot of questions. According to the Benefits Canada survey, 68 per cent of respondents without a comparable plan haven’t decided what they’ll do as a result.
But a solid chunk of those that have decided are looking to stick with their own plans: 18 per cent of all respondents without a comparable plan (including the undecided) are looking to boost it to meet the criteria while eight per cent said they’d keep their own offering and participate in the ORPP as well. Only five per cent of the respondents in the non-comparable group said they’d close their own plan and move all current and new members into the ORPP.
The results largely line up with the trends Eckler principal Janice Holman has seen in her defined contribution consulting practice. While almost all of her clients have assessed their plans for comparability, only one has found it fully met the test. The big hurdle is the voluntary nature of many plans, she says, noting some plan sponsors are looking to change that. “A lot of clients are trying to become comparable.”
Even many employers with group RRSPs, which wouldn’t be comparable, are looking to move to a defined contribution plan instead. “Their contributions are enough. It’s just the wrong plan design,” says Holman, suggesting it’s cheaper to have a pension plan with a four-per-cent employer contribution rather than maintain an offering at three per cent while participating in the ORPP as well.
“We aren’t seeing people look to give up their plans and go ORPP,” says Holman. Part of the reason, she notes, is the lack of credit employers get for their contributions to public plans such as the Canada Pension Plan. “People don’t really see that as a benefit. It’s like a tax.”
According to Holman, many employers, as Leyerle suggested is a possibility, are looking to have part-time and contract staff participate in the ORPP rather than boosting their own plans to include everyone with no waiting period. “It allows them to differentiate in their workforce,” says Holman, noting doing so lets them keep the pension plan as a value proposition.
Impact on business decisions
As part of the survey, Benefits Canada asked participants if the ORPP would affect decisions about doing business in Ontario or other aspects of employee compensation. About 51 per cent said they were unsure whether it would affect other aspects of compensation, but 33 per cent said yes. Asked what the impact would be, 25 per cent of those who said yes suggested they’d trim salary increases; 19 per cent said they’d cut back on benefits plans; and 28 per cent said they’d scale back other financial supports such as group RRSPs.
On the question of the impact on business decisions, 25 per cent of respondents said the ORPP would have an effect. About 47 per cent said no and 28 per cent were unsure. Of those who said yes, only one would close down operations. Four respondents said they’d hire fewer employees and six said they’d cut back on non-salary spending. The numbers of respondents is low on that issue as 61 per cent of respondents who anticipate an impact on business decisions said they were unsure about what it’d be.
The uncertainty is a trend Holman has also seen in her practice. Many plan sponsors, she notes, haven’t decided what they’ll do in regards to the ORPP because they still have until 2020 to figure it out. “A lot are still weighing what they’re going to do. They know the direction that they’re leaning in.”
And when it comes to the impacts on things such as business decisions and other aspects of compensation, Holman says the issue is particularly significant for businesses, such as employers in the retail sector, that have large numbers of part-time or contract employees. “The more that they have of part-time employees, it’s having a bigger impact,” she says, suggesting some of those employers are looking to find ways to offset the extra cost of the ORPP.
For Mitzie Hunter, the Ontario cabinet minister in charge of getting the ORPP off the ground, the fact that a significant number of employers — at least among those that have made a decision about what they’ll do — are looking to maintain or boost their own pension plans is good news. “Our goal with the Ontario Retirement Pension Plan was really to strengthen pension security for plan sponsors,” says Hunter.
“We know that there are good DC plans that exist. These results are really more evidence of that and affirms what we have heard as well,” she adds in reference to the survey numbers.
Asked about the criticism that the four-per-cent comparability threshold is too high, Hunter says the province sought advice on setting the number and notes it came at the issue from the standpoint of ensuring pension adequacy and addressing the concern about people outliving their savings. And on the question of potential impacts on business decisions, Hunter responds that the government has worked to roll out the ORPP gradually. “We have the enrolment happening in stages,” she says.
Many questions remain
Adding to the uncertainty about what employers will do about the ORPP is the fact they still have questions about how it will work. According to the survey, 63 per cent of respondents feel the government hasn’t provided enough detail on the regulations.
“We haven’t had a lot of information,” says Leyerle. “I have a lot more questions than I have answers right now.”
The Ontario government did introduce legislation, Bill 186, that set out more details on the ORPP in April. But among the outstanding questions is whether federally regulated employers, such as banks, will have to participate in the ORPP.
While Ontario has said it’s in touch with the federal government about the inclusion of such employers, Hunter noted in unveiling the legislation that doing so isn’t an option at the moment. “However, we have made provision in this legislation that at a future date, should that change, that they’ll be able to be enrolled down the road,” she told a news conference.
The idea has provoked some oppostion, with the Association of Canadian Pension Management noting a “major concern” about the issue in a letter to federal Finance Minister Bill Morneau last month. “We do not believe it is necessary or appropriate for the government of Canada to abrogate its responsibilities for federally regulated employees,” wrote chief executive officer Bryan Hocking.
CPP the preferred way
While the Benefits Canada survey didn’t show a particularly strong trend around negative impacts on business decisions or other aspects of compensation, the Canadian Federation of Independent Business says smaller companies are bracing for the ORPP. “I would say the impact that they describe would be devastating,” says Ontario vice-president Plamen Petkov in reference to surveys of the organization’s members. The surveys, he notes, have found more than half of its members predict they’ll have to cut work hours or positions.
Others, however, downplay those sentiments. Sheila Bock, a senior economist at the Canadian Centre for Policy Alternatives, says increases to CPP premiums or minimum wage hikes in the past haven’t led to predicted rises in unemployment. “We absolutely need something for the next generation of workers,” she says, citing the need for programs like the ORPP given declining pension coverage.
Despite the diverging attitudes, there’s a strong sentiment among many plan sponsors, as well as ORPP advocates like Hunter, that the preferable route would be to boost the CPP instead. About 65 per cent of respondents to the Benefits Canada survey said they’d rather see an improved CPP over the ORPP. Leyerle counts herself among such people. “I’ve been a big proponent of expanding the CPP and I think that should happen,” she says.
That’s what the Ontario government says it wants as well, although the prospects for that happening soon appear uncertain given the differing views on the issue among the provinces. Asked if CPP reform is feasible within the time frame Ontario has set for the ORPP, Hunter says: “What we know is that these types of conversations take time.”
And asked about Ontario’s expectations around what CPP reform must entail in order for it to forgo the ORPP, Hunter says she won’t predetermine the conversation. But any expansion would need to meet Ontario’s goal of improving pension coverage and adequacy given the concern about people outliving their savings, she adds. “That’s something that’s very important to us.”
Glenn Kauth is the editor of Benefits Canada: firstname.lastname@example.org.
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