What DC plan sponsors need to know about the ORPP

The Ontario Retirement Pension Plan (ORPP) is an unprecedented new mandatory provincial pension plan that represents the provincial government’s “made-in-Ontario” solution for expanding pension coverage for eligible employees in that province. Proposed legislation enacting the ORPP was introduced by the Ontario government last year, along with an ORPP consultation paper on key design questions, and recently passed second reading.

While the deadline for submissions in response to the consultation paper has now passed, there has been considerable attention among Ontario employers and the pension industry at large to the Ontario government’s preferred approach as to what types of plans will constitute a “comparable workplace pension plan” for the purposes of being exempt from participation in the ORPP. At this point, a number of troubling questions for employers remain.

What is the ORPP?
According to the Ontario government, the ORPP is “intended to provide a predictable source of retirement income for those most at risk of under-savings, particularly middle-income earners without workplace pensions.” It will require both employers and employees in Ontario to contribute an equal amount, capped at 1.9% of the employee’s annual earnings up to $90,000 (3.8% combined), to an arms’ length administrative agency that will invest those contributions. Retirement benefits paid under the ORPP will depend on the number of years that the employee contributed to the plan and the employee’s earnings, will be payable for life and benefits will be indexed to inflation. Under the proposed ORPP legislation, contributions will not be required by and on behalf of employees who participate in a “comparable workplace pension plan.”

The ORPP will be introduced in 2017. The Ontario government has indicated that, in order to help with the adjustment, enrollment in the ORPP would occur in stages, commencing with the largest employers, and that ORPP contribution rates would be phased in over two years.

Read: ORPP consultation paper released

What will constitute a comparable workplace pension plan?
One of the key design questions posed in the Ontario Government’s consultation paper is what types of plans will constitute a “comparable workplace pension plan” for purposes of being exempt from the ORPP. The Ontario government’s preferred approach as set out in that paper is that the definition of “comparable” plan should be restricted to only DB pension plans and target benefit multi-employer pension plans (MEPPs), and should exclude DC pension plans as well as group RRSPs and deferred profit sharing plans (DPSPs).

While the stance that participation in group RRSPs (which don’t require mandatory employer contributions nor locked-in contributions for retirement) or DPSPs (which do not require locked-in contributions for retirement) should not exempt employees and employers from participating in the ORPP may be understandable, it’s fair to say that the proposed exclusion of DC plans came as a surprise to many in the pension industry.

The consultation paper raised the questions of whether establishing a minimum employee/employer contribution rate under a DC plan (that would provide a similar benefit to the ORPP), or whether requiring members to convert a portion of their DC plan savings into an annuity, would help make DC plans comparable. If, however, DC plans are completely excluded from the definition of a comparable plan, or even if DC plans that do not meet certain conditions are excluded, there are a number of important implications for employers in Ontario who currently sponsor such plans.

1. What if DC plans are not considered comparable plans?
What are the consequences for employers currently sponsoring DC plans for their employees in the event that DC plans are found not to constitute comparable plans for purposes of being exempt from the ORPP? While many (if not most) of the private sector employer-sponsored DC pension plans in Ontario have an employer contribution rate, or a combined employer/employee contribution rate, at least equivalent to that of the ORPP, requiring such employers to incur the additional cost of contributing to the ORPP as well as to their existing DC plans may lead such employers to amend their DC plans to offset their required contributions to the ORPP in future, or else to terminate their existing DC plans altogether. The latter course of action would not serve the interests of the members of those plans.

The situation is even more problematic for employers with collectively bargained DC plans. While the Ontario government has indicated that participation in the ORPP will be in stages and that contribution rates will be phased in gradually over two years, in part to alleviate the issues associated with dealing with the “impact on the current retirement savings landscape” and the potential need for negotiation through the collective bargaining process, it’s not clear if and how the contemplated transitional measures will take account of collectively bargained DC plans that have been negotiated between an employer and trade union as part of the total compensation package provided to employees. As a result, employers with negotiated DC plans who are currently in the midst of collective bargaining negotiations would be well advised to consider including language in the collective agreement that contemplates this eventuality.

Read: Will employers scrap DC plans because of the ORPP?

2. What about employers with frozen DB plans?
Many employers in Ontario have either closed or frozen their existing DB plans for employees and moved to a DC plan for future service. As a result, a number of employees in Ontario have a DB benefit for a portion of their past service (which may or may not increase in value with future salary increases) and a DC benefit for their current service. If such employees don’t currently participate in a DB plan and if DC plans are excluded from the definition of a comparable plan, then participation in the ORPP in respect of those employees may still be required. This issue warrants further attention.

3. What about Ontario employers with multi-jurisdictional pension plans?
There are a number of plan sponsors in Ontario who sponsor DC plans for workers who are employed in multiple provinces. The difficulty of integrating or addressing the impact of ORPP participation in respect of the Ontario members of such plans, if DC plans are excluded from the definition of a comparable plan, may be compounded for such employers.

4. What will be the impact of the ORPP on the expansion of private workplace pension coverage in Ontario?
One of the Ontario government’s stated purposes in establishing the ORPP is to address the issue of low workplace pension plan coverage. It’s worth considering, however, what impact the ORPP may have on the establishment of private employer-sponsored plans in Ontario.

While employers with DB pension plans and their employees participating in such plans will be exempt from contributing to the ORPP, it’s unlikely that this consequence will encourage more employers to establish DB plans, or that it will “turn the tide” on declining DB plan coverage. The challenges faced by employers with DB plans, particularly in light of market volatility, poor investment returns and historically low long-term interest rates, will persist. Combined with what many employers view as the asymmetry of risk associated with such plans, most employers will still choose not to establish or continue DB plans as a result.

Read: ORPP could hurt economy: Survey

Many employers remain committed to assisting their employees in securing adequate retirement income, and have designed and established well managed DC plans in order to help them achieve this objective. Employer-sponsored DC plans always carry with them the possibility of contribution rate increases or other plan improvements, negotiated or otherwise, but if the ORPP excludes DC plans from the definition of comparable plan, this will likely discourage the establishment of DC plans as well.

The only plans that may benefit from the current approach preferred by the Ontario government in relation to comparable workplace plan are target benefit plans (TBPs), which are currently only permitted for collectively bargained MEPPs under pending legislation in Ontario. If single-employer TBPs are eventually permitted that will exempt employers from participation in the ORPP, this may create a further incentive for Ontario employers to embrace the TBP model in future.

5. Other issues
While other issues raised in the ORPP consultation paper still need to be addressed, including the minimum earnings threshold and the needs of the self-employed in Ontario, there are some major issues confronting Ontario employers as a result of the proposed ORPP legislation.

Employers with DC plans, and collectively bargained DC plans in particular, should continue to monitor the outcome of the Ontario government’s consultation process and should consider carefully the implications for their current retirement arrangements. They should also consider any actions they need to take and the time table necessary to respond to the introduction of the ORPP.

Looking for related articles? Click here for more stories about the ORPP.