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.

Read: Associate minister reiterates need for ORPP

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.

Read: What DC plan sponsors need to know about the ORPP

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.”

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

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Chas:

None of these recommendations will see the light of day because they are fundamentally at odds with the aims of the ORPP.

Surely the opt-out recommendation is made as a bit of peevish mischief. We are now to believe that a government-run retirement income scheme, whose impetus is to put in place a standardized income floor, should allow its most exposed contributors to opt out of it?

The ORPP is perhaps the lesser of evils, but why add to the list?

Thursday, March 05 at 12:52 pm | Reply

Neil Craig:

Well if we are going to have an ORPP those suggestions would certainly go a long way towards addressing most of the major concerns. The comparable plan debate should be just that a comparable contribution formula. Loss of contribution room, poor survivor and death benefits are all concerns for members currently in DC plans of all types that provide contributions in excess of 1.9% matching. According to what I see that is most of the existing DC arrangements.

Thursday, March 05 at 1:23 pm | Reply

Richard Pieprzak:

If we are going to have an ORPP, then the definition of comparable plan needs to be the focus. Under the discussion paper’s current recommendations, the only plans that are exempt are DB pensions and Target Benefit Plans. Therefore, the biggest “exemption” will be for participants in public sector DB plans as the private sector primarily offers DC/money purchase type plans. My biggest fear is that plan sponsors and members may simply reduce their contributions to the DC/money purchase plans to allow for the new, ORPP, “payroll tax”. In the worst case scenario, plan sponsors abort their workplace plans altogether to the detriment of the plan member. Did the ORPP really accomplish its goal in these scenarios?

Remember, “give a man a fish and he’ll eat for a day, teach him to fish and he’ll eat for a lifetime”!

Perhaps a better solution is to offer an incentive to plan sponsors/employers for initiatives relating to increasing plan member/employee engagement and financial literacy.

Why not add a required high school curriculum course in financial management and establish a financial knowledge base early on in one’s life? Currently, our system asks kids to graduate from high school and solicit acceptance to a college or university program to…make an income (money). Yet, the system offers no insights or guidelines as to how this valuable commodity is to be managed!

Thursday, March 05 at 3:45 pm | Reply

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