The Government of Ontario did something right when it decided to exempt certain DC plans from the Ontario Retirement Pension Plan (ORPP). Benefits Canada surveyed Ontario DC plan sponsors before the province revealed the ORPP’s design details, and 68% of them opposed the plan. Some respondents went as far as to say they’d adjust or eliminate their plans if DC plans weren’t considered comparable.
The government’s consultation paper originally said DC plans wouldn’t be deemed comparable to the ORPP, but the province later made some exceptions.
“We were happy to see DC plans included as comparable plans,” says Janice Holman, a principal and leader of Eckler’s DC practice.
For employers to be exempted, their DC plans must be locked in, regulated by existing provincial pension standards and meet a minimum contribution threshold (8% of base salary, and employers will be required to contribute at least 50% of the total minimum contribution).
“I think the government wanted to have a relatively high degree of certainty that DC plans would provide the same kind of benefit that the ORPP [will provide],” says John McIntosh, a senior consultant with Towers Watson.
The province notes there are differences between DB and DC plans, including the fact that DC plans don’t require employer matching, don’t provide pooled longevity and won’t protect plan members from market volatility.
“Actuarial analysis has been conducted to place a value on these differences and determine a contribution rate [of 8% or more] that would be able to reliably deliver the same level of retirement income replacement as the ORPP,” says a statement from the Ontario Ministry of Finance.
Although most respondents rejected the ORPP, 24% supported the plan and the rest weren’t sure (9%).
Why did they support it? Some said the plan would force Ontarians to save, and noted it will provide almost universal access to reasonable retirement income. One respondent expects the ORPP will “provide a benefit to employees not currently enrolled in a company-sponsored plan.”
Yay or nay?
Nearly all (94%) said the definition of a comparable plan should be amended to include DC plans. Another 80% said if DC plans weren’t considered comparable, employers would be more likely to close their DC plans and offer the ORPP instead.
If the ORPP didn’t include DC plans, 24% said they would close their DC plan and move all new and current members into the ORPP. Thirteen percent said they’d freeze their DC plan to new entrants, while 56% said they’d keep both plans open to new and existing members. Seven percent didn’t answer the question.
For those respondents who said they’d keep or freeze their DC plans, 69% planned to reduce DC contribution levels. But 27% intended on keeping contributions the same, and 4% said they’d even increase contributions.
Good for retirement savings
While the majority of respondents don’t support the ORPP, 59% believe the new plan will increase pension coverage. Many say it will help those who don’t have a workplace pension as well as employers that can’t afford to offer one.
But some worried the ORPP could lead to decreased contributions to plans such as group RRSPs (see below, “What About Group RRSPs?”).
One respondent said their company plans to reduce contribution levels to its DC plan by the amount it’s required to contribute to the ORPP: “So our employees will be no better off; in fact, they may be worse off if the contribution to the ORPP prevents them from contributing to the DC plan, which we would match. They will have less at retirement than they [would if nothing changed].”
Respondents were split nearly evenly when it came to whether or not they think the ORPP will improve retirement savings (49% yes versus 51% no). For those who think it will, many believe the ORPP will help because it will force Ontarians to save by being automatic and mandatory.
But the other half said there won’t be an increase in savings because the money being contributed to the ORPP will simply be siphoned from other savings options.
Instead of making RRSP or tax-free savings account contributions, some said the money Ontarians usually contribute to those accounts will end up in the ORPP. And a few respondents said they’d reduce the amount they contribute to their DC plans by the same amount they’d have to contribute to the ORPP.
That’s not all
The majority (79%) of overall respondents said expanding the CPP, which the NDP and Liberals have promised to do if they win the federal election, is a better solution than the ORPP.
Eighty-one percent of respondents are concerned the ORPP will negatively impact small businesses. The Canadian Federation of Independent Business agrees. It says many of its members say the plan will force them to freeze salaries or eliminate positions to offset added costs.
Nearly three-quarters (74%) of respondents said the ORPP will lead to lower contribution levels because employers will be too financially stretched. Still, 70% believe their DC plan is an important part of their overall compensation, regardless of what happens with the ORPP.
For more ORPP stories, visit benefitscanada.com/orpp
Craig Sebastiano is associate editor of BenefitsCanada.com.
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