Are employers turning their backs on the ORPP?

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.”

4.4 MILLION

The number of employees in DB plans; they accounted for 71.2% of employees with a registered pension plan, compared to more than 84% a decade earlier

Source: Statistics Canada

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.

Contributing to more than one plan
Employers with workers in Ontario and other provinces, or those with new employees, may have to contribute to two or more plans. Companies with employees across Canada will need to decide whether they’ll want to have different plans depending on where workers live. A desire to maintain consistency between employees in different provinces may give companies an incentive to ensure they have a comparable plan, explains Scott Clausen, a Mercer partner and senior retirement consultant.

Some employers are comfortable with having different benefits for different provinces as long as their total rewards are reasonably consistent, says John McIntosh, a senior consultant with Towers Watson. “There are a lot of provincial inequities already, so, for some, it won’t be a big concern. Many employers, however, will likely want to make changes so that their Ontario employees aren’t getting an unfair windfall.”

But McIntosh does note that such changes could be an issue for multi-provincial employers that opt for both the ORPP and a DC plan, because additional communication efforts will be required and payroll could become more complicated.

There will be other complications for employers, even though they have a comparable plan.

“New hires with an eligibility period have to contribute to the ORPP, whereas, once that period has passed, they don’t have to contribute into the ORPP anymore,” explains Janice Holman, a principal and leader of Eckler’s DC practice.

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?”).

37.9%

The pension coverage rate (the proportion of all employees covered by a registered pension plan) in 2013; down from 38.5% in 2012

Source: Statistics Canada

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.

What about group RRSPs?
Group RRSPs aren’t considered comparable to the ORPP, which gives employers a few options to consider.

If they offer a generous RRSP, it could be converted to a comparable registered plan relatively easily and avoid the ORPP if staying out of the ORPP is the goal, says John McIntosh, a senior consultant with Towers Watson.

But smaller employers that don’t contribute as much might not want to increase contributions or convert their plans. “They may have a difficult time justifying switching to a registered pension plan, with the additional administration and compliance requirements that it has,” he adds.

If employers do nothing, they’re going to have to join the ORPP. Some employers may decide to absorb the additional costs, keep their group RRSPs and contribute to both plans.

“Some companies may prefer to maintain a group RRSP structure because of its flexibility,” says Scott Clausen, a Mercer partner and senior retirement consultant.

But employers with lower contribution rates may consider getting rid of their group RRSP altogether.

It won’t be worth redesigning the plan to contribute to the ORPP and then have a smaller portion go into their existing plan, says Janice Holman, a principal and leader of Eckler’s DC practice.

“Their costs might go down, but they also won’t have to allocate resources for administering the plan and take on that responsibility,” she adds.

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.

ORPP enrollment schedule
The Ontario Retirement Pension Plan (ORPP) Administration Corporation will be contacting all Ontario employers in early 2016 to verify their current pension plans and assess the coverage. ORPP contribution amounts will be phased in for Waves 1, 2 and 3.

Type of employer20172018201920202021
Wave 1: Large employers (500+ employees) without registered plans0.80%1.60%1.90%1.90%1.90%
Wave 2: Medium employers (50–499 employees) without registered plans–0.80%1.60%1.90%1.90%
Wave 3: Small employers (50 or fewer employees) without registered plans––0.80%1.60%1.90%
Wave 4: Employers with registered plans that don’t meet test–––1.90%1.90%

Source: Ontario Ministry of Finance

Employers with a registered plan that exists on Aug. 11, 2015, or which have started the process of registering a plan, will be assigned to the fourth wave. If the plan is considered comparable by the time the fourth wave begins, employers won’t have to enroll in the ORPP. Also, employers that set up a comparable plan before their wave begins won’t need to enrol in the ORPP.

For more ORPP stories, visit benefitscanada.com/orpp

Craig Sebastiano is associate editor of BenefitsCanada.com.

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