2013 Ontario Economic Outlook and Fiscal Review

Chapter V: Retirement Income Security

Highlights

Taking a leadership role through a bold strategy to improve Ontario’s retirement income system, the Ontario government will:

  • Work to secure agreement with the federal government and other provinces for an enhancement to the Canada Pension Plan (CPP) to protect the middle class in retirement. If agreement cannot be reached, the government will move forward with a “made in Ontario” solution;
  • Engage with interested parties on a target benefit framework for eligible multi-employer pension plans (MEPPs) in the winter of 2014;
  • Engage with interested parties in the fall of 2013 on how pooled registered pension plans (PRPPs) should be implemented in Ontario;
  • Develop regulations that would allow defined contribution (DC) plans to pay retirement income directly to retirees;
  • Finalize new regulations on split pensions and asset transfers between pension plans, which, if approved, are expected to take effect in January 2014;
  • Look to the technical working group established following the 2013 Budget, for advice on design, governance and transition issues, in implementing an asset pooling framework for public-sector pension plans in 2014;
  • Commit to seeing changes in electricity sector pension plans, including cost sharing, governance and other provisions, that will ensure these plans are more affordable; and
  • Modernize the investment rules governing Ontario pension plans, including changes to remove barriers to investments in Ontario public infrastructure projects, potentially creating a significant new source of capital to support economic growth and job creation in Ontario.

Strengthening Ontario’s Retirement Income System

Long-term savings and investment are critical to ensuring Ontarians prepare financially for their retirement. Many Ontarians today are having difficulty putting aside sufficient savings for retirement and are worried about their future financial security.

The government is committed to a strong and secure retirement income system to help ensure that Ontarians are able to enjoy their retirement years. It will assist working Ontarians in planning for their retirement, whether they rely on retirement income provided through the Canada Pension Plan (CPP), are accumulating retirement savings independently, or have access to a workplace pension plan.

The CPP forms the foundation of the nation’s retirement income system. An enhancement to the CPP is critical to ensuring that Ontarians, particularly middle-income earners, have greater financial security in retirement.

The government is leading the way by working to secure agreement among provinces and the federal government on a CPP enhancement. If an agreement cannot be reached, Ontario will move forward with a “made in Ontario” solution.

The government will also implement innovative retirement savings models such as pooled registered pension plans (PRPPs) to promote increased retirement savings in the province. Before introducing legislation, it will consult on an Ontario framework for PRPPs to provide employees, particularly those working in small and medium-sized businesses, with a simplified, low-cost retirement savings vehicle.

For Ontarians with self-directed retirement savings, such as registered retirement savings plans (RRSPs), Ontario will work to reduce the cost of investing and provide individuals with the help they need to make informed decisions about financial savings. The government will examine recommendations by the Ontario Securities Commission (OSC), which is looking at the structure of mutual fund fees, and consider tailored regulations for financial advisers and planners.

Recognizing recent funding challenges, the government will also help those with defined benefit (DB) pension plans. It will continue implementing new and revised rules to ensure Ontario’s private-sector DB plans remain financially sound and public-sector DB plans remain affordable and sustainable.

“A significant minority of Canadian households are not on track to maintain their standard of living in retirement. This lack of preparedness does not have a single root cause — some households are unprepared because the public benefits are eroding over time; some are not saving enough (or have not saved enough); and others will be unable to compensate for the steep clawback of universal benefits. The only way to address this multifaceted challenge is with a multifaceted response.”

McKinsey & Company, “Are Canadians Ready for Retirement?”, 2012, p. 20.

The Case for Action

Studies and analyses from pension experts, academics and research institutes indicate today’s workers may not be saving sufficiently for retirement. This is happening for a variety of reasons:

  • Employment pension coverage is low. Fewer than 35 per cent of workers in Ontario have a workplace-based pension plan. Coverage for workers in the private sector is even lower, with only 28 per cent having the benefit of plan membership. Defined benefit plan coverage in particular is on the decline and, where DB plans exist, many are facing funding challenges in light of historically low interest rates and demographic pressures.
  • Ontarians who do not have access to workplace pensions must rely on RRSPs and alternative savings vehicles. Most people are not able to put aside enough income in these plans. For some of those who have managed to save, investment returns are still below the long-term averages, and traditional investment vehicles like mutual funds often attract high fees.

These concerns also come at a time when people are living much longer and spending a larger portion of their life in retirement. Increasing lifespans have put pressure on savings to provide lifelong income over a retirement period that can amount to several decades. As a result, longevity risk or “outliving one’s savings” has become a concern for many retirees.

In 1998, reforms ensured that the CPP was secure and sustainable. Now is the time to address the adequacy of the CPP.

Retirement experts suggest that households should aim to replace 50 per cent to 70 per cent of their pre-retirement income in retirement. Research shows an increasing risk of middle-income households being unable to meet this target.

Chart 5.1 shows how different earnings levels during working years affect an individual’s ability to reach this target. Retirement income provided by Old Age Security (OAS) and the Guaranteed Income Supplement (GIS), combined with existing CPP benefits, already provides close to or more than 100 per cent earnings replacement for lower-earning workers. By contrast, those with average career earnings between $40,000 and $75,000 are unable to reach a 70 per cent retirement income target through CPP and OAS, and must rely on alternative sources of income to fill this gap. Alternative sources of retirement income include workplace pension plans, tax-assisted savings vehicles such as RRSPs, home equity and other personal savings.

Chart 5.1 Retirement Income Targets and Potential Gaps (Single Person)

Those with higher incomes have a greater capacity to save and accumulate wealth. By contrast, middle-income earners have fewer opportunities to save. Most workers are not members of an employment pension plan. Their personal savings are relatively low and RRSPs remain underutilized by many of those with middle incomes. Middle-income earners need more help if they are to maintain a comparable standard of living in their retirement.

Leading the Way in Reforming the Retirement Income System

Ontario, recognizing the retirement savings challenge, has already taken significant steps in reform.

In 2008, the Report of the Expert Commission on Pensions laid out a comprehensive blueprint for pension reform and encouraged a national discussion on improvements to the system. The Report included recommendations to modernize and strengthen pension laws in Ontario through the Pension Benefits Act, which had not been updated in more than 20 years. In response, the legislature passed two pension reform bills and many of the new regulations required to implement their provisions have been approved by the government or are underway.

In 2010, Ontario released a discussion paper on possible approaches to strengthen the retirement income system, including a fully funded CPP enhancement supplemented by pension innovation to expand retirement plan coverage and encourage lower-cost savings options.

In 2012, the government extended the solvency funding relief for private-sector pension plans provided in 2009 for a further three years to help employers manage their pension costs and help make these plans sustainable in the long term. Temporary solvency funding relief was also provided to public-sector DB plans provided they took steps to put their plans on a more sustainable track.

In the 2013 Budget, Ontario indicated that it would continue to take a leadership role in advocating for a fully funded enhancement to CPP and would also move forward to introduce innovative pension models such as PRPPs and a framework for target benefit plans.

While important work has been done, Ontario must strengthen its retirement income system. The government is committed to building on its efforts to date and pursuing a bold new strategy to enhance retirement savings.

A Strategy to Enhance Retirement Savings

A bold new strategy requires collaboration from all sectors — individuals, employers, labour, financial and investment services, and all orders of government — and a range of tools to address a complex and varied problem.

Ontario will continue to take a leadership role through a sustained and balanced approach to implement its strategy to improve Ontario’s retirement income system:

  • For Ontarians without workplace pension plans: The government will develop innovative pension models to promote increased retirement savings in Ontario. In particular, to help ensure that all Canadians have a reasonable level of income replacement throughout their retirement years, Ontario will:
    • Work to secure agreement among provinces and the federal government on a CPP enhancement. If agreement cannot be reached, Ontario will move forward with an alternative “made in Ontario” solution;
    • Facilitate the use of target benefit plans by clarifying the rules for
      multi-employer pension plans (MEPPs) that provide target benefits and establishing a framework for single-employer, target benefit plans; and
    • Encourage expanded retirement savings by consulting on a framework before introducing legislation to implement PRPPs, a low-cost, portable retirement savings tool.
  • For Ontarians with self-directed retirement savings: Ontario will work to improve the efficiency and stability of capital markets to reduce the cost to individuals of investing, and provide the tools to encourage informed decisions about financial savings.
  • For Ontarians with DB pension plans: Ontario will continue to work with employers and employees to enhance the sustainability of DB pension plans. After taking steps to help plan sponsors manage funding obligations in the face of historically low long-term interest rates, the government continues to make efforts to ensure Ontario’s private-sector DB plans remain financially sound and public-sector DB plans remain affordable and sustainable.

1. For Ontarians without Workplace Pension Plans

Ontario is committed to strengthening retirement income through improvements to existing public pension programs as well as developing new savings options.

An Enhancement to the Canada Pension Plan

The CPP is an efficient and effective mandatory public pension program, with contributions shared equally by employers and employees. Self-employed workers contribute both shares. The CPP provides Canadians with a secure pension that is indexed to inflation and paid for life. It is fully portable across Canada, supporting a modern and mobile labour force.

As a mandatory public pension program, a CPP enhancement would provide a higher level of predictable retirement income for all workers, including the self-employed, and ensure participation by employers in improving retirement savings. Taken together as part of a comprehensive strategy that includes pension innovation, supporting DB plans and changes to help individuals save, a CPP enhancement would make a real difference in improving the retirement income security of today’s workers.

In addition to financial security for beneficiaries, the CPP has an overall positive impact on the economy and allows Canadians to retire with dignity. A stable, predictable income allows retirees to spend at higher rates, and reinvest that income in the economy through the consumption of goods and services.

Federal, provincial and territorial ministers of finance and the Council of the Federation, currently chaired by Premier Kathleen Wynne, have been engaged in ongoing discussions on possible improvements to Canada’s retirement income system.

Ontario will continue to work with the federal government and other provinces to develop an enhancement to the CPP to help improve the adequacy and predictability of earnings replacement for future retirees, particularly for middle-income workers.

A number of objectives will guide Ontario in determining the preferred design of a CPP enhancement. These objectives are intended to focus an enhancement where it is needed most and to strike a balance between the needs of future retirees and the impacts on businesses and the economy.

Enhancement that focuses on today’s workers

A CPP enhancement should be “fully funded” to avoid intergenerational inequity and improve the future retirement incomes of today’s workers.

A fully funded enhancement means that enhanced CPP benefits would accrue to workers as they are paid for through contributions. Any CPP benefit increases would occur gradually over time, based on the contribution that workers and their employers have made.

Moderate the effect on the economy

The magnitude of any CPP enhancement should take into account potential effects on businesses, people and the economy.

A CPP enhancement would increase contributions by businesses and workers. A notice period and an adequate phase-in of higher contributions would moderate the effect on the economy by giving businesses and workers time to adjust. Also, additional contributions collected from an enhancement would be reinvested both domestically and internationally, creating jobs and economic growth.

Over the longer term, higher retirement income would contribute to a greater quality of life for retirees and a more stable, stronger economy.

Improve the retirement incomes of those most at risk

With increasing life expectancies, individuals must accumulate more savings to have sufficient income for what could be a 20- to 30-year period of retirement. A CPP enhancement should be aimed at improving the retirement income of workers who are most at risk of undersaving — middle-income earners.

Retirement income provided by OAS and GIS benefits, combined with existing CPP benefits, already provides close to, or more than, 100 per cent of earnings replacement for lower-income workers.

An enhancement to the CPP should acknowledge the adequate coverage provided by existing benefit programs, and should limit or minimize unnecessary additional contributions from low-wage earners and the businesses that employ them.

Securing an agreement

An enhancement to the CPP is essential in helping to ensure that hardworking Ontarians are able to maintain a similar standard of living in retirement and enjoy their retirement years. This critical initiative requires agreement among seven of the ten provinces, representing two-thirds of the population of the provinces, and a willing federal partner. The government will move forward with a “made in Ontario” solution in the event that federal–provincial–territorial discussions on CPP enhancement are unsuccessful.

Target Benefit Plans

Target benefit pension plans provide a more flexible approach to saving for retirement and are another example of Ontario’s commitment to innovative pension arrangements.

Target benefit plans combine features of DB and defined contribution (DC) plans. While they “target” a specific benefit level funded by fixed contributions, benefits may be reduced to address any funding shortfalls in the pension fund.

“[I]n a context where single-employer plans are becoming increasingly rare, the jointly governed target benefit pension plan (JGTBPP) is, quite frankly, a strategy designed to tempt employers back into offering pensions and to ensure that plan members and retirees are not left with high aspirations but no pension coverage.”

Report of the Expert Commission on Pensions, “A Fine Balance: Safe Pensions, Affordable Plans, Fair Rules,” 2008, p. 176.

With a more predictable cost structure, employers that may not be able to manage the risks of a DB plan would have another option through target benefit plans to offer employees to help save for retirement.

The 2013 Budget announced that Ontario would be moving ahead on regulatory changes related to target benefits in eligible MEPPs and also made a commitment to develop a framework for single-employer, target benefit pension plans.

Ontario will be moving ahead with consultations on a target benefit framework for eligible MEPPs in the winter of 2014.

Pooled Registered Pension Plans

Pooled registered pension plans are a new form of tax-assisted individual retirement savings account. These plans are intended to make it easier to save for retirement by offering employees and self-employed individuals an additional savings vehicle that is low cost (achieved through a simple design and economies of scale), professionally managed and portable from one workplace to another. Pooled registered pension plans are intended to be particularly beneficial for small and medium-sized businesses that may not have the capacity to offer traditional pension plans.

Ontario will engage with interested parties on how PRPPs should be implemented in Ontario in the fall of 2013 before introducing legislation.

2. For Ontarians with Self-Directed Retirement Savings

Investor Education

To help individuals make informed savings and investment choices, the Ontario government will promote financial literacy through organizations such as the Financial Services Commission of Ontario, the OSC and Investor Education Fund (IEF), a non-profit organization established by the OSC.

The IEF website has the most popular financial education material of its kind in Canada. Its consumer-focused content provides unique tools that give Ontario investors the information they need to make better decisions about retirement, education savings, investing, fees and debt repayments.

More Efficient Capital Markets

Canada’s capital markets are regulated by 13 provincial and territorial securities regulators applying 13 sets of securities laws. Ontario has played a leadership role in developing provincial, territorial and federal government support for a common securities regulator that will administer a single set of securities regulations. Ontario, British Columbia and the federal government have agreed in principle to establish a cooperative capital markets regulator (CCMR), in the interest of fostering more efficient and globally competitive capital markets; strengthening the ability to identify and manage systemic risk; providing better protection for investors; and enabling Canada to speak with a single voice to play a more influential role in international regulatory initiatives.

Ontario, together with British Columbia and the federal government, is implementing the CCMR and will encourage broader provincial and territorial participation.

Reducing Costs and Protecting Investors

Ontario is also working to reduce the cost to individuals of investing. The OSC has conducted extensive consultations on the structure of mutual fund fees (including trailer fees) in Canada to determine if there are investor protection or fairness issues and whether any regulatory responses are warranted. The OSC is reviewing the feedback provided in public roundtable and other meetings and comment letters, and is considering the perspectives of investor advocates, the investment industry and other market participants. The government looks forward to the OSC’s recommendations on this issue.

Sound Financial Advice for Ontarians

People need access to informed, professional financial advice to ensure that their investment decisions serve their financial goals. Financial planning is not currently subject to general regulatory oversight or self-regulatory rules. The government will investigate the merits of proceeding with more tailored regulation of financial planners and consider the appropriate regulatory framework for doing so.

Allowing DC Plans to Pay Pensions Directly to Retirees

Currently, individuals retiring from a DC plan must transfer their pension account to a financial institution. Allowing plan administrators to pay retirement income directly to retirees would provide DC plan members with another option. These retirees could benefit from the investment expertise and cost efficiencies associated with leaving their assets in the plan.

The government will develop regulations that would allow DC plans to pay retirement income directly to retirees.

3. For Ontarians with Defined Benefit Pension Plans

Improving Long-Term Sustainability

Ontario has made a number of reforms intended to enhance funding flexibility and mitigate the effects of the 2008 market downturn on DB pension plans. The government plans to implement further funding changes, including limits on contribution holidays and accelerated funding of benefit improvements, to enhance the long-term sustainability of these plans.

Addressing the Issues of Asset Transfers and Split Pensions

Regulatory requirements and various court decisions have made it difficult, expensive and time consuming to transfer pension assets between pension plans as part of a corporate restructuring or government divestment. Individuals affected by such transactions are often left with “split pensions.” A split pension means that a person will collect two pensions at retirement; one earned while working for a former employer and a second earned while working for a new employer. There is a risk that the sum of the two pensions may be less than it would have been if their two pensions had been consolidated into a single pension sponsored by the new employer.

The government has posted draft regulations concerning split pensions and asset transfers that would:

  • Allow certain plans to enter into agreements to offer eligible individuals an opportunity to consolidate their benefits in the successor plan; and
  • Facilitate the restructuring of pension plans while protecting benefit security for retirees and plan members.

Feedback will be taken into consideration in the new regulations for asset transfers and split pensions. These are expected to take effect in January 2014.

Ensuring More Sustainable Public-Sector Pension Plans

Many public-sector pension plans, like their private-sector counterparts, are facing sustainability challenges.

The Commission on the Reform of Ontario’s Public Services recommended that the government work with employer and employee sponsors of jointly sponsored pension plans (JSPPs) in the public sector to limit contribution rate increases and address potential future funding shortfalls through reductions in future benefits. It also recommended measures to contain costs and improve the sustainability of public-sector single-employer pension plans (SEPPs).

Jointly Sponsored Pension Plans

Most of Ontario’s largest public-sector plans are JSPPs, in which ongoing contributions and funding shortfalls are the joint responsibility of employers and plan members. The four JSPPs consolidated in the Province’s financial statements are the Healthcare of Ontario Pension Plan, Ontario Public Service Employees Union Pension Plan, Colleges of Applied Arts and Technology Pension Plan, and Ontario Teachers’ Pension Plan.

The 2012 Budget noted that contribution rates for many JSPPs had risen significantly as a result of recent funding challenges. In response, the government consulted on a framework that would freeze contribution rates until the deficit is eliminated.

After extensive engagement, the government reached agreements with the four JSPPs consolidated in the Province’s financial statements to freeze employer contribution rates for a period of five years. These agreements will avoid up to $1.5 billion in employer contributions that might otherwise have been required. Should a new funding shortfall occur during the freeze period (December 31, 2012 to December 30, 2017), the plans would be required to reduce future pension benefits, to a limit, instead of raising contributions to address the shortfall. These negotiated agreements eliminated the need for a legislative framework.

Single-Employer Pension Plans

Since May 2011, the government has provided temporary solvency funding relief to certain public‐sector SEPPs. In exchange for this relief, these SEPPs are expected to negotiate plan changes that would improve sustainability and affordability over the long term.

The government’s temporary solvency funding relief regime for public-sector SEPPs has been successful. Since implemented, 25 plans have been granted relief and have begun to negotiate plan changes — 19 of them in the university sector. The 17 plans that were accepted into the regime as of the 2013 Budget have had their solvency payment requirements reduced by $240 million annually. As the latest eight plans accepted into the regime begin to make use of the relief, the total reduction in solvency payment requirements resulting from the relief regime will increase further.

Almost all university pension plans have negotiated increases in member contribution rates and/or reductions in future benefits. Among these university pension plans, at least 12 are now either at or close to 50/50 cost sharing for ongoing contributions between members and employers.

The 2013 Budget announced the government’s ongoing commitment to support the sustainability and affordability of public-sector SEPPs through:

  • Continuing the movement to 50/50 cost sharing for ongoing contributions;
  • Exploring opportunities to support joint sponsorship as the model for pension plan governance and funding in the public sector; and
  • Developing a framework that would, if specific conditions are met, permit the transfer of assets from SEPPs to JSPPs and allow certain SEPPs to merge with or be converted to JSPPs.

Building on that commitment and the announcement that the government would consider additional tools to advance these priorities, the Province intends to provide additional relief of solvency funding obligations for public-sector SEPPs that have demonstrated movement towards increased affordability and sustainability. As well, the government intends to permit the use of letters of credit by eligible SEPP employer-sponsors that are engaged in discussions with members and retirees to convert to a JSPP once a framework is in place.

Further to the 2013 Budget announcement, the government has established a technical working group with expertise in design, governance and transition issues related to implementing a new pooled asset management entity for public-sector SEPPs. The working group’s advice will assist the government in determining how to move forward with implementation in 2014. This initiative follows up on the 2012 announcement of the government’s intention to introduce an asset pooling framework for public-sector pension plans, the subsequent report by the Province’s Pension Investment Advisor, Bill Morneau, that recommended the government establish a new entity for this purpose, and the Commission’s recommendations to achieve efficiencies for broader public-sector plans.

Making Ontario’s Electricity Sector Pensions More Affordable

Compared to other public-sector pension plans, electricity sector plans generally require lower contributions from employees, while providing generous benefits. As a result, electricity sector employers are responsible for a large share of pension contributions. This imbalance in cost sharing is borne by electricity ratepayers.

There has been incremental movement towards 50/50 cost sharing for ongoing employee contributions negotiated by some companies, such as Hydro One, in the most recent round of collective bargaining.

However, the affordability of these plans cannot be solved by small increases to employee contributions over time. Changes must take place more promptly. The government is committed to seeing changes in cost sharing, governance, and other provisions that will ensure these plans are more affordable.

Modernized Pension Investment Rules

In 2000, Ontario harmonized the investment rules governing Ontario-registered pension plans with the federal framework in place at that time. The Province has adopted amendments made by the federal government since then.

As recommended by the Ontario Expert Commission on Pensions, the government has continued to review the investment rules to ensure that they make sense for Ontario pension plans. Certain limits imposed by the current rules can have an impact on plans’ ability to effectively manage risk and contribute to Ontario’s economy.

Pension plans are prohibited from owning more than 30 per cent of the voting shares of a single corporation. The rule is intended to restrict the ability of pension plans to control the corporations in which they invest, essentially making them “passive” investors.

This limit may, however, create an obstacle to investments in Ontario public infrastructure projects by Ontario’s pension plans, which potentially represent a significant new source of capital to support economic growth and job creation in Ontario.

Another rule limits the percentage of plan assets that can be invested in any one person or entity, or a group of associated entities or corporations, to 10 per cent. It is intended to reduce the risk of concentration and promote diversification of assets. This limit can have the effect, however, of preventing investments in assets that may be suitable for a particular plan’s liabilities. For example, pension plans with long-term liabilities related to inflation-indexed benefits may wish to better manage investment risk by holding more inflation-linked securities.

Proposed Regulatory Changes

To modernize the investment rules, the Ontario government will develop regulatory amendments under the Pension Benefits Act to:

  • Allow pension plans to further invest in Ontario infrastructure by exempting plans’ investments in certain Ontario public infrastructure projects from the rule limiting ownership in a single corporation to 30 per cent of voting shares; and
  • Provide plan administrators with greater flexibility to pursue investment strategies that allow a better match with plan liabilities, through an exemption to the limit in the current rule for certain government-issued, inflation-indexed securities (e.g., U.S. Treasury Inflation-Protected Securities).

Chart 5.1: Retirement Income Targets and Potential Gaps
Currently, Old Age Security (OAS), the Guaranteed Income Supplement (GIS) and the Canada Pension Plan (CPP) provide full income replacement for lower-income earners (e.g., annual pre-retirement income of $20,000), based on a retirement income target of 70 per cent of pre-retirement income. Those with annual pre-retirement income of $40,000 and $75,000 are unable to achieve their income replacement targets through OAS and CPP alone and face a potential gap in retirement income that must be filled by other savings such as workplace pension plans, RRSPs and home equity.

Return to Chart 5.1