The government is committed to a strong and secure retirement income system to help ensure that Ontarians are better able to enjoy their retirement years.
Canada’s publicly administered Canada Pension Plan (CPP) is fundamental to the retirement income security of all Canadians, but its benefits alone are too low to meet the needs of middle-income earners. As noted in Ontario’s Long-Term Report on the Economy (2014), two-thirds of workers do not participate in workplace pension plans.
Several studies have shown that, unless action is taken, a significant portion of today’s workers will face a decline in their living standard in retirement, and that this problem will likely worsen over time.
The Undersaving Problem
Do Ontarians Have Enough Savings to Retire?
“Year over year, more Canadians who are expecting to retire are concerned about not having enough money to support their retirement: 72% in 2013, 68% in 2012 and 67% in 2011.”
Scotiabank Annual Investment Poll, 2014.
“…defined benefit and defined contribution pension members are Canada’s lucky employees. More than 60 per cent of Canadian workers do not even belong to a workplace pension. Most will rely on a combination of personal savings, the Canada Pension Plan, and federal OAS and GIS supplements. For many retirees, personal savings won’t be much help. In recent years, Canadian consumers have only set aside a threadbare 5.5 per cent of their income, a sharp drop from a 20 per cent savings rate in the 1980s.”
Jim Leech & Jacquie McNish, The Third Rail, (McClelland & Stewart, 2013), p. 25.
“For middle-income Canadians, as you project ahead, the Canada Pension Plan is not going to be able to do that which it must…The role of government is not only to deal with today…”
The Right Honourable Paul Martin
“A growing gap will leave close to six million Canadians facing a more than 20% drop in living standards as they leave the workforce, even accounting for the savings on some expenditures that retirement brings. If left unchecked, current trends in pensions, government programs and savings rates will, particularly for today’s younger cohorts, be insufficient to allow today’s working Canadians to realize the retirement lifestyle that their elders have achieved.”
CIBC World Markets Inc., “Canadians’ Retirement Future: Mind the Gap,” 2013.
The 21st century workforce needs a modern retirement income system, but Ontario and Canada have a 20th century system in place. That is why Ontario is taking a leadership role in addressing this pressing issue.
Retirement experts often recommend that workers aim to replace up to 70 per cent of their income in retirement to maintain a similar living standard. Canada’s retirement benefit programs, namely Old Age Security (OAS) and the CPP, do not provide sufficient income replacement for those with middle incomes, as shown in Chart 4.1.
In addition, a significant portion of today’s workers are not saving enough to maintain their standard of living when they retire. Individuals with middle pre-retirement incomes face a potential retirement income gap due to the limited benefits provided by the CPP and OAS. These workers must rely on other sources of retirement income, such as registered retirement savings plans (RRSPs), to fill this gap.
Inadequate saving not only puts future retirees’ incomes at risk, but will also have negative long-term impacts on the economies of Ontario and Canada.
Increasing savings today would mean higher incomes and increased spending by retirees that would help generate future economic growth and employment. This would help the Ontario economy better cope with population aging and could help reduce intergenerational transfers from future workers to retirees.
As noted in the recently published paper by the former Governor of the Bank of Canada, David Dodge, higher retirement savings would also make more capital available in the economy for investment.1 Increased investment would result in higher productivity, leading to stronger economic growth and job creation.
The retirement savings problem is rooted in several factors including low workplace pension coverage, low personal savings and longer lifespans. A more detailed discussion of these factors and the retirement savings problem can be found in Ontario’s Long-Term Report on the Economy (2014).
Where available, workplace pension plans act as a very effective source of retirement income beyond that which is provided by public programs. Households without workplace pension coverage are more likely to experience a standard-of-living decline in retirement than those with workplace pensions.2
However, many employers do not offer these plans. In 2012, only 34 per cent of Ontario’s working population belonged to a workplace pension plan.
Building adequate savings through a pension plan is particularly difficult for those who change employers often over the course of their careers. Younger workers, who are expected to have multiple employers, will be more likely to encounter this patchwork of coverage.
Since two-thirds of Ontario’s workers do not participate in a workplace pension plan, they must rely to a greater degree on personal savings.
However, in 2012, there was about $730 billion in unused RRSP room in Canada, including $280 billion in Ontario alone. Among those with incomes between $25,000 and $75,000 who do contribute to RRSPs, average contributions have declined in recent years. A recent survey by Scotiabank3 indicated that only about three in ten Canadians planned to make an RRSP contribution in 2014, down from 39 per cent in previous years.
For those individuals who do manage to save, traditional investment vehicles like mutual funds often carry high management fees that can significantly erode savings growth, regardless of the real rate of return on the investments. Over time, relatively small increases in fees can have an impact on an individual’s retirement savings. Relative to individual retail customers, the fees or management expense ratios (MERs) associated with certain investments are much lower for pension plans. As such, members of pension plans, even small plans, can benefit.
Chart 4.2 illustrates how management fees affect retirement savings over time for the case of an individual making annual contributions of $6,000 to an RRSP. Compared to the potential savings portfolio value in the absence of fees, management fees of 2.4 per cent over the 40-year period could reduce the potential portfolio value by more than 44 per cent. However, if fees were low (one per cent), the total retirement savings would be about 40 per cent higher than the total retirement savings in a portfolio with a 2.4 per cent fee.
Increasing lifespans are a sign of higher living standards and better health outcomes. However, this has put pressure on personal savings and workplace pension plans’ ability to ensure lifelong income over a retirement period that can last several decades.
As shown in Chart 4.3, Ontario men at age 65 can currently expect to live another 19 years. It is projected that, by 2035, Ontario men aged 65 will have, on average, 23 more years to live. For Ontario women aged 65, life expectancy is currently 22 more years and is projected to rise to 25 years by 2035. While these projections are averages, a significant portion of future retirees will live well beyond the average.
Increasing life expectancy makes it especially difficult for those without pension plans to ensure their personal savings are enough to carry them through their retirement years. Those without sufficient income from pensions or personal savings will be forced to rely to a greater degree on government programs and services, and on financial support from family members.
Modernizing the retirement income system will require a range of tools and close collaboration with all players, including individuals, employers, labour, the financial services industry, and all orders of government.
The Province is committed to taking a leadership role in modernizing the retirement income system to help ensure that today’s workers are able to enjoy their retirement years.
As part of a commitment to strengthen the retirement income system, the government announced a bold new strategy in the 2013 Ontario Economic Outlook and Fiscal Review. The three-pronged strategy focuses on:
The Province will continue with this strategy, with particular emphasis on innovation and modernization, to help ensure that any improvements to the retirement income system meet the needs of a 21st century workforce.
The Canada Pension Plan is an efficient and effective mandatory public pension program, with contributions shared equally by employers and employees. It provides Canadians with a secure pension that is predictable, indexed to inflation and paid for life. Because the CPP is fully portable within Canada, it allows workers who change jobs frequently (e.g., younger workers) to have ongoing pension coverage, and it covers virtually all types of employment.
However, the basic structure of the CPP has not changed since the plan was created in 1966. The CPP’s replacement rate is only 25 per cent of pensionable earnings and workers cannot contribute on amounts above a maximum earnings threshold.4 These limits mean that the current maximum benefit is only about $12,500 per year, and the average annual benefit paid is far below that, at about $6,400 in Canada and $6,800 in Ontario. These amounts are not high enough to allow workers, particularly middle-income earners, to maintain their standard of living in retirement.
Enhancing the CPP is critical to ensuring Ontarians and Canadians, particularly middle-income earners, have greater financial security in retirement. Ontario’s preferred approach to strengthening the retirement income system is through an enhancement to the CPP.
Ontario has long played a leadership role in retirement income security and has been advocating for an enhancement to the CPP since 2010. In 2013, as chair of the Council of the Federation, Ontario elevated the pressing need for pension reform to a national dialogue. Through this role, Ontario led discussions among provincial and territorial finance ministers on ways to improve Canada’s retirement income system, including an enhancement to the CPP. During these discussions, provinces and territories agreed to continue work on a possible CPP enhancement; for example, by engaging further with business and employer communities.
Despite the consensus among provinces and territories to continue this collaborative effort, in December 2013, the federal government unilaterally shut down CPP enhancement discussions.
This action by the federal government not only curtailed work on a potential enhancement, but has also crowded out discussions on other possible reforms to modernize the CPP.
The Province is not prepared to wait for the federal government to step up to address the retirement income challenge currently faced by today’s working Canadians. Unless action is taken now, there is a risk that the retirement savings problem will worsen over time. The retirement income system will become increasingly out of touch with the changing workforce, placing younger generations at a significant disadvantage relative to their parents.
Given the federal government’s decision to shut down discussions on an enhancement to the CPP, Ontario is proposing to move forward with a new mandatory provincial pension plan — the Ontario Retirement Pension Plan (ORPP) — that would be cost-effective, responsible and designed to meet the needs of a 21st century workforce.
The ORPP would be the first of its kind in Canada and would expand pension coverage initially to more than three million working Ontarians who currently rely on the CPP, OAS and their own savings for retirement income. It would build on the key features of the CPP, and could later be integrated with the CPP should negotiations on an enhancement be successful in the future.
By targeting those most at risk of undersaving, particularly middle-income earners, the ORPP would help Ontario working families build a more secure retirement future.
The ORPP would include the following design features:
When combined with the retirement benefit provided through the CPP:
For illustrative examples in this chapter, earnings levels are stated in 2014 dollars. “Steady career earnings” means that the individual earned the equivalent of the stated earnings in each of the 40 years, taking into account annual increases in the average wage.
The ORPP would be publicly administered at arm’s length from government, have a strong governance model and be responsible for managing investments associated with annual contributions of approximately $3.5 billion. Benefits would be earned as contributions are made to ensure that the system is fair, and younger generations are not burdened with additional costs.
Since the ORPP is intended to assist individuals most at risk of undersaving, particularly middle-income earners without workplace pensions, those already participating in a comparable workplace pension plan would not be required to enrol in the ORPP.
To reduce the burden on lower-income workers, earnings below a certain threshold would be exempt from contributions, similar to the CPP. Currently, the CPP has an annual basic exemption of $3,500. The government will consult on whether the ORPP’s lower-income threshold would mirror that of the CPP.
The government recognizes the unique status of self-employed individuals in the labour market as both employee and employer. The government will consult to determine how best to assist self-employed individuals in achieving a secure retirement future.
Recognizing that retirement income security is critically important to Ontario families and for the future prosperity of the province, the government will be moving forward with implementation of the ORPP as a priority. The ORPP would be introduced in 2017 to coincide with the expected reductions in Employment Insurance premiums.
Enrolment of employers and employees into the ORPP would occur in stages, beginning with the largest employers. Contribution rates would be phased in over two years.
The ORPP numerical examples are based on analysis of recent CPP enhancement proposals.5 These examples may help show how the ORPP might address the undersaving problem. Since the design and structure of the ORPP may vary from the CPP, actuarial analysis would be required to finalize elements of the ORPP.6
Barbara, Bonnie and Bernice are about to enter the labour force and plan to work for 40 years and retire at 65. For illustrative purposes, at age 65, Barbara, Bonnie and Bernice will have had steady career earnings of $45,000, $70,000 and $90,000 respectively, in 2014 dollars. Chart 4.4 illustrates the annual ORPP retirement benefit, the benefit level when combined with CPP benefits, and the annual CPP and ORPP contributions.7
With a contribution rate of 1.9 per cent, Barbara (earning $45,000) would contribute about $788 annually to the ORPP, matched by her employer over her working career. In retirement, Barbara would receive:
With a contribution rate of 1.9 per cent, Bonnie (earning $70,000) would contribute about $1,263 annually to the ORPP, matched by her employer over her working career. In retirement, Bonnie would receive:
With a contribution rate of 1.9 per cent, Bernice (earning $90,000) would contribute about $1,643 annually to the ORPP, matched by her employer over her working career. In retirement, Bernice would receive:
To date, the government has benefited tremendously from the advice of former Prime Minister Paul Martin, drawing on his extensive experience in retirement income security and CPP reform. In January of this year, the government established a Technical Advisory Group on Retirement Security, bringing together a range of pension expertise and perspectives.
As noted earlier, a provincial pension plan of this scale would be the first of its kind in Canada. The government will continue to engage the Technical Advisory Group on, among other issues, the appropriate lower-income threshold and how best to assist the self-employed. Further work, including actuarial analysis, is also required to finalize the ORPP design details.
Ontario is home to some of Canada’s largest and most highly regarded pension funds. Consideration will be given to how to leverage the expertise of these public-sector pension plans with respect to their strong governance and proven investment track record. In addition, the government will consider how to leverage the province’s strong financial services sector and Ontario’s proposed new asset pooling entity in the administration of the plan and investment management.
Ontario will work with other provinces to examine whether the ORPP could be expanded to enhance the retirement income security of those living outside Ontario.
To ensure the ORPP would effectively balance providing benefit security in retirement with minimizing the impact on business, the government will consult with Ontario employers and labour. The government also plans to work with the federal government, where necessary, to facilitate a seamless implementation of the ORPP for Ontarians.
Further technical details will be released later this year prior to introducing legislation.
The ORPP would be a major step in addressing the undersaving challenge and modernizing the retirement income system.
The ORPP would expand pension coverage in Ontario at a time when workplace pension coverage is on the decline. It would build on advantageous features of the CPP such as benefit predictability, pooled longevity and investment risk, and low-cost administration. The ORPP would assist Ontario’s modern workforce in preparing for retirement while supporting a strong and prosperous Ontario.
While the ORPP is a critical element in enhancing the retirement income security of Ontarians, the undersaving challenge is a complex issue requiring a multi-faceted approach and a range of tools. Voluntary savings vehicles will continue to play an important role in Ontario’s retirement income system.
Pooled registered pension plans (PRPPs) are a new form of tax-assisted individual retirement savings plan. They are intended to make it easier to save for retirement by offering employees and the self-employed an additional low-cost savings vehicle (achieved through a simple design and economies of scale). They are professionally managed, portable from one workplace to another, and have more favourable tax treatment than group RRSPs.
In the fall of 2013 and the winter of 2014, the government consulted with interested parties to determine how PRPPs could best be implemented to ensure that they meet the needs of Ontario’s current workforce.
After reviewing feedback from a variety of stakeholders, including members of the public; labour and employer representatives; retiree organizations; pension experts; and various public- and private-sector entities, the government has decided to move forward with a legislative framework for PRPPs that is broadly consistent with the model introduced by the federal government and adopted by various provinces. In particular, an Ontario PRPP framework would include the following key design features:
The government intends to introduce PRPP legislation in the fall of 2014.
Ontario continues to support national efforts to improve the retirement income system and recognizes the value in working with other jurisdictions to develop innovative solutions that advance this important goal for all Canadians. An Ontario PRPP framework that is harmonized with those of other jurisdictions would assist in creating a coordinated approach to administration and regulation across the country. Not only would this help to create economies of scale and minimize costs, but it would also foster greater portability, supporting a modern, mobile workforce.
Target benefit pension plans offer employers an innovative new option by combining features of defined benefit (DB) pension plans and defined contribution pension plans. Target benefit pension plans “target” a specific pension funded by fixed contributions. Unlike DB pensions, the target benefit pension may be reduced to address funding shortfalls.
The Province intends to consult on a regulatory framework for multi-employer target benefit pension plans with a view to introducing a framework that sets out eligibility conditions, funding rules and governance requirements. Feedback from these consultations will help in subsequently developing a framework for single-employer target benefit pension plans.
The 2013 Ontario Economic Outlook and Fiscal Review acknowledged that many individuals rely on financial advisers, including financial planners, when making savings and investment decisions. The extent of this reliance may pose a concern since financial planning in Ontario is not currently subject to general regulatory oversight. In light of this potential regulatory gap, the government committed to investigate the merits of, and possible options for, proceeding with more tailored regulation, and consulted with industry stakeholders in January 2014. However, no consensus emerged on the appropriate regulatory framework.
The Minister will appoint an expert committee to consider more thoroughly possible policy alternatives for more tailored regulation and to develop recommendations.
The government will continue work to enhance the security of benefits for members of DB pension plans while ensuring these plans remain affordable for plan sponsors.
Pension plans are recovering from funding challenges experienced following the 2008–09 recession. Since then, the funding level of plans in Ontario has improved considerably.
To ensure that DB plans are prudently funded and sustainable for the long term, important steps need to be taken to refine funding rules.
The government plans to enact regulations that define the funding level at which a contribution “holiday” can be taken and the duration. In addition, proposed new regulations would set parameters for accelerated funding of benefit improvements in underfunded pension plans. These new rules would ensure plans can manage future funding pressures and continue to pay for the benefits they offer in the longer term.
The government will also carefully consider, in consultation with affected stakeholders, the implementation of other funding rules changes to support the long-term sustainability of DB pension plans in Ontario.
As well, the government intends to address the regulations that temporarily exempt specified Ontario multi-employer pension plans and jointly sponsored pension plans (JSPPs) not subject to solvency funding requirements from the “solvency concerns” test. This test currently requires plans with solvency funded ratios of less than 85 per cent to file plan valuations with the regulator annually, rather than triennially.
The government intends to extend the exemption that would otherwise expire on December 31, 2014, to December 31, 2017, to allow sufficient time for consultation on an appropriate test for all non-solvency funded plans. This would include target benefit pension plans, for which a framework is currently under development.
The government is also currently seeking feedback from stakeholders before putting in place new regulations to further enhance transparency and accountability with respect to plan funding and investment strategies to plan members as well as former and retired members.
The government will be moving forward with a framework to enable pooling of assets of pension plans in the broader public sector as well as endowment and other funds of public entities in order to improve their investment results. Larger pools of capital enable access to a broader range of investments, which is key to improving risk-adjusted returns.
The Province will target the introduction of legislation in the spring of 2015 to enable the establishment of a new asset pooling entity, which would operate at arm’s length from government.
The Workplace Safety and Insurance Board and the Ontario Pension Board have strong investment track records and are willing and well placed to be initial participants in the new pooling entity.
Participation of other pension plans and qualified organizations in the pooling entity would be on a voluntary basis.
A JSPP is a DB pension plan in which the employer(s) and plan members share responsibility for the plan’s governance and funding. Employers and members jointly determine contribution levels, the allocation of surplus and how deficits are funded.
The 2013 Budget announced the government’s intent to facilitate the transfer of assets from employer-sponsored, single-employer pension plans (SEPPs) to JSPPs and to allow employer-sponsored SEPPs to be converted to JSPPs. Through this Budget, the government is fulfilling this commitment by introducing legislative amendments to the Pension Benefits Act that would create regulatory authority to prescribe requirements for plan conversion.
To ensure that the new JSPP protects the existing pension entitlements for converting members, and is transparent and voluntary, the amendments would require that:
In some circumstances, plan sponsors may prefer to transfer their pension responsibilities to an existing JSPP. The government intends to make regulations to ensure that the assets transferred are sufficient to fund the transferred liabilities, while not unduly subsidizing or enriching existing JSPP beneficiaries.
The government recognizes that the availability of an exemption from solvency funding rules for new JSPPs is an important factor for stakeholders exploring conversions.
Employers and plan members joining an existing JSPP that is already exempt from solvency funding requirements would receive the same treatment.
The government will consider exempting new JSPPs that involve multiple employers from solvency funding requirements, subject to certain criteria, to be developed in consultation with stakeholders. For new single-employer JSPPs, consideration will be given to whether sufficient protections are in place for members and whether the plans can be expected to be sustainable in the future before providing a similar solvency exemption.
This bar chart shows how the CPP and OAS contribute to retirement income for individuals with pre-retirement earnings of $45,000, $70,000 and $90,000. The chart shows that each individual faces a potential gap in achieving a 70 per cent income-replacement target due to the limited benefits provided by these programs. An individual with annual pre-retirement income of $45,000 would need an additional $14,109 annually over and above benefits provided by the CPP and OAS to meet a 70 per cent income-replacement target of $31,500. An individual with pre-retirement income of $70,000 would need an additional $29,829 to meet an income-replacement target of $49,000. An individual with pre-retirement income of $90,000 would require an additional $43,829 to meet an income-replacement target of $63,000.
All amounts are before tax and expressed in 2014 dollars. Pre-retirement earnings are constant over a 40-year career, taking into account annual increases in the average wage. Individuals are assumed to retire at age 65.
This line graph shows how management fees affect retirement savings over time for the case of an individual making annual contributions of $6,000 to an RRSP. The graph shows the value of a savings portfolio under three scenarios: a 2.4 per cent management fee, a one per cent management fee, and no fees. Given a 2.4 per cent management fee, the value of those savings after a 40-year period would be $434,872. With a low one per cent fee, the value of those same savings would be $605,689 after 40 years. Under a no-fee scenario, the value of those same savings over the same period would be $784,630. The graph shows that compared to the potential savings portfolio value in the absence of fees, management fees of 2.4 per cent could reduce the potential portfolio value by more than 44 per cent.
This line graph shows that life expectancy at age 65 has increased steadily since the late 1970s. In 1979, Ontario males could expect to live another 14 years, compared to another 19 years for females. By 2011, these expectations had increased to 19 years for males and 22 years for females. The graph’s projections show that this trend will continue. By 2035, life expectancy at age 65 is projected to be 23 years for males and 25 years for females.
This chart illustrates the proposed annual ORPP retirement benefit level, the benefit level of the proposed ORPP when combined with CPP benefits and the annual CPP and proposed ORPP contributions for three different individuals – Barbara, Bonnie and Bernice – who have different steady career earnings.
Barbara’s pre-retirement earnings are $45,000 annually. Barbara and her employer together would contribute $1,575 annually to the ORPP and $4,110 annually to the CPP over her working career. In retirement, Barbara would receive an ORPP benefit of $6,410 annually for life. Combined with her CPP benefits, she would receive about $17,090 annually for life, replacing about 40 per cent of her pre-retirement income.
Bonnie’s pre-retirement earnings are $70,000 annually. Bonnie and her employer together would contribute $2,525 annually to the ORPP and $4,850 annually to the CPP over her working career. In retirement, Bonnie would receive an ORPP benefit of $9,970 annually for life. Combined with her CPP benefits, she would receive about $22,430 annually for life, replacing about 34 per cent of her pre-retirement income.
Bernice’s pre-retirement earnings are $90,000 annually. Bernice and her employer together would contribute $3,285 annually to the ORPP and $4,850 annually to the CPP over her working career. In retirement, Bernice would receive an ORPP benefit of $12,815 annually for life. Combined with her CPP benefits, she would receive about $25,275 annually for life, replacing about 30 per cent of her pre-retirement income.
All amounts are before tax and expressed in 2014 dollars. Pre-retirement earnings are constant over a 40-year career, taking into account annual increases in the average wage. Individuals are assumed to have contributed to the CPP and ORPP throughout their career and to retire at age 65.