After a lifetime of hard work, Ontarians deserve a secure retirement. However, retirement security is becoming harder to attain. For many workers in today’s economy, long-term, full-time employment with pension benefits is elusive. Many Ontarians must save and invest on their own, forcing them to deal individually with the complexities of stock markets, interest rates and currency fluctuations. As well, all Ontarians will face greater financial uncertainty due to the prospect of living longer.
Evidence shows that many Ontarians are not saving adequately for retirement. Unless action is taken now, retirement savings challenges will likely worsen over time.
Ontario needs a system that helps individuals maintain their standard of living in retirement. A better retirement income system would also support the prosperity of the province as a whole. Increased retirement savings would contribute to higher investment and stronger economic growth over the long term.1 As well, growth in retirement savings would lead to higher incomes and consumption for retirees, and help the Ontario economy better cope with an aging population.
That is why strengthening retirement security is a key pillar of the government’s four-part economic plan, as outlined in the 2014 Budget. Highlights of the plan are:
The government has taken the following decisive actions to fulfil the commitments made in the 2014 Budget:
As part of its continuing progress to enhance retirement income security for all Ontarians, the government announces the following measures in this Budget:
Recent studies by The Conference Board of Canada, Manulife Bank of Canada and RBC show that a significant number of Canadians are concerned that they will not have sufficient income for their retirement years.2 A Sun Life Financial report also shows that 36 per cent of working Canadians are not confident about having enough money to enjoy the lifestyle they want in retirement, compared to 20 per cent of current retirees.3
These concerns reflect the economic and social changes taking place in the province, which underpin the need to enhance retirement savings.
In today’s workforce, people change jobs and employers frequently. It is estimated that, on average, workers can expect to change employers about five times throughout their careers.
A mobile workforce makes consistent participation in a workplace pension plan more difficult because most workplace pension plans, where they exist, are specific to an employer. Even individuals participating in generous workplace pension plans at any one point in their careers may not be covered under such plans through to retirement.
The modern workforce is also characterized by an increase in non-standard employment, which includes temporary work, part-time work and holding multiple jobs. Between 1997 and 2014, non-standard employment in Ontario grew at an average annual rate of 2.4 per cent, nearly double the growth rate of standard employment during this same period. The long-term growth of
non-standard employment has been driven largely by increasing temporary employment, which has grown at an annual rate of 3.5 per cent.
Workers in non-standard employment, particularly temporary workers, may find it difficult to access workplace pension plans.4 In 2013, only 35 per cent of Ontario workers participated in a workplace pension plan. Pension coverage is even lower for younger workers — in 2012, only about one-quarter of workers aged 25 to 34 participated in workplace plans, compared to nearly half of workers aged 45 to 54.5
In this context, it is important to note that the benefits provided by the Canada Pension Plan (CPP) and Old Age Security (OAS) are simply inadequate to meet the retirement income needs of many Ontarians. The CPP replaces 25 per cent of an individual’s earnings up to a maximum earnings level, which currently is $53,600. The current annual maximum CPP benefit is about $12,800 per year, but in 2014 the average CPP annual benefit was only about $6,900 in Ontario. When combined with that year’s average OAS benefit to Ontario’s seniors, this amounted to about $13,100 per year.
These modest benefits contribute to the undersaving problem faced by so many Ontarians, and further underscore the need for improved access to workplace pension plans.
Without action, there is potential for a growing disparity between those who are well prepared for retirement and those who are not. This is of special concern for today’s younger workers, who are at particular risk of being ill prepared for retirement.
Non-standard employment is common among a significant portion of the Ontario workforce. In 2011, among workers aged 18 to 64, about one in five held more than one job throughout the year and one in five was employed part time.
Average lifespans are increasing and this trend is likely to continue. Half of Canadians who are 20 years old today are expected to reach age 90, and one in 10 is expected to live to 100.6 While increasing life expectancy is a sign of higher living standards, it puts greater pressure on savings to provide sufficient income for Ontarians throughout their retirement years.
Without action to enhance access to retirement savings vehicles that provide a steady stream of payments for life, an increasing number of Ontarians may face greater financial uncertainty in their retirement due to the prospect of outliving their savings.
Experts generally recommend that individuals aim to replace 50 to 70 per cent of their pre-retirement income to maintain a similar standard of living in retirement. However, a number of studies show that many people are not saving enough to meet this goal. The percentage of households not saving sufficiently ranges from approximately 15 to 50 per cent.7
With declining access to workplace pension plans, personal savings become even more important in preparing for retirement. However, many families without workplace pension plans are not compensating for their lack of pension coverage by utilizing voluntary savings vehicles. For example, in 2012, even when accounting for differences in income levels, Ontario families without workplace pension plan assets were less likely than those with them to hold various types of assets for retirement, including investments, registered retirement savings plans (RRSPs) and real estate.
Many Ontarians do not take full advantage of voluntary individual retirement savings vehicles. In 2013, there was approximately $790 billion in unused RRSP room in Canada, including about $300 billion in Ontario alone.
Ontario’s retirees will become a growing share of the population, a trend that will have a significant impact on the economy in the future. It means that there will be fewer people of working age to support each senior, putting pressure on younger workers to support health care and other services for seniors.
Without adequate retirement incomes, as individuals age, their consumption of goods and services could decline, which would dampen economic growth. Increasing retirement savings today would, over the longer term, help ensure that future seniors have greater income security in their retirement. This would allow future retirees to maintain their consumption of goods and services and enhance growth in employment and the economy.
As noted by David Dodge, former Governor of the Bank of Canada, and Richard Dion, Senior Business Advisor at Bennett Jones LLP, improving productivity is an important way to foster economic growth and address the demographic challenge. Enhancing productivity requires greater investments in Ontario’s people, equipment and infrastructure. An effective way to finance these investments would be through an expeditious and sustained increase in the household savings of the current working population.8
The government is continuing to move forward with its 2013 commitment to ensure a strong retirement income system through a three-pronged approach, focused on:
Unless action is taken now, saving adequately for retirement will likely become more difficult over time. That is why, as first announced in the 2014 Budget, the government is moving forward with a new mandatory provincial pension plan — the Ontario Retirement Pension Plan (ORPP). Designed for today’s changing labour market and mobile workforce, the ORPP would be a significant step forward in addressing the retirement savings challenge by helping ensure Ontario’s workers have a secure retirement income foundation.
The ORPP would build on the strengths of the CPP and would:
Through mandatory contributions, the ORPP would provide a secure retirement income foundation for eligible Ontario workers. The ORPP is intended to complement workplace and other voluntary retirement savings arrangements that will continue to play a critical role in helping Ontarians maintain their standard of living in retirement.
On December 8, 2014, the government introduced Bill 56, the Ontario Retirement Pension Plan Act, 2014 (the “proposed ORPP Act”). The proposed ORPP Act lays the foundation for the plan including:
Before January 2017, the Province will also introduce legislation that would finalize details of the plan, based on extensive actuarial and legal analysis and ongoing engagement with Ontarians.
In December 2014, the government also released a consultation paper on three key ORPP design questions, including:
To help shape the Province’s approach to these key areas, Associate Minister of Finance Mitzie Hunter led an extensive consultation process with business, labour, associations, young workers, pension experts, individuals and families from across Ontario. In early 2015, the government heard from a wide range of stakeholders through:
The government is considering feedback from the consultations and considering further analysis, as described below. It will announce its conclusions on the key design questions shortly.
The ORPP is being designed to reflect the results of research, consultation and analysis of the CPP, and to incorporate the key features of a strong pension plan, including:
The consultation paper proposed a potential exemption for individuals already participating in workplace pension plans that replicated to the greatest extent the ORPP’s proposed key features — specifically DB plans and target benefit MEPPs.
A variety of different views on the issue were expressed, highlighting many important considerations.
The benefits of a broad-based ORPP participation model, with no exemptions for existing workplace pension plans, were emphasized by some stakeholders. This approach would align most closely with the CPP, provide the most continuous coverage across employers, and offer the greatest protection against risk for the broadest possible membership. Administrative efficiency for employers and for the ORPP plan administrator was also highlighted.
It was noted that an approach that provides the broadest possible coverage for workers in every situation and at every stage of their working lives would also contribute to a large, stable membership of the ORPP. This approach would promote cost-effectiveness, enable better investment and contribute to the overall health of the plan. In turn, this would help ensure that it is available for generations to come.
In contrast, other stakeholders focused on the important features of capital accumulation plans (CAPs), including DC plans and group RRSPs. For example, employers take pride in the retirement savings options they offer their workers, highlighting that many CAPs include significant contributions from employers and result in generous benefits. They cited the importance of options that involve a degree of individual choice and responsibility with respect to how to invest and access retirement savings.
Some also commented that ORPP contributions may require adjustments to overall compensation and existing benefit offerings. They emphasized that it will be important to consider the impact of the ORPP not in isolation, but as part of Ontario’s overall approach to building an attractive business climate. In addition, these stakeholders noted that Ontario employers should be treated fairly and not incur competitive disadvantages on the basis of the retirement savings vehicles they provide for their employees.
Discussions highlighted that the financial services sector is thinking creatively to improve offerings for employees and employers in response to long-standing retirement income issues, and to tackle new challenges arising from the changing retirement savings landscape. Ontario has built world-class financial services that should be leveraged in considering ORPP design.
Feedback from the consultations also indicated that individuals and families want to increase their knowledge about the retirement savings landscape in general, noting the importance of financial literacy, and to understand what different plan design parameters might mean for them.
Most importantly, it was clear that individuals, businesses, communities, families and associations want to be part of the process and to continue to help shape the plan.
The extent and variety of feedback from these consultations highlight the complexity of this issue. They also highlight the need for further analysis and dialogue to determine how best to meet the government’s objective of strengthening the retirement income foundation for Ontarians through the ORPP.
Under the CPP, employers and employees make contributions on annual earnings above $3,500 up to a maximum pensionable earnings threshold that now stands at $53,600. In the 2014 Budget, the government committed to consult on whether to mirror the CPP’s $3,500 minimum earnings threshold in the ORPP.
The minimum earnings threshold for the ORPP needs to balance a number of important considerations, including:
The federal Guaranteed Income Supplement (GIS) is an income-tested program that provides financial support to low-income seniors. It consists of a basic benefit and an additional top-up benefit for those recipients with the lowest incomes. Combined, the GIS provided a maximum annual benefit of about $9,050 to single seniors and about $12,000 to senior couples in 2014. The basic GIS benefit is reduced by 50 cents for every dollar of household private income. The top-up benefit is reduced by 25 cents per dollar, starting at $2,000 for single seniors and $4,000 for couples.
The Ontario Guaranteed Annual Income System (GAINS) provides a maximum annual benefit of $996 to seniors with the lowest incomes. It is a provincial top-up to the federal Old Age Security (OAS) and GIS. GAINS is reduced by 50 cents for every dollar of household private income.
To be eligible for GIS and GAINS benefits, individuals must be receiving OAS.
The government held consultations to help inform the discussion regarding a minimum earnings threshold. The discussion paper released by the government to support these consultations notes that:
Many anti-poverty advocates and community groups and some policy experts highlighted the importance of a low minimum earnings threshold to ensure that workers in multiple jobs, or part-time or temporary work, benefit as much as possible from the ORPP. They emphasized the particular challenges faced by recent immigrants, persons with disabilities and youth, who face barriers to securing jobs with workplace pension benefits.
Employers in some sectors called for a high minimum earnings threshold, pointing out that a low threshold would significantly impact their costs, which could affect compensation and hiring decisions.
Some employers have also suggested that requiring all employees to contribute to the ORPP could create barriers to employment for younger workers and others entering the labour market.
The consultations highlighted the balance that must be achieved between ensuring that all workers have adequate retirement income security and ensuring that long-term low-income workers are not adversely affected by saving more for retirement. Further analysis and dialogue are needed to determine how best to achieve that balance and what, if any, additional measures may be required to assist current low-income workers (for example, through an enhancement to the federal Working Income Tax Benefit) and future low-income seniors. Further discussion with respect to impacts on employers will also be critical.
Call for an Enhancement to the Federal Working Income Tax Benefit
While the government has already taken steps to improve income security for low-income Ontarians through the Poverty Reduction Strategy, further supports are needed. That is why the Strategy calls for an enhancement to the federal Working Income Tax Benefit (WITB), a refundable tax credit intended to supplement the incomes of working individuals and families.
An enhancement to the WITB would provide additional support to low-income workers so they could better manage their living expenses, while helping them save for their retirement through the ORPP.
Ontario is not alone in calling on the federal government to take action; the House of Commons’ Standing Committee on Finance has also recommended:
That the federal government formally review the Working Income Tax Benefit to determine how it could be expanded or modified to further benefit Canadians and further incent workforce attachment, subject to the government’s stated intention to balance the budget in the medium term.
“Income Inequality in Canada: An Overview,” Report of the Standing Committee on Finance (2013).
The self-employed occupy a unique position in the labour market, with financial circumstances and needs that can be more complex than those in traditional employer–employee relationships.
In this instance, the term “self-employed” refers to those individuals who either:
As individuals who are not in an employer–employee relationship, and do not receive a salary or wages as compensation, the self-employed are precluded by the federal ITA from participating in registered pension plans, including the proposed ORPP.
The self-employed are able to take advantage of other voluntary retirement savings vehicles, including PRPPs, once available in Ontario.
Pooled Registered Pension Plans
Voluntary retirement savings tools, such as registered retirement savings plans (RRSPs) and pooled registered pension plans (PRPPs), will continue to play an important role in Ontario’s three-pronged approach to ensuring a strong retirement income system. PRPPs would give employees and the self-employed a new type of voluntary, low-cost, tax-assisted option to help increase retirement savings.
Fulfilling its commitment in the 2014 Budget, the government introduced the proposed Pooled Registered Pension Plans Act, 2014 (the “proposed PRPP Act”) on December 8, 2014. The proposed PRPP Act provides a legal framework for the establishment and administration of PRPPs in Ontario.
Ontario is committed to the creation of a coordinated approach to the administration and regulation of PRPPs across the country. As the government moves forward with implementing PRPPs, it will continue to work with other jurisdictions in an effort to promote harmonization, which could help minimize costs and foster greater portability, supporting a modern, mobile workforce.
Throughout the consultation period, many self-employed individuals indicated they are concerned about their retirement futures and voiced an interest in participating in the ORPP. They are looking to the government to facilitate their inclusion in the ORPP or to consider allowing them to opt in or opt out of the plan.
Not being permitted to participate in the ORPP due to federal ITA provisions, self-employed individuals are interested in learning about other retirement savings vehicles and financial tools available to them. The roles of different players — from schools to financial institutions to government — were highlighted as part of a shared responsibility for improving financial literacy.
The Province will continue to explore collaboration with the federal government to enable the participation of the self-employed in the ORPP, with a view to bringing forward options as part of a future proposed legislative review of the ORPP.
Ontario is a global leader in pension administration and management. Pension organizations such as the Ontario Teachers’ Pension Plan and the Canada Pension Plan Investment Board have been recognized as some of the top performers in the world. Experts attribute the success of these organizations to features such as strong, independent governance structures; the ability to attract talented teams of investment and pension administration professionals; and the scale required to achieve high performance at a low cost.
Building on the best attributes of these models and the framework in Bill 56, Ontario is introducing legislation that would establish the Ontario Retirement Pension Plan Administration Corporation (ORPP AC), a professional, independent pension organization that would be responsible for administering the ORPP. The government envisions the ORPP AC as evolving into one of the world’s leading pension organizations.
Key attributes of the ORPP AC would include the following:
Amendments to several other statutes would be introduced to support the establishment of the ORPP AC.
The ORPP contributions and investment funds would be held in trust for ORPP beneficiaries and would not form part of general government revenues.
The government is considering options for additional elements of the ORPP’s accountability framework. These may include:
The legislation would also mandate a legislative review within 10 years, which would provide an opportunity to ensure that the mandate, governance and operational framework of the ORPP AC continue to be appropriate for the long term.
To support the ORPP’s strong governance framework, the government would put in place a focused interim board to oversee the implementation process. If the legislation passes, the Province expects to name an interim chair for the ORPP AC in the coming months. Furthermore, to facilitate the implementation of the ORPP, including design parameters of the pension plan and the establishment of the ORPP administrative entity, the government has established an implementation team of professionals with a wide range of relevant experience and expertise.
One of the government’s initial implementation priorities is to identify potential providers that could help deliver a simple, reliable and cost-effective pension service-delivery system for the ORPP. At this time, the government is assessing a range of service-delivery options for pension administration. As part of this process, the Province is proceeding with a procurement to identify potential third-party service-delivery providers for the ORPP. Costs of administering the ORPP would be borne by the plan.
Designing the administration of the ORPP is a significant undertaking. The government was reminded during its consultations that the administration must be simple, seamless and responsive. As the government proceeds with implementation, it continues to leverage the considerable expertise and experience of Ontario’s world-class pension plans, the financial sector and other governments. In addition, the Province continues to benefit from the advice of experts such as Michael Nobrega and David Dodge, and the Technical Advisory Group on Retirement Security.
The government is committed to a smooth transition to the ORPP. For example, the Province will provide employers and employees with regular updates on implementation and will ensure a simplified process to minimize administrative costs. In addition, the government will continue to work with the business community, pension plan administrators, labour and other impacted stakeholders to create a plan that reflects the needs of Ontarians.
As noted previously, 65 per cent of Ontario workers did not participate in a workplace pension plan in 2013. For these individuals, self-directed retirement savings and investment returns are often the only way to achieve retirement security.
Developing an appropriate investment strategy usually involves specialized knowledge and persistent attention. For this reason, financial literacy has become increasingly important. Government agencies such as the Financial Services Commission of Ontario (FSCO) and Ontario Securities Commission (OSC), through its Office of Investor Policy, Education and Outreach, have responded to this growing need by introducing and promoting financial literacy initiatives to help individuals make informed financial and investment choices.
Many hardworking Ontarians also need the assistance of sound and professional financial advice and planning services. In response, the government has appointed an expert committee to thoroughly consider more tailored regulation of financial advisers, including financial planners. By enhancing regulation of the financial advice sector, the government can help consumers build a more secure retirement future in relation to their savings, investments and other financial choices. See Chapter I, Section D: Creating an Innovative and Dynamic Business Environment for more details.
Ontario’s three-pronged approach also includes reforms to strengthen and modernize workplace pension plans by:
Target benefit pension plans combine features of DB and DC pension plans, “targeting” a specified retirement pension funded by fixed contributions. Unlike DB plans, target benefit plans may reduce accrued benefits to address funding shortfalls. Many current multi-employer pension plans (MEPPs) share these characteristics.
The government will soon be releasing a consultation paper on a proposed regulatory framework for target benefit MEPPs. Once implemented, it is anticipated that this framework would replace the time-limited funding regulations that are currently in place for certain MEPPs, known as specified Ontario multi-employer pension plans (SOMEPPs).
Feedback from the consultation on a target benefit framework for MEPPs will help inform the subsequent development of a framework for single-employer target benefit pension plans.
Since the passage of Bills 236 and 120 in 2010, Ontario has made significant progress in updating the regulation of pensions. The Province will continue this modernization process throughout 2015.
In 2014, the government continued to implement pension reforms, including important regulations to enhance the transparency of pension administration. Of particular note, in November 2014, two regulations under the Pension Benefits Act (PBA) were introduced, requiring pension plan administrators to:
Additional initiatives currently being undertaken by the government include:
The government is also taking steps to ensure that pension plan reporting properly reflects professional reporting standards. In the summer of 2014, the government sought stakeholder feedback to proposed regulations under the PBA that would update reporting requirements to reflect changes to professional accounting standards. In light of comments received, the Province is considering broadening the scope of these regulatory amendments, to reduce the administrative burden of regulatory compliance while maintaining transparent financial reporting.
Possible amendments could include:
Additional steps will be undertaken in 2015 to further enhance transparency for pension beneficiaries through the development of regulations to facilitate the creation of pension advisory committees (PACs). The role of PACs will be to monitor plan administration, make recommendations to the administrator regarding the pension plan, and promote awareness and understanding of the pension plan.
The government recognizes that a strong pension regulator is necessary to ensure promised benefits are secure. The 2014 Ontario Economic Outlook and Fiscal Review announced a mandate review of the Financial Services Commission of Ontario (FSCO) that will consider, among other issues, the role of the FSCO in regulating pensions.
The government has also signalled its intention to proceed with the development of regulations to implement 2010 reforms to the PBA to modernize the powers of the Superintendent of Financial Services. These regulations will be informed by the views of stakeholders and the results of the mandate review.
The financial crisis of 2008 had a major effect on virtually all pension plans in Ontario. Reductions in asset values, coupled with low long-term interest rates, created funding challenges for most DB pension plans, including those in the public sector. The Province sponsors or co-sponsors public-sector pension plans, or provides indirect funding through transfer payments to public-sector employers who sponsor pension plans. As such, the economic environment also had the potential to impact the Province’s finances.
Beginning in 2011, the government has provided temporary regulatory relief from solvency funding rules for many broader public-sector single-employer pension plans (SEPPs). These measures reduce the solvency payment requirements of eligible SEPPs in exchange for commitments from employer sponsors to negotiate plan changes that would improve the sustainability and affordability of their plans in the long term.
Since the temporary solvency funding relief program was implemented, 25 plans have been granted relief; most have already negotiated plan changes, including increased employee contributions and reduced future benefits. The relief has resulted in a $1.3 billion cumulative reduction in required solvency payments as of the end of 2014. Total solvency funding relief is expected to reach an estimated $2.1 billion by the end of 2016.
These measures reduce the risk that employers would be required to divert funding from services to pension plans, thereby protecting jobs and programs, while facilitating sustainable plan changes.
While most of the largest pension plans in Ontario are jointly sponsored, many public-sector employers sponsor SEPPs. Some of these employers, along with a number of employee groups, have been exploring the possibility of converting to the jointly sponsored pension plan (JSPP) model, which provides for greater transparency, and shared governance and risk-taking.
A single-employer pension plan (SEPP) may provide a defined benefit (DB) or a defined contribution (DC) pension plan, which is generally administered by the employer, who is solely responsible for determining plan design. Accrued benefits in a DB pension plan cannot be reduced even if the plan is wound up and, most importantly, employers are responsible for funding any shortfalls.
A jointly sponsored pension plan (JSPP) is a DB pension plan in which employer(s) and plan members share responsibility for the plan’s governance, administration and funding. Employers and members jointly determine the terms and conditions of the plan, including benefit and contribution levels, the allocation of surplus and how deficits are funded. Accrued benefits can be reduced on wind-up if there are insufficient assets.
To facilitate the transformation of public-sector pension plans from SEPPs into JSPPs, the Building Opportunity and Securing Our Future Act (Budget Measures), 2014, amended the PBA to provide a legislative framework for the voluntary conversion of public-sector employer-sponsored SEPPs into jointly sponsored plans.
Earlier this year, the government posted on the Regulatory Registry for consultation a description of the proposed regulations that would give effect to the amendments. Many valuable comments were received and will be considered as the government moves forward in drafting the regulations. Interested stakeholders will have an opportunity to comment on draft regulations later this year.
The availability of an exemption from solvency funding rules may be one of the main factors for stakeholders considering the move to joint sponsorship. It should be noted that virtually all of the existing JSPPs that were granted a solvency exemption in 2011 are MEPPs with sophisticated governance structures, numerous participating employers and a large asset base. These characteristics help mitigate the risks associated with an exemption from solvency funding requirements.
The 2014 Budget committed the government to developing criteria, in consultation with stakeholders, for exempting new public-sector, multi-employer JSPPs from solvency funding requirements. In response, the government recently released for consultation proposed criteria to be used in determining whether new JSPPs receive a solvency exemption. The government will consider feedback before finalizing the criteria.
In 2013, the government established a technical working group to advise on the design, governance and transition issues associated with the implementation of a new pooled asset management entity for Ontario’s broader public-sector funds. The working group reflected the government’s interest in receiving technical investment management recommendations from key stakeholders that represent potential participants of the proposed entity.
The co-chairs of the technical working group recently provided the government with their final report. The Province has studied the report closely, and drawn from it to develop legislation that is being proposed to create a new pooled asset corporation.