2015 Ontario Economic Outlook and Fiscal Review
Chapter I: Building Ontario Up — Progress for Prosperity

Section F: Strengthening Retirement Security

The government is taking a leadership role in strengthening the retirement income system. The 2014 Budget and 2015 Budget outlined a three-pronged approach to ensure a strong retirement income system, focusing on the Ontario Retirement Pension Plan (ORPP), introducing new retirement savings vehicles such as pooled registered pension plans, and strengthening workplace pension plans. Ontario is moving forward on its commitment to implement the ORPP in 2017 and has appointed an initial board of the ORPP Administration Corporation. The government will also initiate, on an expedited basis, a review of the current solvency funding rules for defined benefit pension plans, focusing on plan sustainability, affordability and benefit security. To provide private-sector sponsors with immediate assistance in the face of persistently low interest rates, the government intends to offer temporary solvency funding relief.

Study after study shows that a significant proportion of people are concerned about achieving a secure retirement. Without swift action, the retirement savings challenge will likely worsen over time.

Three critical factors are contributing to insufficient retirement income and underpin the need to enhance retirement savings: labour market changes; low personal savings and low average Canada Pension Plan (CPP) benefits; and increasing life expectancy and an aging demographic.

Labour market changes: In 2013, only 35 per cent of Ontario’s workers participated in a workplace pension plan. As well, in the modern, mobile workforce, workers are less able to participate consistently in a single workplace pension plan.

Low personal savings and low average CPP benefits: Evidence shows that many Ontarians are not making full use of voluntary savings vehicles, such as registered retirement savings plans (RRSPs). Moreover, the average annual CPP benefit in Ontario in 2014 was about $6,900. This is not enough for many Ontarians to maintain their standard of living when they retire.

Increasing life expectancy and an aging demographic: People are living longer and this trend is likely to continue. While this is a sign of higher living standards and better health outcomes, it also means Ontarians are facing the growing prospect of outliving their retirement savings. In addition, an aging population means there will be fewer workers to support each retiree. This will put pressure on younger workers to support health care and other public services that seniors will need.

2015 Budget: Building Ontario Up

After a lifetime of contributing to the economy, Ontarians deserve a secure retirement. That is why the Province is committed to strengthening retirement income security. As noted in the 2015 Budget, the government is fulfilling its commitment by:

  • Creating a new mandatory provincial plan, the Ontario Retirement Pension Plan (ORPP);
  • Moving forward with an additional vehicle for retirement savings — pooled registered pension plans (PRPPs); and
  • Implementing initiatives to strengthen and modernize workplace pension plans.

Developing the Ontario Retirement Pension Plan

The ORPP builds on the strengths of CPP and would:

  • Offer a predictable stream of retirement income for life;
  • Aim to replace 15 per cent of an individual’s pre-retirement earnings up to $90,000;
  • Require contributions to be shared equally between employers and employees, with a maximum combined rate not exceeding 3.8 per cent; and
  • Require benefits to be earned as contributions are made, to ensure fairness and avoid intergenerational inequity.

The ORPP would complement workplace and other voluntary retirement savings arrangements that will continue to play an important role in helping Ontarians maintain their standard of living in retirement.

The government’s goal is to ensure that, by 2020, every eligible employee in Ontario would be covered by the ORPP or a comparable workplace pension plan.

Progress since the 2015 Budget

Plan Design

Over the past several months, the government has reviewed and analyzed the feedback from consultations on plan design, governance and administration.

The government intends to confirm that the ORPP minimum earnings threshold will be aligned with the CPP’s Year’s Basic Exemption of $3,500 for eligible employees between the ages of 18 and 70. A minimum earnings threshold of $3,500 ensures that workers in multiple jobs, or part-time or temporary employment, benefit as much as possible from the ORPP. Many individuals experience low earnings at particular points in their careers (entry into the labour force or after being displaced). The government will examine and advocate for measures to improve supports for low-income workers and low-income seniors, and continue to ask the federal government to enhance the Working Income Tax Benefit.

In August, the government released details relating to comparable plans and phased implementation of the ORPP.

Ontario intends to define a “comparable plan” as a plan subject to federal and provincial regulation that meets certain minimum thresholds, such as mandatory employer contributions and locked-in funds. Comparable plans would include certain defined benefit (DB) plans, defined contribution (DC) plans, and PRPPs, once they are established in Ontario.

To be considered comparable, DB plans must be equal to or exceed the benefits being offered through the ORPP. For this reason, comparable DB plans in Ontario must meet a minimum benefit accrual rate of 0.50 per cent. An accrual rate is the rate at which retirement income in a pension is built up over time.

For DC plans, the contribution rate should reliably deliver the same level of retirement income replacement as the ORPP. Accordingly, a DC plan must have a minimum annual contribution rate of eight per cent and require at least 50 per cent matching of the minimum rate from employers.

The government continues to work with actuarial and pension experts to determine the threshold rate for various combinations of multi-employer pension plans (MEPPs) and PRPPs, and will align the approach with the principles applied to DB and DC plans.

In finalizing details of ORPP plan design, the government is guided by the critical objective of plan sustainability to ensure that the ORPP is actuarially sound on a long-term basis.

Implementation

Employers have highlighted the need for a streamlined and cost-effective administration. The government also recognizes that employers need time to adjust. That is why the government has proposed a staged enrolment of employers in the ORPP, along with phasing in of contribution rates.

TABLE 1.3 ORPP Phase-In and Contribution Schedule
(Rates reflect combined employer/employee contributions)
Type of Employer Jan. 1, 2017 Jan. 1, 2018 Jan. 1, 2019 Jan. 1, 2020 Jan. 1, 2021
Wave 1: large employers (500 or more employees) without registered workplace pension plans 1.6% 3.2% 3.8% 3.8% 3.8%
Wave 2: medium employers (50 to 499 employees) without registered workplace pension plans 0% 1.6% 3.2% 3.8% 3.8%
Wave 3: small employers (49 or fewer employees) without registered workplace pension plans 0% 0% 1.6% 3.2% 3.8%
Wave 4: employers with registered pension plans that either do not meet the comparability test or do not cover all classes of employees 0% 0% 0% 3.8% 3.8%

To facilitate enrolment, all Ontario employers will be provided with information in early 2016 that enables them to verify the comparability of their existing pension plans and assess the coverage offered to employees.

As another step in the implementation of the ORPP, the government has appointed the initial board of the ORPP Administration Corporation. The Board will be led by Susan Wolburgh Jenah, who will serve as the chair, with two members, Murray Gold and Richard Nesbitt. This board will oversee the startup of the corporation.

The government continues to be supported by several external experts in the development of the ORPP.

As outlined in the Ontario Retirement Pension Plan Act, 2015, the government will release a cost-benefit analysis of the ORPP by the end of 2015.

Voluntary Retirement Savings Vehicles

In May, the Pooled Registered Pension Plans Act, 2015, received Royal Assent. Regulations are currently in development.

Strengthening and Modernizing Workplace Pension Plans

In July, Ontario released a consultation paper seeking input from affected stakeholders on a proposed regulatory framework for target benefit MEPPs. The government is reviewing responses to the consultation to inform development of a framework that will replace the time-limited funding regulations in place for certain MEPPs, known as specified Ontario multi-employer pension plans (SOMEPPs).

In November, the government enacted regulations governing the process by which single-employer pension plans in the broader public sector can be merged with, or converted into, jointly sponsored pension plans in the broader public sector.

Going Forward

Collaboration on Retirement Security

Ontario is pleased to work with a new federal partner to ensure that the ORPP is efficiently administered with the least possible burden on employers and employees. The Province and the federal government are currently exploring collaboration opportunities for the implementation of the ORPP.

Retirement income security is an important issue for all Canadians. That is why Ontario has played a leadership role in advocating for a CPP enhancement since 2010 and welcomes the renewed interest from the federal government in addressing retirement security collaboratively with the provinces and territories. Ontario will be an active participant in national discussions on this issue. The Province will support a CPP enhancement that is consistent with the ORPP’s objectives with respect to adequacy and coverage.

However, the implementation of a CPP enhancement would take considerable time and requires the agreement of governments across the country. In light of these circumstances and the pressing need to address retirement security, Ontario continues to move forward to implement the ORPP in 2017, while allowing for potential integration of the ORPP with a CPP enhancement in the future.

Solvency Funding Relief

Over the last several years, private-sector sponsors of single-employer DB pension plans have faced funding pressures associated with the low interest rate environment. While the government provided temporary solvency funding relief to these plans in 2009 and 2012, many sponsors continue to face challenging contribution requirements as a result of persistently low interest rates. Recognizing this situation, the government will initiate, on an expedited basis, a review of the current solvency funding framework with a view to developing a balanced set of reforms that would focus on plan sustainability, affordability and benefit security, and take into account the interests of pension stakeholders — including sponsors, unions, members and retirees.

To provide sponsors with immediate assistance, the government plans to extend the temporary solvency funding relief measures, provided in 2009 and 2012, for an additional three years for valuation reports dated in the three-year period starting on December 31, 2015. Consistent with earlier approaches, in the first valuation report filed in the three-year period, the temporary measures would provide sponsors with the following options:

  • Consolidating existing solvency payment schedules into a new, longer five-year payment schedule.
  • Extending the solvency payment schedule to a maximum of 10 years (from the current maximum of five years) for any new solvency deficiency determined in the valuation report in which relief is taken, subject to the consent of plan beneficiaries.

New Investment Opportunities

To open up new investment opportunities and tap the capacity of the pension sector to contribute more to economic growth, the government intends to eliminate the “30 per cent rule,” which restricts Ontario pension funds from owning more than 30 per cent of the voting shares of a corporation. Currently, real estate, resource and investment corporations are exempted from the rule, and the government had been looking at providing a further exemption for investments in public infrastructure, having identified this as an opportunity in 2013.

Pension plan administrators would continue to be required to exercise a fiduciary standard of care, diligence and skill in the administration and investment of the pension fund.

The government intends to post a description of the proposed regulation for consultation in early 2016.