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How to prepare for the Ontario retirement pension plan

risk-based-pension-regulationThe Government of Ontario has announced details of its mandatory provincial pension plan that would expand pension coverage for more than three million residents of Ontario. These details include who will participate in the Ontario Retirement Pension Plan (the “ORPP”), which types of pension plans will be considered comparable, and a timeline for implementation.

Organizations will need to assess their existing pension plans to determine whether they are comparable and therefore exempt from the new regime. If they are not exempt, organizations will need to adjust their pension plans to align with the ORPP, or set aside money to pay the ORPP contribution requirements.

This article sets out an overview of the new design details announced on August 11, 2015; a discussion of what plans will be considered comparable; details on the implementation timeline; and steps organizations can take to comply.

1. Design details

  • The ORPP would not apply to those currently in a comparable workplace pension plan. A comparable plan is one that provides a predictable stream of replacement income and an adequate standard of living in retirement similar to the benefit that would be provided by the ORPP. Qualifying plans – including defined contribution plans – would need to meet a minimum contribution threshold, be locked in and be regulated by existing provincial pension standards.
  • Enrolment would be phased in to ensure the ORPP is focused on employees without access to a plan and to give employers time to adapt.
  • Like the CPP, the ORPP would be funded by equal co-contributions from both employers and employees.
  • Contributions would also be phased in, reaching their maximum levels by 2021. At the maximum, employees and employers will contribute an equal amount, capped at 1.9% each (3.8% combined) on an employee’s annual earnings up to $90,000.
  • Benefits would be paid starting in 2022. They would be earned as contributions are made.
  • Every employee in Ontario would be part of the ORPP or a comparable workplace pension plan by 2020.

2. Comparable workplace pension plans under the ORPP

Employers and employees who have a comparable pension plan will not be required to participate in the ORPP.

Comparable plans will include certain types of provincially and federally regulated pension plans with contribution levels that ensure similar benefit levels to those provided by the ORPP. These will include both defined benefit (“DB”) pension plans and defined contribution (“DC”) pension plans.

The Government has set out comparability thresholds that outline the minimum level of contribution or benefit a workplace pension plan will need to provide in order to be comparable under the ORPP. The comparability thresholds for DB pension plans and DC pension plans are set out below.

(a) DB pension plans
In order to be considered comparable, DB plans in Ontario must meet a minimum benefit accrual rate of 0.50 %. An accrual rate is the rate at which you build up retirement income in a pension over time. The rate is multiplied by your earnings to calculate how much money you will eventually be entitled to. This rate can be expressed as a fraction; the bigger the fraction, the greater the amount of retirement income.

(b) DC pension plans
In order to be considered comparable, a DC plan must:

  • Have a minimum annual contribution rate of 8 % of base salary earnings; and
  • Require employers to contribute at least 50 % of the total minimum contribution, being at least 4%.

(c) Other types of DB/DC registered plans
The Government has also set out comparability thresholds for some other types of plans that are structured in a variety of ways, such as flat-benefit DB plans, flat-dollar DC plans, and hybrid pension plans. You can read about the comparability thresholds for these types of plan in the Government’s Technical Bulletin at the following link:
www.fin.gov.on.ca/en/pension/orpp/bulletin-100815.html.

3. Implementation timeline

Enrolment in the ORPP will be staged in four waves between 2017 and 2020. These waves will depend on both the size of an employer and whether or not the employer maintains a registered pension plan, or has begun the process of registering a pension plan, as of August 11, 2015.

  • Wave 1 will affect large employers (500 or more employees) without registered workplace pension plans. For these employers, contributions will start on January 1, 2017. At that time, the contribution rate will be 0.8 per cent for both employees and employers. In 2018, the contribution rate will be 1.6%, and in 2019 it will reach 1.9% for both employees and employers.
  • Wave 2 will affect medium employers (approximately 50-499 employees) without registered workplace pension plans. For these employers, contributions will start on January 1, 2018. At that time, the contribution rate will be 0.8% for both employees and employers. In 2019, the contribution rate will be 1.6%, and in 2020 it will reach 1.9% for both employees and employers.
  • Wave 3 will affect small employers (50 or fewer employees) without workplace pension plans. For these employers, contributions will start on January 1, 2019. At that time, the contribution rate will be 0.8% for both employees and employers. In 2020, the contribution rate will be 1.6%, and in 2021 will reach 1.9% for both employees and employers.
  • Wave 4 will affect employers of any size with a workplace pension plan that is not modified or adjusted to meet the comparability test, as well as employees who are not members of their workplace’s comparable plan. For these employers, contributions will start on January 1, 2020, at the maximum contribution rate of 1.9% for both employees and employers.

4. Steps organizations can take to comply

The ORPP Administration Corporation will begin contacting all Ontario employers in early 2016 to verify their existing pension plans and assess the coverage offered to employees.

Organizations may wish to begin assessing whether their plans would be considered comparable, and, if not, whether it makes sense to make changes to their plans or to implement new comparable pension plans. Organizations that do not have comparable plans will need to set aside money to pay the ORPP requirements.

If an organization is subject to the ORPP, it will have to deduct the following amounts from payroll once it is phased into the maximum contribution levels by 2020:

  • For an employee earning $45,000 a year, the employee and the employer will each contribute $2.16 per day;
  • For an employee earning $70,000 per year, the employee and the employer will each contribute $3.46 per day;
  • For an employee earning $90,000 per year, the employee and the employer will each contribute $4.50 per day; and
  • Earnings above $90,000 (in 2014 dollars) will be exempt from ORPP contributions.

By Audrey DeMarsico, Associate, Research, Osler, Hoskin & Harcourt LLP. Audrey’s practice focuses on legal research as an expert service to resolve complex legal issues in all practice areas. She provides support for litigation, insolvency and restructuring, and corporate and commercial matters.

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