Important news this week as ONN released our report to build a sector-wide pension plan for Ontario nonprofit workers.
Together, we can make retirement income security a reality for the nonprofit sector!
As nonprofits and charities, we play a vital role in the social and economic development of our communities. With a healthier and better-supported workforce, our organizations can lead by example, and be better positioned to strengthen our communities and our province.
A roadmap for a pension plan for Ontario’s nonprofit sector
ONN’s Pensions Task Force was mandated to develop recommendations on the design of a sector-wide pension plan for Ontario’s nonprofits and charities.
They refined that mandate to provide a framework for a pension plan that is affordable for workers and nonprofits and that shares risks carefully, provides adequate benefits, and is easy to administer.
By the end of the year-long work of the Task Force, it was clear that a sector-wide approach could provide a much more efficient vehicle for retirement income security, offering workers greater benefits and a more secure retirement income for comparable contribution rates—and offering employers a powerful recruitment and retention tool.
The Task Force determined that a multi-employer pension plan was a good vehicle to take advantage of our sector’s scale while keeping the administrative burden low.
The vast majority of Canadians [aged 55-64] retiring without an employer pension plan have totally inadequate retirement savings… The overall median value of retirement assets of those aged 55–64 with no accrued employer pension benefits is just over $3,000. For those with annual incomes in the range of $25,000–$50,000, the median value is near just $250.
— Richard Shillington, An Analysis of the Economic Circumstances of Canadian Seniors
Fifteen Critical Recommendations, as Q & A
Ontario nonprofit workers should have access to a sector-wide pension plan. We recommend that ONN proceed with the next phase of this initiative.
On the basis of this demonstrated need and the importance of providing decent work in the nonprofit sector, the cost of pension premiums should be factored into all government and non-government funding agreements with nonprofits, regardless of whether contributions are a requirement of a collective agreement.
A nonprofit sector pension plan, together with public plans, should aim to provide workers at the average industrial wage for Canada with a 70% income replacement rate during retirement.
Participation in a sector-wide plan should be mandatory for all employees (including management and contract/part-time workers above a threshold) where the plan is to be available in a workplace. Our recommendation is not intended to preclude the plan establishing a reasonable waiting period as permitted by legislation.
To meet the aim of seeing the average worker reach the 70% adequacy threshold, employers and employees should each contribute 3 to 5 percent of earnings per year.
The plan type should be structured if at all possible to allow for (1) contributions rates that are set at the workplace level, and (2) contributions being adjusted over time as budgets allow.
According to our consultation with the sector, this level should be considered reasonably affordable among the majority of nonprofits and their employees.
The Task Force recommends a sector-wide plan over individual workplace-level plans for those who are not already served by one.
It is our recommendation that ONN choose a plan type that balances the needs of employers and workers. Employees as a group are best served by a plan that is affordable in terms of contribution rates and adequate in terms of retirement benefits, and that provides a predictable retirement income until death. Employers as a group are primarily concerned about affordability and predictability of costs, and avoiding future liability.
A pension plan suitable for the nonprofit sector must offer a way to limit employers’ obligation to making fixed contributions while giving some level of predictability to employees as to their pension amount. We therefore recommend that the nonprofit sector-wide plan be designed as a target-benefit multi-employer pension plan. Such a plan would resolve the employer liability concerns and still provide a reasonable level of retirement income security to employees.
Given the unique characteristics of the nonprofit sector, a sector-wide pension plan must prioritize efficiency and flexibility (over time and across organizations) without taking away from the ability of workers to be able know in advance their retirement income with reasonable certainty.
Such a plan should be as inclusive as possible to facilitate intra-sectoral mobility and to achieve an economy of scale and a sense of reliability and permanence for everyone from contract and part-time employees to large, established nonprofits.
The Task Force recommends choosing a plan design that allows for ancillary benefits such as past service credit. These should be considered carefully as they could require higher contribution rates and have implications for intergenerational equity. The task force also recommends a simple career-average benefit formula.
The plan should also permit incoming transfers of pension assets to provide a safer and more efficient retirement vehicle for members’ pension assets earned in previous jobs.
Nonprofit employers and workers that join a pension plan must make ongoing pension contributions, regardless of plan structure. Liability for funding any future plan shortfall depends on the plan structure.
The nonprofit sector-wide plan should be a Multi-Employer Pension Plan with target benefits. According to a legal opinion commissioned by ONN for this project, this would be a satisfactory plan structure to limit the future liability of nonprofit employers, including boards of directors, such that ongoing and predictable contributions are their only liability.
The Task Force recommends finding a suitable existing plan rather than building from scratch, if possible. ONN should consider carefully its preferences and needs for a pension plan and determine whether these are available through existing plans. We suggest that ONN should give priority to the following features:
- target benefits
- available to non-unionized and unionized workplaces
- allows for portability between contributing employers
- a simple benefit formula
- low administration costs
- allows for different contributions from different employers and allows increasing contribution rates over time at any individual employer
- nonprofit sector employers and employees have a role in governance of the plan.
Based on our preliminary research and outreach, it may be that some but not all of these would be satisfied through an existing plan. If ONN were to decide that no current plan meets enough of these criteria, or if there is no suitable plan willing to take on the sector’s workforce, ONN should consider establishing its own plan.
The Task Force gave serious consideration to four plan types:
- The Target Benefit Multi-Employer Pension Plan
- The Jointly Sponsored Pension Plan
- The (Quebec nonprofit sector) Member Funded Pension Plan
- The Jointly Sponsored Target Benefit Pension Plan.
Any of these would likely require legislative or at least regulatory change.
It is our view that a Target Benefit Multi-Employer Pension Plan is the best option given the regulatory landscape but that these others are worth pursuing if this plan is determined not to be feasible.
Governance will be determined in large part by the funding responsibilities. However, in general there should be employer, employee, and retiree representation in the administration of a non-profit sector plan.
When the plan is being established, it should initially use an experienced third-party service provider. Over time, as the plan grows, self-administration should be considered.
While the new plan should be careful not to “raid” existing plans, and we do not want employers with more generous plans to abandon theirs in favour of a sector-wide plan with lower contribution and benefit levels, the nonprofit sector plan be structured to allow for mergers with existing plans.
We recommend that ONN facilitate a comprehensive education/outreach program in 2017 as part of its Decent Work project in order to help employers and employees in the sector understand the issue and the advantages (and risks) of a sector-wide plan. An effective communications campaign about the need for a pension plan—notwithstanding the enhancements to the CPP—is essential. So too are targeted communications materials directed at boards of directors, management, and front-line workers so that each group understands what is to be gained by a sector-wide plan.
We also recommend that ONN work with partners to catalyze efforts to improve pensions literacy in the nonprofit sector and that government and non-government funders support the ONN to do so.
Why Should You Care?
Ontario’s nonprofit workers are having a difficult time saving enough for retirement in the context of an increasingly precarious labour market and the disappearance of workplace pension plans. Our Task Force examined the impact of the proposed Ontario Retirement Pension Plan (ORPP) and then the Canada Pension Plan (CPP) enhancement when the ORPP was shelved.
In keeping with a widely accepted assumption, the Task Force worked with a post-retirement income adequacy threshold of 70 percent of pre-retirement earnings (taking into account CPP and public programs). By international standards, Canada has low contribution and benefit rates for public pension plans. The average worker will receive only 44 percent of pre-retirement earnings from public programs even after the CPP enhancement takes full effect.
The modest nature of CPP enhancement means that many nonprofit workers without a workplace pension could still experience a significant drop in their standard of living when they retire.
Conventional thinking is that individuals without a workplace pension plan are expected to save for retirement with Registered Retirement Savings Plans (RRSPs).
There is ample research that shows, however, that there are three problems with relying on RRSPs: they are voluntary and take-up is low, they cost too much in fees, and they leave too much of the burden on individuals when they would do much better to pool their risks, reduce their fees through economies of scale, and collectively purchase professional investment expertise.
Even if nonprofit workers could find the money to invest, refrain from diverting it from other expenses like down payments on housing, and develop the confidence needed to select good investment options, mutual fund fees mean that RRSPs are probably the least efficient way to support the retirement income security of our sector’s workers.
The CPP enhancement will not significantly affect today’s workforce. Changes will be phased in between 2019 and 2026. Because it takes decades to accumulate significant benefits at the new rate, today’s young people who will soon enter the workforce and retire in forty to fifty years will be the first generation to truly benefit from the enhancement
Even once the CPP enhancement has taken effect, a significant gap for modest-income workers will remain, especially if their work has been part-time, seasonal, intermittent, or through self-employment—as is the case for almost half our nonprofit workers. We need a plan to fill more of the remaining gaps in retirement income for workers.
What Comes Next?
There is a clear need for a pension plan to serve the nonprofit sector and the Task Force recommends that ONN take on the task of facilitating its launch. The plan should be designed so as to offer target benefits, it should be structured to provide flexibility at the workplace level concerning contribution levels, and participating workers and employers should be permitted to ramp up contributions over a short time to the point where each is contributing 3 to 5 percent of earnings per year.
The Task Force asked ONN staff to engage in preliminary meetings with staff of existing multi-employer and jointly-sponsored plans to gauge whether they are suitable partners and interested in working with our sector. Our next step on this front is to engage in further discussions and, if these are fruitful, negotiations over the terms on which sector workers may participate in an existing plan. Discussions would include whether we (ONN) or sector employers/employees/retirees would have a say in the governance of the plan, something which the task force identified as an important issue.
Setting up the plan will take significant time and resources. Legal, actuarial and other advice should be sought early on as there are a number of technical issues that need to be resolved at the outset. We have identified some challenges in this report and no doubt there will be others. We have suggested that legislative or regulatory change may be necessary and that may require public policy advocacy.
Whether ONN facilitates the participation of nonprofits in an existing plan or establishes one of its own, the task will be major. Launching a new plan, however, provides an opportunity for ONN to do something ambitious and important. The need is clearly there for a sector-wide plan and the successful creation of one would have a tremendously positive impact on the nonprofit sector’s most valuable resource—its people.