Ontario Retirement Pension Plan: What does it mean for nonprofits?
A dwindling number of Ontario workers enjoy a workplace pension plan these days, as more employers decide that they cannot afford the cost and the risk. At the same time, working-age Ontarians are having a harder time saving than in the past as they graduate with more debt, pay more for their housing, and watch their wages stagnate in today’s tough economy. Since people are living longer than they used to, more people are expected to outlive their retirement savings. Looking down the road, these trends will have some worrying consequences for the health and well-being of our seniors.
Without a workplace pension plan, people generally end up relying on universal plans like the federal Old Age Security and Guaranteed Income Supplement. These plans are critically important to provide a basic income, but go nowhere near the 50 to 70% of a person’s working-age income that is recommended for a decent retirement income.
Then there’s the Canada Pension Plan (CPP). Many people agree that the CPP is the gold standard for worker pensions because it gives you a predictable retirement income, you take it with you when you change jobs, and you enjoy the benefit of shared risk—so you don’t have to worry about stock market crashes or living “too long.” On top of that, it’s pretty fair to successive generations (you don’t subsidize your parents or your kids), it makes some allowance for parents’ time out of the workforce, and it has low administration costs. The trouble is, it only pays out a maximum of $12,780 (2015 dollars) per year—and the average retiree only sees about $7,300 per year (as of October 2014). The CPP is great, but it’s also small.
Unfortunately, federal-provincial discussions on expanding the CPP have gone nowhere, so Ontario’s Associate Finance Minister Mitzie Hunter has been given the task of forging ahead with a made-in-Ontario solution to the problem of low savings rates and vanishing workplace pension plans. In December, she introduced in the Legislature Bill 56, which would create the Ontario Retirement Pension Plan (ORPP). It is expected to pass this year, with the new Plan going into effect in 2017.
What will the ORPP look like?*
The plan will, for the most part, mirror the CPP in its design so that it can be integrated with it in future, if there is political will to do so. Here are some of the expected features:
- Premiums: The ORPP will see new premiums levied on earnings, with employers and employees each contributing (up to) 1.9% (after the minimum annual threshold of $3,500 is reached). Premiums would not be levied (and benefits would not be earned) beyond the upper threshold of $90,000 annually. This means that most employers who do not offer a comparable pension plan will have to start paying a 1.9% premium on all salaries/wages, starting in 2017.
- Benefits: Like the CPP, the ORPP will be “defined benefit” in that it will give retirees a predictable income, indexed to inflation, until death. The plan will aim to replace 15% of an individual’s earnings. Benefits are “locked in” until the retirement age. There is some risk that ORPP benefits will be clawed back from the Guaranteed Income Supplement for low-income seniors—a risk that the Ontario Government needs to address directly, and which ONN has recommended be looked at in our submission to Minister Hunter.
- Exceptions: The ORPP will be mandatory for all workplaces in Ontario except those that already have “comparable” plans in place (and those that are federally regulated, like banks). The definition of a “comparable” plan is still up for debate, but it will likely mean a pension plan that:
- pools investment and longevity risk so that individuals don’t have to worry about picking the wrong fund, seeing the stock market crash, or outliving their benefits;
- has equal contributions from employers and employees;
- provides benefits that are “locked in” until retirement age;
- is either “defined-benefit” (see above) or “target-benefit”, which shares some risk of plan shortfalls with employees – note: this means defined contribution/group RRSPs will likely not be considered comparable;
- is indexed to inflation.
- Self-employment: As it stands, self-employed individuals would be excluded from participating in the ORPP because of a provision in the federal Income Tax Act (ITA). However, these individuals can participate in the CPP (paying both the employer and employee contributions) and the Ontario Government will decide after consulting with stakeholders whether to seek to have the ITA amended to allow for the participation of self-employed individuals in the ORPP.
What does all this mean for the Ontario nonprofit sector?
Over the past two months, Minister Hunter has reached out to a number of organizations in the nonprofit sector to talk about how the ORPP could affect them. At meetings convened by the Minister, ONN and other nonprofit sector representatives expressed support for the introduction of the ORPP as a way to improve retirement income security. We also gave Minister Hunter four main recommendations:
- The design and implementation of the ORPP must take into account the unique needs and characteristics of the community nonprofit sector.
- The ORPP’s design must ensure that low-income workers are assisted in bearing the cost of premiums and that these workers actually benefit from the program when they retire (rather than having other benefits clawed back).
- ORPP implementation must be placed in the context of the urgent need for reforming the funding relationship between the government and the community nonprofit sector. At a minimum, the grants and contracts through which the nonprofit sector delivers services on behalf of the Ontario government should reflect the increased cost of doing business. More broadly, we need a discussion with government on how to work together to ensure that nonprofits can offer fair compensation, including pensions, in a way that is financially sustainable.
- The Ontario Government should establish a joint task force with the community nonprofit sector to examine the impact of the ORPP on the sector, as well as to explore broader workplace pension opportunities. Other than ORPP implementation issues, the task force would focus on three key issues: the development of labour market information for the sector; the need for financial literacy for nonprofit boards, staff, and clients around pension issues; and policy development on a proposed sector-wide workplace pension plan.
*Based on the model presented in “Ontario Retirement Pension Plan: Key Design Questions.” December 2014. Some of these features may change based on the Ontario Government’s consultations with stakeholders.