Ontario Pension Plan

In order to bring the retirement income system up-to date requires close collaboration by all involved individuals such as employers, labour, the financial services industry, and all sectors of government.

In order to ensure that today’s employees are able to savour their retirement years, the Ontario government is taking the initiative to modernize their retirement income system. As part of this, the government released a new approach during the 2013 Ontario Economic Outlook and Fiscal Review. It focuses on: Ontarians without workplace pension plans; Ontarians with self-directed retirement savings; and Ontarians with defined benefit plans.

The government will pursue this approach with specific emphasis on innovation and modernization in order to help ensure that any developments to the system meet the needs of a 21st century workforce.

Workplace Pension Plans

Canadians are secure with the efficiency and effectiveness of the mandatory public pension program, which is the Canada Pension Plan (CPP), with contributions shared equally by employers and employees because it is predictable, indexed to expansion and paid for life. Since the Canada Pension Plan is fully portable within Canada, it allows younger workers, who switch jobs more often, to have the insurance of ongoing pension. What’s nice about this is, it covers all types of employment.

Nevertheless, the CPP’s basic structure has not changed since it was developed in 1966. Its replacement rate is only 25 percent of pensionable earnings and employees cannot contribute above the maximum earnings verge. These restrictions mean that the current maximum benefit is only about $12,500 per year, and the average annual benefit paid is far below that, at about $6,400 in Canada and $6,800 in Ontario. This is not high enough to grant middle-income earners the ability to maintain their standard of living in retirement.

Upgrading the CPP is detracting to securing Ontarian and Canadian middle-income earners have better financial insurance in retirement. Ontario’s chosen ways to enhancing the retirement income system is through an enhancement to the CPP.

As chair of the Council of the Federation, Ontario elevated the pressing need for pension reform to a national dialogue in 2013. During these dialogues, provinces and territories agreed to continue work on a possible CPP enhancement. But in December of 2013, the federal government unilaterally shut down CPP enhancement discussions. This action by the federal government not only diminishes work on a potential enhancement, but has also lost out discussions on other possible reforms to modernize the CPP.

Provincial Pension Plan: The Ontario Retirement Pension Plan

Since Ontario is not able to wait for the Federal government to step up to and address the retirement income challenge currently faced by today’s working Canadians, they came up with a new mandatory provincial pension plan – the Ontario Retirement Pension Plan (ORPP) —that would be cost-effective, responsible, and designed to meet the needs of a 21st century workforce. This would be the first of its kind in Canada and would broaden the pension coverage initially to more than three million Ontario employees who currently rely on the CPP, OAS and their own savings for retirement income.

Ontario Retirement Pension Plan Design Features

The ORPP aims to help those most at risk; especially the middle-income earners build a more secure retirement future. Below are the design features of ORPP:

• Provide a predictable stream of income in retirement by pooling longevity and investment risk, and indexing benefits to inflation, similar to the CPP’s retirement benefit.
• Require equal contributions to be shared between employers and employees, not exceeding 1.9 per cent each (3.8 per cent combined) on earnings up to a maximum annual earnings threshold of $90,000. The ORPP maximum earnings threshold would increase each year, consistent with increases to the CPP maximum earnings threshold.
• Aim to provide a replacement rate of 15 per cent of an individual’s earnings, up to a maximum annual earnings threshold of $90,000.

And when combined with the retirement benefit provided through CPP:

• An individual with steady career earnings over 40 years of $52,500 — the maximum annual earnings covered by CPP — would replace about 40 per cent of pre-retirement income and would receive an annual lifetime benefit of approximately $19,935. This represents a 60 per cent increase over the maximum CPP benefit.
• An individual with steady career earnings over 40 years of $90,000 — the maximum annual earnings threshold under the ORPP — would replace about 30 per cent of pre-retirement income and would receive an annual lifetime benefit of about $25,275. This is roughly double the retirement benefit the individual would receive under the CPP alone.

 

To have a strong governance model and be liable for managing investments associated with annual contributions or approximately $3.5 billion, the provincial government shall administer the ORPP. To ensure that the system is fair and that the younger generations are not burdened with additional costs, so benefits would be earned as contributions.

Those already engaging in a comparable workplace pension plan would not be required to register in the ORPP since this is intended to help the middle-income earners without workplace pensions.

Incomes below the certain threshold would be exempt from contributions to lessen the burden on lower-income employees, similar to the CPP. Currently, the CPP has an annual basic exemption of $3,500. The government will consult on whether the ORPP’s lower-income threshold would mirror that of the CPP.

Every self-employed individual has a unique status in the labour market as both employee and employer. So the government will review on what’s the best thing to do to help self-employed individuals in attaining a secure retirement future.

The government will prioritize the implementation of the ORPP since the retirement income security is desperately important to Ontario families for the forthcoming growth of the province. In 2017, the ORPP would be introduced to correspond with the expected reductions in Employment Insurance (EI) premiums.

Employers and employees registration into the ORPP would occur in stages, starting with the largest employers. And the contribution rates would be phased in over two years.