The age-old question, Am I saving enough for retirement? has been asked time and time again. The Government of Ontario made its opinion known in its 2014 budget by stating that a “significant portion of today’s workers are not saving enough.” At the same time, Queen’s Park called on the federal government to enhance contributions to the Canada Pension Plan (CPP), but the Harper administration shut down those discussions immediately. In April 2015, Queen’s Park took matters into its own hands, passing Bill 56, which defines a legal framework for establishing and administering the Ontario Retirement Pension Plan (ORPP).

The ORPP has attracted many comments, both positive and negative. It would significantly expand retirement benefits for some of Ontario’s workers, effectively doubling the maximum pension benefit currently paid under the CPP. However, criticism of the plan focuses on its high administration costs and calls into question its effectiveness in helping Ontario’s workers to increase their total savings.

The ORPP Framework

The legislated framework of the ORPP is short on details; however, a number of key features showing how it will be administered have been revealed. The plan will be launched in January 2017 and rolled out over four years, starting with the enrolment of employers with more than 500 workers. Ontario employers that offer their workers a pension plan considered comparable to the ORPP will be exempt from enrolment.

“Once the plan is fully phased in, the deduction will be 1.9 percent of annual earnings up to $90,000.”

For defined benefit plans, the minimum comparability threshold is measured in terms of annual benefit accrual rate, which must be at least 0.5 percent. For employers offering defined contribution plans, the minimum comparability threshold is equal to the total contribution of 8 percent of earnings, and employers must contribute at least half of the total.

The ORPP will mirror the CPP, with mandatory employee contributions made through payroll deductions and matched by employers. Once the plan is fully phased in, the deduction will be 1.9 percent of annual earnings up to $90,000.

ORPP Yays

Citing numerous studies in its 2014 budget, Queen’s Park warned that most workers in Ontario are not saving enough to maintain their standard of living after they retire, so urgent changes are needed to encourage Ontarians to feed the pig. Without federal government support to enhance the CPP, the ORPP is the best alternative to supplement benefits paid by the CPP and Old Age Security, and particularly to strengthen the retirement savings of individuals most at risk of not saving enough. This assertion is based on Ontario’s Long Term Report on the Economy for 2014, in which financial advisors recommended a replacement ratio between 50 percent and 70 percent to maintain a standard of living comparable to pre-retirement. With roughly two-thirds of Ontario’s workers not in an employer-sponsored pension plan, the assumption is that those individuals would rely primarily on retirement benefits provided by the Government of Canada, which has a maximum annual benefit payment of only about $19,400 (the average number is much less at about $13,400).¹ The most at-risk segment of the population is the middle income earners without a workplace pension, since relying on government benefits alone would not be sufficient to meet their target replacement ratio. Queen’s Park argues that the ORPP is urgently needed to help Ontarians save, and the Plan will aim to provide a 15 percent replacement rate on earnings below an annual salary of $90,000. The ORPP will effectively double the benefits paid under the CPP, bringing the total maximum retirement benefits for Ontarians close to $32,300.

Furthermore, as with other defined benefit plans, the ORPP has certain advantages over individual investment vehicles (e.g., RRSPs). The ORPP would reduce investment and longevity risk for plan members by paying a predictable, inflation-adjusted pension until the member’s death. Also, by pooling members’ assets, the plan is able to diversify into asset classes that are prohibitively expensive for individual investors (e.g., direct real estate and infrastructure projects).

ORPP Nays

A recent Fraser Institute study maintains that the benefits of increased savings that underpin the need for ORPP are overstated. This Canadian think tank examined the savings rate of Canadian residents between 1996 and 2004, during which the CPP contribution rate rose from 5.6 percent to 9.9 percent. The study showed that increased mandatory contributions to programs such as the CPP had the unintended consequence of “crowding out” private households’ discretionary savings. Once the ORPP is established, some of the workers’ funds will be transferred away from private savings vehicles such as RRSPs and TFSAs. Furthermore, RRSPs offer financial planning benefits such as full transferability to a beneficiary upon death (the CPP offers only reduced benefit to the survivor), access to tax-free funds under the Home Buyers’ Plan or Lifelong Learning Plan, and emergency access to funds with tax penalties (e.g., withdrawing funds when faced with terminal illness). With reduced contribution rates to RRSPs, these benefits of savings will be diminished.

The intended goal of the ORPP is to help Ontario workers with no employer-sponsored retirement options. The launch of ORPP may be the impetus for some employers to establish their own comparable retirement savings plan that they deem to be more economic. Unlike the CPP, where the costs are distributed among a very large member base, the fixed costs of ORPP administration will be absorbed by a much smaller member base. Furthermore, additional administrative costs would be involved since this plan would need to keep track of Canadians who move in and out of the province.²

Interestingly, only 14 percent of respondents to a CFA Society Toronto online survey believe Ontarians save enough for retirement, but a staggering 63 percent agree that “the ORPP will not be effective in achieving this goal.”

What’s Next?

Even though the ORPP is slated to launch a year from now, its fate is still uncertain. In October 2015, Ontario Premier Kathleen Wynne indicated that her government would drop the idea of a provincial plan if the newly elected Liberal government would be open to making enhancements to the CPP.

However, there are now signs of co-operation between Ottawa and Queen’s Park. Later in October, after Justin Trudeau was elected, a spokesperson from the Wynne government said, “…the incoming federal government will direct the Canada Revenue Agency and the Departments of Finance and National Revenue to work with Ontario officials on the registration and administration of the…ORPP,” which the Harper administration refused to allow.

However, if Trudeau wishes to enhance the CPP, he will have his work cut out for him, since he will need to get buy-in from the other provinces (except Quebec) and territories before making any changes.

Do you think ORPP is good for Ontarians? Share your thoughts on Twitter @CFAToronto #ORPP or on CFA Society Toronto’s LinkedIn members only group.

¹ Maximum $1,065 per month is paid through CPP, and $546.07 per month is paid through OAS. www.esdc.gc.ca/en/cpp/oas/benefit_amount.page
² www.benefitscanada.com/pensions/db/the-orpp-is-good-in-theorybad-in-practice-70099