The sudden appearance of the Ontario Retirement Pension Plan (“ORPP”) adds yet another acronym to the constellation of retirement options in the financial landscape. Born out of the May 1, 2014 provincial budget, the ORPP traces its origins to a seminal paper authored by Reena Goyal and Jean-Pierre Laporte called “Reforming the Canada Pension Plan” found in the October 2004 issue of Benefits and Pensions Monitor. While the fate of the ORPP rests in part on the electoral success of Premier Wynne’s Liberal Party of Ontario in the forthcoming provincial election, let's review it in the context of pension innovation.
Based on the Ministry of Finance’s budget materials, the ORPP would include the following design features:
- A predictable stream of income in retirement by pooling longevity and investment risk, and indexing benefits to inflation, similar to that provided by CPP’s retirement benefit.
- Equal contributions 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 in line with increases to the CPP’s maximum earnings threshold.
- Aim to provide a replacement rate of 15% of an individual’s earnings, up to a maximum annual earnings threshold of $90,000.
- Be publicly administered at arm’s length from government, have a strong governance model and be responsible for managing investments associated with annual contributions of approximately $3.5 billion.
- Benefits would be earned as contributions are made to ensure that the system is fair, and younger generations are not burdened with additional costs for older retirees.
Assuming that the province adopts a minimum earnings floor of $3,500, an Ontario resident affected by the application of the ORPP would have to make the following contributions, by way of example:
|Portion of Salary upon which employee CPP premiums payable||$49,000|
|Portion of Salary upon which employee ORPP premiums payable||$86,500|
|CPP employee premium (4.95%)||$2598|
|ORP employee premium (1.9%)||$1642|
|CPP employer premium (4.95%)||$2598|
|ORP employer premium (1.9%)||$1642|
|Total CPP premiums||$5196|
|Total ORPP premiums||$3285|
|Total CPP & ORPP premiums||$8,481|
|Percentage of total CPP & ORPP premiums to Salary||9.42%|
Presumably, Ontarians participating in the ORPP will also be allowed to contribute to a Registered Retirement Savings Plan based on the current 18% of earned income rule, but capped by the RRSP limit ($24,270 in 2014). All in all, an individual earning $90,000 could be able to set aside annually for retirement:
|RRSP contribution (lower of 24,270 and 18% of $90,000)||$16,200|
|Total CPP & ORPP Premiums||$8,481|
|Total Annual Retirement Savings:||$24,621|
This represents 27% of salary. While draft legislation has not been introduced, one would think that the premiums paid to the ORPP would offer some tax relief either through the system of non-refundable credits, or if the ORPP premium is considered equivalent to an RRSP contribution (1:1 deduction).
Much as had been advocated by Goyal and Laporte in 2004, the key strengths of this reform is that it gives individuals who otherwise would not have received pension coverage outside of the CPP access to a defined benefit-style pay-out at a very low administrative cost. The government announcement suggests that the combined CPP and ORPP would generate a benefit of $25,275 after 40 years of contributions.
Since the policy is designed to avoid inter-generational wealth transfers, and is not financed based on the old “pay as you go” system that characterizes most of the CPP, it is unclear what kind of pension amount would be payable after 10 years of contributions.
Some commentators have suggested that the additional 3.8% cost represented by the ORPP may act as a deterrent to job creation within Ontario, as those companies with operations throughout Canada would be able to hire in provinces which don't have this additional expense. The argument here, presumably, is that what matters to employees is their take home pay after all deductions, and for employers, the total cost of an employee, including their share of E.I., CPP and ORPP.
The final aspect of this reform that warrants further comment relates to the group of employers excluded from the ORPP, known as the exclusion group. The Budget materials suggest that employers offering a pension plan will be exempt. This begs the question of whether employers offering Pooled Registered Pension Plans or Group Registered Retirement Savings Plan will also be exempt from the new regime. An employer wishing to avoid the 1.9% employer contribution might sponsor a PRPP where corporate contributions are optional and thus avoid the ORPP costs or sponsor a group Defined Contribution Pension Plan and only make the mandatory 1% of T4 income contribution, thus saving 0.9%.
While the thinking behind the introduction of the ORPP is to be welcomed, the actual details have still to be fully worked through, leaving the situation unclear. Of course, as noted at the beginning of this article, introduction of the ORPP is dependent upon electoral success for the provincial Liberal government.