What do you think of the new Ontario Retirement Pension Plan (ORPP)

The Ontario Liberals’ recent majority victory means the Ontario Retirement Pension Plan (ORPP) will soon be a reality. The labour market in Ontario isn’t any different from the rest of Canada – there are the pension have’s and the pension have not’s.

Targeting The Pension Have Not’s

With each passing year, the number of workers covered by a workplace pension plan dwindles. Today only one-third of workers have a workplace pension plan, leaving two-thirds of workers on their own when it comes to retirement savings. The ORPP is designed to level the playing field, providing retirement income to those without a workplace pension plan.

What is the Ontario Retirement Pension Plan (ORPP)?

Financial EducationThe ORPP is targeted at workers in the province of Ontario earnings up to $90,000 a year, who are not covered by a workplace pension plan. The ORPP would be a forced savings vehicle designed to help those struggling to keep up with the rising cost of living save for retirement. Similar to RRSPs, the ORPP would provide employees with a tax efficient way to save for their golden years.

Not everyone is a fan of the ORPP. The Canadian Federation of Independent Business has been especially critical of the pension plan, calling it a tax on small business.  In fact, the ORPP could lead to job loss, as employers may choose to set up shop in different provinces to avoid joining the mandatory plan. When introduced, employers without a workplace pension plan will have to contribute to the ORPP, on top of Canada Pension Plan (CPP) contributions.

How Costly Will the ORPP Be for Employers?

Under the ORPP, an employer would have to match an employee’s contributions of 1.9 per cent per year in earnings up to $90,000. Similar to CPP, the maximum earnings of $90,000 covered by the ORPP will increase each year based on the CPI.

For a worker earning $45,000 annually, the employer would have to match contributions of $66 per month ($788 annually).  For a worker earning double that amount annually, $90,000, the employer and employee would each have to contribute $137 per month ($1,643 annually).

Similar to CPP, the ORPP isn’t designed to fund a worker’s entire lifestyle in retirement. Much like CPP, it’s aimed at replacing 15 per cent of an employee’s working income in retirement. The middle-class and Millennials without the benefit of a pension plan would benefit most under the plan.

Related article:  The online Guide to CPP and OAS

Workplace Pension Plans as an Employee Retention Strategy

A job for life may no longer be a thing of the past. Job stability is near a record high – about 50 per cent of Canadian workers have been with a single employer for five years or more, according to a new report from CIBC World Markets.  In fact, the likelihood of workers remaining with their employer rises with each year of seniority, starting at 60 per cent for those on the job for a single year, rising to 95 per cent for those on the job for five years or more. This flies in the face of reports that say job hopping is the new norm.

Why are employees remaining with their employer longer than ever before? Although a mediocre job market might have something to do with it, group benefits like workplace pension plans clearly matter to workers. Over three-quarters of new hires at employers offering traditional defined benefit (DB) pension plans said the retirement program gives them a compelling reason to stay on the job, according to the Towers Watson Retirement Attitudes Survey. This doesn’t just hold true for older workers – 63 per cent of workers under age 40 said their retirement program was an important factor in accepting their job.

The ORPP will help level the playing field by forcing employers to join if they currently don’t offer a workplace pension plan. However, there’s nothing to stop employers from going above and beyond the bare minimum by offering workplace pension plans. From traditional defined benefit plans to newer Target Benefit Plans (TBPs), there is no shortage of choices. Although offering these plans may be an expensive right now, they’re likely to pay off in the long-run, as employers will have a better chance of retaining their most talented employees.

Employers Have Plenty of Time to Prepare

Although the ORPP will be an added expense for employers in Ontario, the good news is employers have plenty of time to prepare.  The Liberals don’t plan to introduce the ORPP until 2017, when federal Employment Insurance premiums are expected to be reduced. The ORPP won’t be introduced in one fell swoop – contribution rates will be phased in over two years. Enrollment will be staggered, with the largest employers enrolling first, allowing small businesses plenty of time to budget. The ORPP will be mandatory for any employer who does not offer a registered pension plan.

Written by Sean Cooper

Sean Cooper is a Pension Analyst with a global pension and benefits consulting firm. He is a financial journalist with articles featured in major publications, including the Toronto Star, the Globe and Mail and MoneySense. His areas of expertise include pensions, retirement and health benefits. He has made several media appearances, including Bell Media, Newstalk 1010 and CTV. Follow Sean on Twitter @SeanCooperWrite and check out his personal finance blog at www.seancooperwriter.com.

4 Responses to What do you think of the new Ontario Retirement Pension Plan (ORPP)

  1. What are the details for small company pension plans?
    That is, as a small employer if I create a company pension plan that takes 0.1% of employees pay and is matched with 0.1% from the company, does this qualify as company pension plan such that the ORPP bypassed……..

    Bob

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