The 21st century workforce needs a modern retirement income system, but Ontario and Canada have a 20th century system in place. That is why Ontario is taking a leadership role in addressing this pressing issue.
On May 1st, the Ontario government presented its Budget for 2014 (the Budget). Chapter IV “Strengthening Retirement Security in Ontario” makes it clear that pensions are a government priority and perhaps even an election issue.
In this Budget, Ontario has taken a leadership role in proposing some innovative and thoughtful solutions to address the ongoing problems of pension adequacy and coverage. Public understanding of the importance of a sound retirement system is increasing. The government appears to appreciate the importance of this issue to the electorate, as well as the broader policy issues.
The Budget notes that: (i) the Canada Pension Plan (CPP) is fundamental to the retirement income security of all Canadians, but current benefit levels are too low to meet the needs of “middle income earners”; (ii) a significant portion of today’s workers are not saving enough to maintain their standard of living in retirement; and (iii) unless action is taken, a significant portion of today’s workers will face a decline in their standard of living in retirement.
The Budget identifies the following contributing factors: no access to a workplace pension plan, inadequacy of voluntary savings, high investment management fees, and longer life spans. Ontario is proposing a wide array of measures to address the “retirement savings gap”, including a new made-in-Ontario pension plan to complement CPP. This proposed Ontario pension solution has garnered the attention of several other provinces, including Prince Edward Island, Alberta, Manitoba and British Columbia, who now have representatives on the working group. We examine, below, some of the Budget’s key pension proposals.
Expanding Public Pensions – A New Ontario Pension Plan
The Ontario government has long advocated for CPP enhancement. In light of the federal government’s lack of support for CPP reform at this time, Ontario has decided to move forward on its own with a new mandatory provincial pension plan – the Ontario Retirement Pension Plan (ORPP). According to the Budget, the ORPP, a defined benefit (DB) type plan, would combine with CPP to provide greater replacement income post-retirement and would include the following design features:
Pooling longevity and investment risk;
Benefits indexed to inflation;
Equal contributions to be shared between employers and employees, subject to a maximum of 1.9% each;
Plan administration and investment by an agency at arm’s length from the government; and
A reduced burden on lower income workers (i.e., earnings below a certain threshold would be exempt from contributions).
Although participation in the ORPP is said to be mandatory, the Budget indicates that there will be exemptions for workers who already participate in a “comparable” workplace pension plan. The Budget does not elaborate on what is meant by “comparable”. Would this mean DB plans only? Or defined contribution plans too?
While the government has touted the ORPP as a made-in-Ontario solution, it has indicated a willingness to work with other provinces regarding potential expansion. The Budget also indicates an interest in working with the federal government to ensure a seamless implementation.
Subject to consultations with employers and employees, the Budget forecasts an implementation date in 2017, with contributions to be phased in over two years. Technical details would be released in advance of any legislation.
Defined Benefit Plans
The government reiterated its intention to introduce regulations implementing previously announced reform measures, including limits on contribution holidays and accelerated funding of benefit improvements in underfunded pension plans. There will also be consultation on other funding rules to support the long term sustainability of DB pension plans. In addition, the government intends to extend the exemption of multi-employer pension plans and jointly sponsored pension plans (JSPP) from solvency funding requirements so that it can consult on the appropriate test for all non-solvency funded pension plans, including target benefit plans (TBP).
Asset Pooling and JSPPs
The Budget confirms the Government’s commitment to proceed with regulations affecting DB plans in two important areas: (i) to facilitate pooling of the assets of pension plans in the broader public sector for investment purposes; and (ii) to enable conversions of single employer pension plans (SEPP) to JSPPs, including via transfers of benefits from SEPPs to existing JSPPs.
Asset Pooling: The government intends to introduce legislation in the spring of 2015 to enable the establishment of a new asset pooling entity, which would operate at arm’s length from the government. The Workplace Safety and Insurance Board and Ontario Pension Board will act as the initial participants in this new pooling entity, with others entitled to participate on a voluntary basis.
JSPP Conversions: The government will amend the Ontario Pension Benefits Act (PBA) to create the regulatory authority to prescribe conversion requirements. The PBA amendments would require:
The same pension be provided to retirees and the equivalent value to employees upon conversion;
Notice be provided to all beneficiaries and unions;
Consent of beneficiaries be obtained prior to conversion; and
Approval of the Superintendent be obtained.
A transfer of assets and liabilities from existing SEPPs to existing JSPPs would appear to be considered a conversion subject to these rules.
The Budget also notes that new JSPPs will not necessarily be exempt from solvency funding requirements (as current JSPPS). For new single employer JSPPs, consideration will be given to whether sufficient protections are in place for members and whether the plan can be expected to be sustainable.
The Budget reiterates a prior budget announcement regarding consultations on a regulatory framework for multi-employer TBPs, which would consider eligibility conditions, funding rules and governance requirements. It further provides that such consultations would help to subsequently develop an expanded TBP framework for SEPPs. There is no timeline provided in the Budget regarding TBPs on the proposed or expanded basis. It appears that while Ontario agrees with the federal government that TBPs would be a good concept to adopt, they are not as far advanced in the development of a TBP framework.
Recognizing the need for a “range of tools” when addressing retirement security, the government indicated that it will continue to proceed with pooled registered pension plans (PRPP). Based on earlier consultations, the Budget announces the following design features:
Voluntary participation and contributions by employers;
Automatic enrolment of employees where an employer chooses to offer a PRPP, with an option to opt out; and
Low cost to plan members.
This design would appear to follow the federal model for PRPPs, and be targeted as a potential solution for the self-employed.
The Budget also recognized the value of a framework that is “harmonized” with other jurisdictions, as it would help to create a “coordinated approach to administration and regulation across the country.” Thus far, PRPP legislation has been implemented by the federal government for federally regulated industries and also as voluntary retirement savings plans in Quebec. The government intends to introduce PRPP legislation this fall.
Self-Directed Retirement Savings
Recognizing individuals’ reliance on financial advisers for retirement savings and investment decisions, the government will appoint an expert committee to investigate a possible regulatory framework for financial advisers, including financial planners.
Implications for Ontario Employers and Plan Administrators
While one can debate the efficacy of the Ontario government’s choices – and perhaps the pursuit of both the ORPP and PRPP models in particular – the Budget has made it clear that, unlike some of the recent pundits commenting on the federal government’s TBP announcement, Ontario does not view the pension debate as an “either or” proposition. The Ontario government appears to have recognized that in order to provide greater pension security, it is preferable to offer employers and employees a number of options, including government sponsored programs like the ORPP and new plan designs like TBPs.