Defined Contribution Pension Plans Exempt from Ontario Retirement Pension Plan—with conditions
On August 11, 2015, the Ontario Liberal Government announced plans to phase in the mandatory Ontario Retirement Pension Plan (ORPP) beginning in 2017. Their goal is to ensure every employee in Ontario is participating in the ORPP or a comparable workplace pension plan by 2020.
Please note that final details on the ORPP are still subject to legislative approval.
What is a comparable workplace pension plan?
Ontario defines a “comparable plan” as a Registered Pension Plan that complies with federal and provincial government regulation and also meets certain minimum thresholds.
A comparable pension plan must meet the following objectives:
- Provides people with a predictable stream of income for life.
- Provides people with peace of mind, knowing they won’t outlive their savings.
- Requires contributions from employers to ensure fairness.
- Aims to replace up to 15% of a person’s pre-retirement income.
Employers and employees who participate in a comparable workplace pension plan will not be required to join the ORPP.
Examples of comparable workplace pension plans
- Defined Contribution (DC) Registered Pension Plans: For a workplace DC pension plan to reliably deliver the same level of income replacement in retirement as the ORPP, it will require a minimum total contribution of 8% of base salary earnings. Employers will be required to contribute at least half of this amount (4%).
- Defined Benefit (DB) Registered Pension Plans: To be considered comparable, DB plans must match or exceed the benefit being offered through the ORPP. For earnings-based DB plans—where an employee’s earnings history is considered as part of their retirement income calculation—the annual benefit accrual rate must be at least 0.5% to be considered comparable.
A flat-dollar plan—or flat-benefit plan—has a retirement income formula based on a fixed or "flat" dollar amount for each period (e.g., each month or year of service). Employers with a flat-dollar plan will be assessed for comparability by expressing the benefit rate as a percentage of earnings.
- Hybrid Plans: A Hybrid plan is a Registered Pension Plan with features from both types of plans (DB and DC) and may be exempt depending on the results of a comparability test.
Examples of non-comparable workplace pension plans
- Group Registered Retirement Savings Plans (GRRSPs)
- Deferred Profit Sharing Plans (DPSPs)
In 2016, the Province will be verifying comparable workplace pension plans and enrolling businesses; however, contributions to the ORPP aren’t required until 2017. Enrolment in the ORPP will be phased in as follows:
- Wave 1: Large employers (500 or more employees) without registered workplace pension plans. Contributions to start: January 1, 2017.
- Wave 2: Medium employers (50- 499 employees) without registered workplace pension plans. Contributions to start: January 1, 2018.
- Wave 3: Small employers (50 or fewer employees) without workplace pension plans. Contributions to start: January 1, 2019.
- Wave 4: Employers with a workplace pension plan that is not modified or adjusted to meet the comparability test, as well as employees who are not members of their workplace’s comparable plan. Contributions to start: January 1, 2020.
Both employers and employees will make equal contributions. Contribution rates will be phased in from the time a business enrolls. Once employers and employees begin contributing at the maximum rate, they will continue to contribute at that rate.
What can employees expect in retirement from the ORPP?
The amount of money an individual receives after retirement will depend on the following:
- How many years they contribute to the ORPP.
- How much an individual and their employer(s) contribute to the ORPP.
- Salary throughout the years participating in the ORPP.
ORPP benefits will be inflation-protected and consistent with the sustainability of the plan, in order to provide a predictable stream of income for life.
Payments will start in 2022. Ontarians who retire after making contributions to the ORPP will be eligible to start receiving a pension at age 65, with options to receive adjusted retirement income as early as age 60 or as late as age 70. Retirement income will be earned as contributions are made to ensure fairness for younger generations.
No help from Ottawa for ORPP
Federal Finance Minister Joe Oliver sent Ontario Finance Minister Charles Sousa a letter indicating that Ontario will not receive any assistance from Ottawa in collecting contributions (access to the CPP collection system) or making any legislative changes (allowing the ORPP to act similar to the CPP for tax purposes) to support the ORPP.
We will be working with our clients to determine any changes they may need to make to ensure their plans meet the comparability test etc. In the meantime, if you have any questions please contact your Pension Consultant or Paul Webber, Manager & Senior Pension Consultant at 1 866-912-6926 ext. 51654 or firstname.lastname@example.org.
Read our previous articles on the ORPP