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News



February 25, 2015
Ontario tables new provincial pension plan

The Ontario government has tabled legislation to launch its own pension plan beginning January 1, 2017.

The tabling of the proposed structure and rules governing the new pension plan follows years of dispute between the province and the federal government on how to handle the pending wave of baby boomer retirements, many of whom have not saved enough to support themselves after they leave the workforce. (See the November 2013 edition of the Coughlin Courier for background.)

Initially, Ontario’s government favoured a more robust Canada Pension Plan (CPP) that expanded its combined employee-employer contribution rates from the current 9.9 per cent of pensionable income to 12.1 per cent.  In return, pensioners would receive approximately $6,000 of additional pension income each year.  Instead of receiving the current benefit of $12,780 per year, retirees would earn roughly $18,000 annually from the federal government’s universal pension plan.

That idea received a cool reception from the federal government.  It favours its pooled registered pension plan (PRPP), a voluntary defined contribution pension supplement. The PRPP is designed to allow self-employed individuals and those working for smaller companies to contribute to a national defined contribution plan administered through accredited financial institutions.  (See the December 2010 and January 2011 editions of the Coughlin Courier for background.)

With no resolution in sight, the province upped the ante by meeting its promise to launch its own pension plan.

“The Canada Pension Plan, Old Age Security, the Guaranteed Income Supplement and Ontario Guaranteed Annual Income System do not provide enough income replacement for many Ontario workers to ensure they are able to maintain a similar standard of living after retirement,” an Ontario government media release stated.  “A significant number of today’s workers will be stretched to save enough to ensure they can maintain their standard of living throughout their retirement years.”

Under the new legislation, the new Ontario Retirement Pension Plan (ORPP) would provide a defined benefit for life based on replacing 15 per cent of an individual’s yearly maximum pensionable earnings (YMPE).  The YMPE for 2015 is $53,600.  Based on that assumption, the ORPP would provide a maximum income of $8,040 per year.  

The CPP is designed to provide an income based on replacing a maximum of 25 per cent of the YMPE.  In 2015, the maximum CPP income is $12,780.  Together, the two pensions would provide a maximum pension income of $20,820.

However, the ORPP will not come cheaply.  Borrowing liberally from the CPP’s contribution structure, both employers and employees will be required to contribute 1.9 per cent each to a maximum pensionable annual earnings threshold of $90,000.  

The CPP requires a joint employer-employee contribution of 9.9 per cent, or 4.95 each to the YMPE maximum.

For an Ontario worker, the introduction of the ORPP will result in a total pension deduction of 6.85 per cent from each pay.  

Employers will also be required to make the same contributions on behalf of each of their employees.

For many employers, the ORPP amounts to another payroll tax that will stifle employment and investment.

“Business owners tell us the main reasons for not offering a pension plan are high costs and administrative complexities,” says Canadian Federation of Independent Business Ontario Vice-President Plamen Petkov.  

His views were echoed by federal Minister of State for Finance Kevin Sorenson.

“Canadians don’t want higher payroll taxes,” he says. “Half of the small businesses surveyed do not feel their businesses can remain at their current capacity with this payroll tax hike.”

Under the ORPP, only groups with a defined benefit or target benefit pension plan will be able to opt-out of the new provincial pension plan.  All others, including groups with defined contribution pensions, group registered retirement savings plans (RRSPs), pooled retirement pension plans (PRPPs), deferred profit sharing plans (DPSPs) and the self-employed will be required to participate in the new pension program.

Exemption levels for low income earners are still to be established.

With the tabling of the ORPP legislation, the Ontario government plans to consult with various business, labour and community groups, beginning in early 2015.  As a result, details of the new pension’s rules and requirements may change in the coming months.  However, the withdrawal of the proposal does not seem likely at this point.

For Ontario plan sponsors and plan members, the ORPP will likely become a priority issue in the coming months. Watch the Coughlin Courier for more information as it becomes available.

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