The big news out of the latest announcement from the Ontario government about the Ontario Registered Pension Plan (ORPP) is that there is no news.
The province is pressing ahead with the implementation of the ORPP on the schedule it announced last August, with participation phased-in beginning in January 2017 and benefits flowing beginning in 2022.
In this case, no news is both bad news and good news.
The bad news is that this is the first clear indication of just how strong the opposition to CPP expansion is among other provinces. Ontario has clearly come to the conclusion that despite the election of a supportive federal government and other recent changes at the provincial level, there is little chance of reaching a consensus on CPP expansion in the foreseeable future.
That’s bad news for Canadians who had hoped that momentum for reform nationally could be sustained. It is also bad news for anyone hoping that a focus on expanding the CPP would put a truly universal, expanded public pension system back on the table.
The good news is that, despite the vested interests in the financial services industry having pulled out all the stops in an effort to derail the ORPP and kill any hope of change, the government is pressing ahead.
Pension plan coverage in the private sector has been dropping steadily for the past 40 years. And even the depressingly low numbers for defined benefit plan coverage today understate the extent of the problem facing many Ontarians in the future.
Many plans in the private sector are frozen to new participants so that as their members age, coverage will decline. That phenomenon is reflected clearly in the huge gap in coverage between workers over 50 (more of whom have access to a private pension plan) and workers under 35 (most of whom do not have access to a private pension plan).
While the announcement contains little that was really new in the big picture, it did provide answers to some troubling issues that had emerged over the past few months:
The rules with respect to opting out have been tightened. Opting out will be determined at the sub-group level of an employer’s workforce. That means that an employer who provides a pension plan for some, but not all, of its employees will not be able to opt out of the ORPP for all of its employees.
Only those groups of employees who actually participate in a pension plan that meets the comparable plan test can be exempted. That means, for example, that if an employer’s plan imposes a waiting period for participation, employees will be in the ORPP during the waiting period.
Furthermore, the plan will permit employers to opt in with respect to all or part of their workforce, even if they have a plan that meets the equivalency test. This provides a valuable option for some groups in weak plans that meet the test to move to the ORPP either as an add-on or a partial substitute for a current plan.
For example, actuarial studies conducted for the government indicate that when differences in investment returns and the cost of bearing longevity risk are taken into account, a defined contribution plan would have to have contributions of 8% of pay to match the benefit value of the ORPP at 3.8% of pay. That means that a 1:1 switch of contributions from a defined contribution plan or group RRSP would deliver a substantially better benefit at less cost.
The announcement also left unaddressed some important issues left hanging in the original design:
It is silent on the question of coverage for self-employed individuals and individuals on non-standard forms of employment. Effective resolution of that issue depends on cooperation from the Canada Revenue Agency and the federal government. This will be a good test of the sincerity of the federal government’s claim that it is prepared to facilitate the implementation of the ORPP.
It has also not addressed another fundamental issue—portability between exempt “equivalent” plans and the ORPP. An exempt equivalent plan is only really equivalent to the ORPP if the plan member remains a member until retirement and receives benefits at the level that earned the exemption.
If an employee terminates his or her membership in an “equivalent” plan before retirement as a result of changing jobs, either voluntarily or involuntarily, the benefit payable for his or her years of service in the plan will likely be inferior to the ORPP benefit that would have been payable for that same period of service.
This would be an easy problem to fix simply by requiring a buy-back of ORPP service when an employee leaves an exempt plan without a retirement pension. But so far, the government has given no indication that it is prepared to address the issue.
Ontario’s pension initiative has always been a second-best solution behind an expansion of the Canada Pension Plan. And Ontario’s decision to abandon universal coverage and automatic portability in favor of an opt-out puts the ORPP further back in second place. But it is now clear that the best solution—expanded CPP—is neither available now nor a realistic prospect for the immediate future.
Faced with a choice between second best and abandoning the retirement future of generations of younger workers for whom the current system does not work and cannot work, the answer is obvious. The Government of Ontario should be congratulated for facing down its conservative critics and proceeding with what will be the most important change in retirement income policy in 50 years.
Now that the political threshold has been crossed, two critical issues remain:
First, the government must ensure that, to the extent possible, its design decisions would facilitate integration of the ORPP into a future expansion of the CPP.
Second, in the next few months it is imperative that the government press ahead with coverage for the self-employed and non-standard workers and guarantee the integrity of the system by requiring full portability of ORPP-equivalent benefits.
Economist Hugh Mackenzie is a CCPA research associate. Follow Hugh on Twitter: @MackHugh