On Wednesday, April 29th, the Ontario Legislature passed Bill 56: The Ontario Retirement Pension Act, 2015. The government is committed to establishing the ORPP (Ontario Retirement Pension Plan) by January 1, 2017.
Once established, the ORPP will be the first of its kind in Canada, building on key features of the Canada Pension Plan (CPP). The ORPP will strengthen Ontario’s retirement security system by providing millions of Ontario workers with a predictable stream of income, paid for life.
The ORPP will:
- Offer a predictable stream of income in retirement for life, and index benefits to inflation, similar to the CPP’s retirement benefit.
- Require equal contributions to be shared between employers and employees, helping to bolster retirement savings.
- Aim to replace 15 per cent of an individual’s earnings.
- Require benefits to be earned as contributions are made, ensuring the system is fair and younger generations are not burdened with additional costs associated with older workers’ benefits.
- Offer portability, giving younger workers who are expected to change employers multiple times in their working lives, a single place to accumulate savings over the course of their careers.
- Two thirds of Ontario workers do not have a workplace pension plan.
- Pension coverage for younger workers is even lower – in 2012, only about one-quarter of workers aged 25 to 34 participated in workplace pension plans, compared to nearly half of workers aged 45 to 54.
- A number of studies show that many people are not saving enough to maintain a similar living standard in retirement.
- The ORPP will expand pension coverage to millions of working Ontarians.
How Does the ORPP Affect Business Owners and Employees?
Through conversations with employers and employees, the reaction to the new Ontario Retirement Pension Plan (ORPP) has been one mostly of negativity and lots of confusion. Many employers see the ORPP as just another tax which the Government is implementing. Employees look at the ORPP as an additional CPP contribution, where like CPP, future payments are unknown or unclear and calculations of those future payments are greyer than ever.
So Where Does the Truth Lie?
Will the ORPP truly solve all of Ontarians retirement woes? The short answer is no, but the reasoning behind it is a much broader debate. One fact is true: Ontarians are NOT saving enough for retirement. We will leave out the current Ontarians who are not contributing in any form to their retirement savings. This group of people will certainly benefit from the ORPP, as it will force them to put additional money away. Even then, solely relying on government benefits will hardly allow you to go out for a decent meal in retirement, let alone support your retirement hopes and dreams.
For Ontarians who are contributing to their retirement savings, which could include Individual RRSPs, Group RRSPs or DC Pension Plans, Old Age Security, Canada Pension Plan and TFSAs, the new ORPP will add a much needed boost to the amount of money one receives in retirement. When we speak about investing, we speak about diversification. The same language should be used when taking about retirement savings: diversify. There should not be a one pillar approach when you are saving for retirement. Retirement saving should consist of many different pillars which utilize all investment vehicles available.
As for employers, specifically those who are currently offering a retirement plan to their employees; in some cases even with a match on an employee’s contributions; their reaction to the ORPP is one that should be watched closely. Skeptics see employers reducing contributions to company retirement plans or collapsing plans all together. The eternal optimist would see this as an opportunity for employers to separate themselves in their respective industries, and push themselves above their competition.
Employers offer retirement plans to assist with their employees retirement goals and to attract and retain top talent. The introduction of the ORPP does not change any of these objectives. In fact, by offering a company retirement plan with a contributions match, as well as utilizing the ORPP, business owners would cement themselves as a best in class company, as it relates to an employee’s compensation package.
For more information please contact me at 416.915.4421.