The July 2014 Ontario Budget

Mercer Insights


THE JULY 2014 ONTARIO BUDGET


Download Communiqué PDF

Download Communiqué PDF

On 14 July 2014, the Honourable Charles Sousa, Ontario’s Minister of Finance, tabled the government’s budget. This budget is substantially the same as the budget tabled on 1 May 2014, prior to the provincial election. This Communiqué provides highlights of the measures related to employment pensions and benefits.

Ontario Retirement Pension Plan

The budget proposes to introduce an Ontario supplement to the CPP, the Ontario Retirement Pension Plan (ORPP). The government intends to take the lead in addressing retirement income needs given the federal government’s decision to “shut down” discussions on the enhancement of the CPP.

The ORPP will mirror some of the structure of the CPP: it will be mandatory and earnings-and-formula based and will be administered by a non-profit, arm's-length, entity with a strong governance model. The ORPP could later be integrated with the CPP if it were expanded in the future.

Participation will be phased in commencing in 2017, beginning with the largest employers. Contributions totaling 3.8% of salary, to a maximum of $90,000, will be equally shared between employers and employees and will be phased in over two years. The ORPP would aim to provide, for an employee with 40 years of service, an income replacement rate of 15% on earnings up to $90,000, in current dollar terms. The CPP currently promises a 25% replacement rate on earnings up to the YMPE, currently $52,500, based on the same length of service. 

Benefits would be earned as contributions are made to help prevent intergenerational subsidies. Those participating in a comparable workplace pension plan would not be required to enroll, but no details are given about the basis of comparison. 

In addition to further actuarial analysis of the design, there remains much consultation to do before the ORPP comes to fruition. How self-employed workers can be accommodated and whether or not there should be a lower-income threshold (analogous to the current $3,500 in the CPP, and on which no contributions are paid) are two outstanding items. Employers and labour will be included in the consultation process.

The government undertakes to work with other provinces to see if ORPP can be expanded to those living outside Ontario. It will work with the federal government, where necessary, to facilitate a seamless implementation. It plans to leverage the expertise of large Ontario pension funds, the province’s financial sector and the proposed new asset pooling entity. Implementation will be led by former CEO of OMERS Michael Nobrega.

Further technical details will be released later this year before introducing legislation.

Pooled Registered Pension Plans

The government will introduce PRPP legislation this fall as another tool to address the retirement savings issue. The PRPP is a new type of registered pension plan that provides employees and the self-employed another way to save for retirement. 

Ontario joins the federal government and other provinces including Saskatchewan, Alberta, British Columbia and Québec where this type of legislation has already been developed. The Ontario framework will be consistent with the federal model that has been followed by other provinces. The Québec Voluntary Retirement Savings Plan (VRSP) differs in some respects, in particular in having mandatory employer participation requirements.

Employers will not be required to provide a PRPP, and if they do, they will not be required to make contributions. If an employer provides a PRPP, employees will be automatically enrolled with the ability to opt out. 

Employer Pension Plans

Alongside the proposals for the ORPP and PRPP, Ontario proposes changes to the Pension Benefits Act.

Target Benefit Pension Plans
Ontario continues its commitment to permit registered pension plans to be designed as target benefit plans (TBPs). TBPs combine the risk pooling advantages of defined benefit plans with the greater contribution stability of defined contribution plans. There will be consultation on the regulatory framework for multi-employer TBPs including eligibility conditions, funding rules and governance requirements. Subsequently a framework for single-employer TBPs will be developed. No time line is indicated.

Funding Rules for Defined Benefit Pension Plans
Two previously announced defined benefit funding measures remain on the table. The funding level at which a contribution holiday is permitted will be defined. Specifics are not mentioned, although past statements have proposed setting the contribution holiday threshold at 105%. Also, there will be measures to require accelerated funding when benefit improvements are made in an underfunded plan. 

Other funding rules to promote sustainability will be considered through consultation. This would likely include discussion about enhanced going concern funding standards to replace solvency funding requirements, as has been widely discussed in the pension industry.

Currently, certain SOMEPPS (specified Ontario multi-employer pension plans) and JSPPs (jointly sponsored pension plans) have an exemption from the requirement to file annual valuations if a plan has solvency concerns. This exemption will be extended from December 31, 2014 to December 31, 2017. The government will consult on the appropriate trigger for annual valuations for all plans that are not subject to solvency funding, which would include TBPs.

Feedback from stakeholders is being sought on measures to enhance transparency and accountability to active and inactive plan members concerning plan funding and investment.

Asset Pooling
The government will introduce legislation in the spring of 2015 to facilitate asset pooling among public sector pension plans and other funds with a goal of improving investment returns. Asset pooling is expected to achieve better access to a wider range of investments and lower costs. A new asset pooling entity would operate at arm’s length from the government, and participation by funds would be voluntary. The Ontario Pension Board and the Workplace Safety and Insurance Board have indicated willingness to participate.

Conversion to the JSPP Model
The government is following through on last year’s budget announcement to create a framework that would allow single-employer pension plans to merge into existing JSPPs or to convert to the JSPP model. A JSPP is a plan in which employers and plan members share all decision-making responsibility. The government proposes to amend the Pension Benefits Act to allow the new rules to be created by regulation.

If a single-employer plan merges into a JSPP, the assets transferred would have to be sufficient to fund the transferred liabilities without unduly subsidizing or enriching existing JSPP beneficiaries. If the existing JSPP already has a solvency funding exemption, the incoming liabilities would also be exempt.

The plan conversion amendments would be required to provide for:

  • notice to all plan beneficiaries and trade unions;
  • no change to retiree pensions;
  • preservation of benefit value for current employees; and
  • prior consent of the plan beneficiaries and the Superintendent. 

Some important features of the amendments to the Pension Benefits Act in the budget bill that would implement this proposal include:

  • provision for deemed member consent, to be established by regulation;
  • exclusion of transferred members from grow-in rights if the receiving JSPP has opted out of grow-in;
  • provision that a conversion prevails over collective agreements and trust agreements; and
  • crown immunity.

Other funding rules to promote sustainability will be considered through consultation. This would likely include discussion about enhanced going concern funding standards to replace solvency funding requirements, as has been widely discussed in the pension industry.

Carrigan Amendments
The government has included amendments to the Pension Benefits Act that were previously in Bill 151 in its budget bill. These amendments will reverse the October 31, 2012 decision of the Ontario Court of Appeal in Carrigan v. Carrigan Estate. In that case the Court held that a pre-retirement death benefit was payable to the deceased member’s designated beneficiary, even though the member had a common law spouse on the date of death, because the member also had a married spouse from whom he was separated but not divorced. The amendments would restore the entitlement of a common law spouse in these circumstances. This portion of the budget bill will come into force with Royal Assent.

Oversight for Financial Planning

The government notes that many individuals with self-directed retirement savings rely on financial planners and advisors to assist them in making their savings and investment decisions. In January 2014, the government held consultations with key stakeholders about the lack of general regulatory oversight for this financial planning. As a result the government will establish an expert committee to consider options for the regulation of financial planning.

Long Term Disability Insurance

The province proposes amendments to the Insurance Act to protect future recipients of long-term disability payments. The amendments will require all long-term disability benefits to be insured. Implications for employers will depend on their existing funding arrangements.

Comment

The ORPP is a significant announcement and, based on the information contained in the budget, has the potential to help Ontarians without a workplace pension save for retirement in an economically efficient way by pooling investment and longevity risk. The ORPP will be complex to administer but it has many promising features.

The ORPP aims to provide a replacement rate of 15% over a 40-year career but does not appear to guarantee this promise. The ORPP should include conditional benefits that can be adjusted in an efficient manner to reflect changes in the funded status of the plan. The technical details to be announced later this year should confirm if (and how) the plan design will allow benefits, or contributions, to be adjusted to deal with different economic conditions of the plan.

Other details that need to be confirmed include:

  • The tax deductibility of contributions: Employee and employer contributions should both be tax deductible to ensure that a contribution to the ORPP would be treated the same as contributions to other tax assisted retirement plans.
  • The treatment of low income individuals: Low income Canadians are well served by Canada’s current retirement system and can least afford increased payroll deductions. A low income threshold similar to the CPP would not reduce the burden on introducing the ORPP on lower-income individuals. Ideally the ORPP would only cover earnings in excess of around $30,000.
  • How will improved longevity be addressed? Will unreduced benefits be available at age 65, as under the CPP, or should an unreduced pension only be available at a later age?
  • Whether an employer who offers a group RRSP or a PRPP will be exempt from having to participate in the ORPP.

Companies that currently provide comparable plans may even choose not to opt out of the ORPP if integrating current benefit formulas with the ORPP provides an opportunity to transfer a portion of future risk out of their current plan.