Both defined benefit (DB) and defined contribution (DC) plans may be considered adequate alternatives to the ORPP, provided they pass the “comparability test” and ensure similar benefits to the provincial plan.
To be eligible, DB plans must meet a minimum benefit accrual rate of 0.50 per cent. An accrual rate measures the pace at which retirement income accumulates in a pension. To calculate the amount an employee will be entitled to in retirement, the plan’s benefit accrual rate is multiplied by the employee’s total career earnings. By the province’s calculations, any accrual rate above 0.50 per cent is adequate to ensure stable retirement income.
DC plans do not require matching contributions from employers, and do not allow for pooled longevity, investment risk, and similar measures to ensure people do not outlive their savings or lose their savings in volatile markets. To be considered comparable to the ORPP, the province requires that DC plans meet a minimum annual contribution rate of 8 per cent, with at least 50 per cent matching of the minimum rate from employers. This means that employees must contribute at least 8 per cent of their pensionable earnings, and employers must contribute at least 4 per cent of each employee’s pensionable earnings.
DB plans are typically indexed to inflation and draw from large investment pools capable of withstanding economic downturn. In this way, they are similar to the CPP, which the ORPP is meant to mirror. DC plans, on the other hand, are individually funded and more vulnerable to market volatility. They are generally considered to be a less effective means of ensuring secure retirement income. In allowing DC plans to be considered “comparable” to the ORPP, the Ontario government may ultimately undermine the plan’s core goals of ensuring adequate, predictable income in retirement.
As the provincial government developed the ORPP, they consulted numerous experts and organizations, including CARP. Throughout the development process, CARP has consistently advocated for an ORPP design that would match our call for a Universal Pension Plan (UPP), which in turn mirrors the well-established features of the CPP. We also advocated against allowing any exemptions to the ORPP. Allowing employers with “comparable” workplace pension plans to opt out of the ORPP may undermine the province’s stated goal of creating a large pension fund with the ability to remain actuarially sound, create adequate investment returns, and provide fund stability. If the ORPP does, in fact, mirror the CPP or UPP, no private pension plan will be truly comparable.
The ORPP should provide Ontarians a pool of funds large enough to protect against market volatility and to produce high investment returns. By providing target benefits to allow Ontarians to better plan for retirement, the ORPP can reduce poverty in old age and provide stable retirement income. CARP will continue to advocate for an ORPP that fulfills this vision.
August 27, 2015