THE ONTARIO RETIREMENT PENSION PLAN:

THE ORPP At first, the provinces seemed content BOON OR to let the newly minted DC programs IS GOOD IN that replaced DB plans do their intended job of providing workers with a decent THEORY, BAD pension in retirement. Unfortunately, the same actuarial assumptions that failed to IN PRACTICE properly fund DB plans have failed to generate sufficient retirement income for By DC members. Joe Nunes Recognizing that individuals and their BUST? employers are not saving enough for ver the years, a growing chorus retirement, Ontario has been lobbying of voices has been pleading with the federal government to expand the THE ORPP IS A the greatest number of Ontarians Othe provinces to lighten up on Canada Pension Plan (CPP). Unable to is the ORPP—as long as it’s DB the overburden of pension regulation and convince the feds that expanding the GOOD MOVE and mandatory for those without a give employers a fighting chance to CPP was a good idea, some politicians comparable employer plan. provide a DB promise. Unfortunately, the tried to play a game of chicken: “If you By Although we know the ORPP is province didn’t listen—which hasn’t been don’t work with us to expand the CPP, Hugh O’Reilly coming, many questions remain. great for many DB plan members, then we will build our own mini-CPP.” Chief among them is the issue of because the punitive regulatory system Unfortunately for Ontario taxpayers and t one time, funding your retirement comparability. Should an employer has put the majority of private sector businesses, the province lost, and it’s now was straightforward. Most offering any type or level of plan be DB plans out of business. very visibly committed to the Ontario Canadians could count on a exempt? My view is, only workplaces Retirement Pension Plan (ORPP). decent standard of living in retirement offering a DB plan or participating in a I have trouble understanding why there from the three pillars of our retirement multi-employer pension plan should be isn’t more public outrage about the ORPP. income system: the Canada Pension Plan considered comparable, since the point The only thing I can suggest is, people are (CPP), old age security and Guaranteed of the ORPP is to enhance Ontarians’ too busy to really dig into something that Income Supplement; employer-sponsored retirement income security. sounds simple (more income when I pension plans; and their own private Some companies do offer generous retire!) but is, in fact, very complicated. savings. Most employer plans were DB, DC plans—but even if they allow While I appreciate what the Ontario which guaranteed a consistent stream of participants to save large sums of money, government is trying to do, I have a income for as long as a retiree lived. these plans can’t be considered number of concerns with its approach. Today, those pillars have eroded and comparable to DB. DC plan members The impact of financial losses or The current proposal requires cracks are beginning to show. Canadians can’t pool timing and longevity risks. inadequate savings continues to contributions from low-income workers. have had to endure shocks such as the And, as 2008 showed, Canadians’ reverberate through our society. Sun Life But with old age security (OAS), CPP and 2008 financial crisis, prolonged low retirement savings can be vulnerable to a Financial’s 2015 Canadian Unretirement guaranteed income programs, it’s unlikely interest rates, the widespread conversion market event. People lost years of Index Report finds almost 60% of these workers will be in dire circumstances from DB to DC in the private sector and personal savings overnight. For those who respondents expect to continue working at retirement relative to what they the increasing weight of greater need were close to retirement age, there simply in some capacity after age 65, with 32% experienced in their working years. across the board. Many Canadians are wasn’t enough time to recover and earn expecting to work full time—more than The ORPP also requires full funding, worried about the future—and the likely back what they’d lost, through either those who expect to be fully retired, for which will mean either a 40-year-plus outcome that their standard of living in employment income or investment. the first time in the survey’s history. And phase-in of full benefits or an acceleration retirement will be lower than what their DC plan members who make it to of those who intend to work after age 65, toward full benefits where older parents enjoyed. retirement with their nest egg intact are 59% said they’d be working because workers benefit at the expense of future The time is right to shore up our then left with limited, often expensive they’d need to. generations. The children and retirement system, and the Ontario options to annuitize their savings or If Ontario’s workers are so well served grandchildren of the baby boomers Retirement Pension Plan (ORPP) is a the potential that they may outlive their by existing savings vehicles and employer- already face a less prosperous future and, step in the right direction. With no clear money. The key advantage of the sponsored plans, why do they have so in my opinion, shouldn’t be burdened direction federally to expand the CPP, DB model is, it provides a predictable little confidence they will be able to fully through additional intergenerational and the pooled registered pension plan stream of income for the rest of a retiree’s support themselves with those savings transfers of wealth. I worry it will be too remaining a voluntary option, the best life, independent of market conditions on in retirement? tempting for the government to promise

path to improving retirement security for an individual’s retirement date. This is where the ORPP comes in. IMAGES TURNBULL/GETTY benefits today and push the costs to

38 / July/August 2015 • BenefitsCanada BenefitsCanada• July/August 2015 / 39 “KICKING THE RETIREMENT CAN DOWN THE ROAD TO ANOTHER GENERATION ISN’T AN OPTION. WITH THE ORPP, WE’RE TAKING BOLD “I WORRY IT WILL BE TOO TEMPTING FOR THE GOVERNMENT TO STEPS INTO UNCHARTED TERRITORY, BUT I’M CONFIDENT THEY’RE PROMISE BENEFITS TODAY AND PUSH THE COSTS TO TOMORROW— THE RIGHT STEPS.” ALL DISGUISED IN ACTUARIAL ASSUMPTIONS THAT WILL TAKE DECADES TO PROVE RIGHT OR WRONG”

Do we really want saving for pillar in our retirement system. Ensuring pension plans. Ontario’s large DB jointly tomorrow—all disguised in actuarial alone, there’s no opportunity to leverage been heavy lobbying by this group. And retirement to be like playing a dangerous retirees have incomes that allow them to sponsored public sector plans are global assumptions that will take decades to the infrastructure the federal government if they’re exempt, it will mean even fewer lottery in which you hope timing will participate meaningfully in the economy is leaders in what they do, both as investors prove right or wrong. has put in place for the CPP—an participants sharing the cost of this be on your side? Or do we want a future good for everyone. and as pension administrators. Pension Note also that the current proposal infrastructure that allows for collecting boondoggle. where most people can depend on a The ORPP could be implemented in a plans around the world look to our model establishes a “pension plan” in and investing contributions as well as The reality that few people want to face secure basic level of income in very cost-effective way for Ontario for an example of how to get pensions Ontario—not a social program. As a determining and paying benefits. The is, in a low interest rate environment, it’s retirement—one they’ve helped to fund? taxpayers. For administration, a highly right, and we can bring that expertise to result, there is no mechanism to access administrative operation of the CPP is very expensive for employees and their On its own, the ORPP won’t provide effective and tested system already exists the ORPP for the benefit of everyone the favourable tax treatment of the CPP large and complex, and it will be difficult employers to fund an adequate retirement enough income to fund an individual’s for the CPP—a system Ontarians have in Ontario. without co-ordinating this program for Ontario to replicate these services. It income. In this context, the fact that retirement, nor does it intend to. What it already paid for. My view is that Ontario Kicking the retirement can down the with other tax-assisted programs takes $600 million a year to run the Canadians are undersaving for retirement will do is increase the amount of secure should, for a fee, be given access to road to another generation isn’t an option. defined under Canada’s Income Tax Act CPP—in fact, one Fraser Institute study is no surprise. income retired Ontarians have overall. It and allowed to use the existing CPP With the ORPP, we’re taking bold steps (ITA). This means the ORPP will need suggests the real number might be more I’m skeptical the ORPP will work— shores up one pillar and takes pressure off administration platform. into uncharted territory, but I’m confident to be integrated with the pension than three times that amount. even if Ontario includes every worker and the other two. I also believe the ORPP doesn’t need they’re the right steps. The ORPP will adjustment system for determining Finally, an Ontario-only solution with works with the federal government to get Businesses are concerned about to have a full bricks-and-mortar structure. improve retirement income security and worker eligibility for other programs exemptions for certain employers and favourable tax treatment as well as a increased costs, but we need to ask what There are ways to design it to be more give a broader universe of Ontarians the such as RRSPs, registered pension plans their workers means the program will not beneficial arrangement for the program’s the cost will be to future generations—and virtual, as it draws upon the expertise means and confidence to retire with and profit-sharing plans. Essentially, for have as much critical mass as an administration and investment. But if to our economy—if we sit back, do already existing in some Ontario plans. dignity. These are worthy goals—and many workers who have reached the expanded CPP. Broad participation is the ORPP is to have any chance of nothing and hope for the best. It will be Developing a full internal investment worth the cost and effort it will take to maximum savings threshold under the very important as a way to spread the working, these are the necessary steps the unfortunate and short-sighted if employers capability is not necessary for the ORPP make them reality. ITA, it won’t generate any new savings. governance and administrative costs over government needs to take. choose to scale back or eliminate their Administration Corp. This cost can be Savers are only changing where those as many members and dollars as possible. Hugh O’Reilly is president and CEO of OPTrust. Joe Nunes is president of Actuarial Solutions existing plans when the ORPP is in place: avoided by using the investment expertise savings areRxD_6291_BenefitsCanadaCampaign_ORANGE_PRESS.pdf invested. Currently, DC 1 plan 2015-03-18 sponsors are 9:50 not AM there’s a reason we have more than one of some of Ontario’s jointly sponsored [email protected] Because Ontario is travelling this road targeted for exemption, but there has Inc. [email protected]

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