I have held off writing about what employers should be doing in respect of the Ontario Retirement Pension Plan for two reasons: First, leading up to last fall’s Federal Election, I really thought the whole thing might just go away. Second, I was waiting for Ontario to clearly spell out how the ORPP will work; contributions and benefits, as well as payroll administration. I am stunned that at this stage employers don’t even know whether they are sending the money to CRA or if they are sending it to Morneau Shepell. How is an employer supposed to make an intelligent decision about implementing a new plan, enhancing an existing plan, cancelling an existing plan, or making no changes? If you think this question is easy, remember, employers need to think about not only the immediate impact of payroll, but administrative costs and also the long-term benefit to workers that each alternative will offer. Add to the mix that national employers will have an added layer of complexity that employers with workers only in Ontario won’t face.
But the time has come for us to start making educated guesses. Although the commentary I am providing here wouldn’t pass the standard of analysis required by the actuarial profession, we need to start somewhere to get the discussion going. So here are some general thoughts about what employers should be moving towards. Note, I am going to focus on Ontario employers initially and then comment on national employers at the end.
The starting point for the discussion is ‘what is an employer doing now?’ I am going to break it into three broad categories. Nothing, Something, and Comparable (once again, these are labels so don’t get too excited if you think they aren’t quite right). You should note that the ORPP plans to exclude earnings below $3,500 and to have a Comparable plan you will need to have immediate eligibility and vesting. I won’t focus on these details in the discussion below but these factors affect the math that needs to be done to compare the cost of joining the ORPP versus the cost of choosing an alternative road.
Nothing: If an employer currently offers no pension or savings arrangement of any sort, the answer is relatively easy. You will join the ORPP and payroll cost will go up slightly less than 1.9% depending on how much payroll you have over $90,000 (or whatever cap Ontario finally chooses). You get a new administrative hassle and you probably should be a member of the Canadian Federation of Independent Business, which sees this largely as a new tax. I would like to think that there might be a handful of ‘enlightened’ employers in this group that see this as an opportunity to establish a meaningful retirement plan and phase it in over several years. At the same time, I worry that the simple calculation that 1.9% is less than 4% (what will be required from employers to setup a ‘comparable plan’) will drive these employers to the lowest cost solution rather than the best long-term solution.
Something: This group is interesting. If the something an employer is doing already is costing 2.1% of payroll, then moving up to an employer contribution of 4% is probably going to be easier than signing on to a completely different program. What if an employer’s something is 1%, 1.5%, or 2% of payroll? The simple math says take the ORPP rather than improving the existing plan. With that said, I really believe that there is a threshold where an employer can spend slightly more than the combined cost of their existing program and the cost of the ORPP and finish with a much better result for the employees and avoid a big administrative hassle. It will be up to each employer to talk through that choice. Of course, if the ‘something’ is a Group RRSP, then not only does the employer need to step up to higher contributions, they also need to convert to a Registered Pension Plan to earn the ‘comparable badge’. The thing that scares me most about this group is the idea that some of these employers might cancel their ‘something’ plan and redirect the funds to the ORPP. A sponsor with a 2% DC plan might actually save money by closing it and relying on the ORPP. I think the employment lawyers will say that cancelling the existing plan is a change in the terms of employment – but I don’t know that issue is enough cause for concern to stop an employer from cancelling a plan, especially if decisions are made early enough to give employees lots of notice. The road to salvaging those ‘half-decent’ plans will be to help employers step up to a stronger commitment to retirement income. I am not naïve to think employers will just dig into their pockets and send new money to employees – there are going to need to be tradeoffs in other parts of the ‘total rewards’ package that employers are offering. But I think using the ORPP as the fuel for changing the mix of compensation is the best answer for an employer to retain control over its compensation plans and to avoid joining into what I still worry will be a badly designed government program that might not deliver the expected benefits to retirees because of the inherent administrative costs that I am unconvinced are being properly budgeted.
Comparable: The bottom line for this group is that there is no action to take as Ontario has decided if you meet the threshold of a ‘comparable plan’ (other than dealing with immediate eligibility and vesting). Of course most of our civil servants in Ontario are in plans with benefit levels that are easily considered comparable. So for them there will be no ORPP. One of my arguments against exclusions altogether is that we are excluding millions of workers and so as a taxpayer I get to pay to administer the Teacher’s and Public Service plans AND now get to pay to administer the ORPP – if you decide that taxpayers will not pay a nickel then you are going to spread the cost of administration over half as many participants as you could have if everyone was in. This is the cost-efficient strength of the CPP which still isn’t as inexpensive as many believe. But also in the Comparable category are the employers in the private sector that have DB or DC plans that already have generous enough benefits to be exempt from the ORPP. Granted, these somewhat less rich private sector plans can be half of the value of the gold-plated government sponsored plans, but for those in the Nothing and Something bucket, those plans look pretty good. Again, employers that are using a vehicle other than a Registered Pension Plan will need to convert.
The combinations here are endless – employers mostly in Ontario with a handful of employees scattered across the country all the way to national organizations with a relatively even distribution of employees in several provinces. For the national employers in the Nothing bucket, doing nothing new and just accepting the ORPP as a new payroll tax in Ontario is probably the easiest answer. For those in the Comparable bucket the best news is that not only do you avoid the ORPP but you probably are set to avoid any similar plan introduced in another province.
The hardest place to be is going to be those employers in the Something bucket nationally. Do you improve the plan for Ontario employees only or for all employees across the country? Do Ontario employees get the 1.9% ORPP contribution and keep the wages and benefits they had before the ORPP existed or do they need to give something else up (maybe wages – more likely health benefits) to even out the costs? I can’t offer a template answer or a tidy mathematical formula to answer these questions – each employer is going to work down the list of choices and consider the cost-benefit of each.
Over the years a number of golf instructors have told me that the transition in my golf swing is too quick. Honestly I am working on it – I am just a slow learner. But if you think that my golf swing is too fast wait until you see what is about to happen to the landscape for registered pension plans. Although Ontario has created ‘waves’ for employers to get organized, they are going to find each successive wave has significantly greater numbers of employers and for those in the ‘something’ bucket that decide to move away from the ORPP and towards a comparable plan, there is going to be an avalanche of work bearing down on Canada’s current pension industry – plan registrations, amendments, payroll changes, etc. Are Ceridian, ADP, and the like even ready for what has to be done for those that choose the ORPP route? How could they be since no one knows what that route looks like?
I will say it again – Ontario has made a mess of this. I didn’t win the fight to see the ORPP cancelled so I will continue on the sidelines calling out Ontario on every misstep they make along the way.