Friday, May 2, 2014

Ontario Set to Launch the ORPP

Rob Ferguson of the Toronto Star reports, Ontario budget reveals details on new provincial pension plan:
Ontarians who lack company pension plans will start paying up to 1.9 per cent of their income — matched by employers — into a provincial pension plan in 2017.

Finance Minister Charles Sousa made the promise in his Thursday budget, saying an Ontario Retirement Pension Plan would provide a maximum of $25,275 annually to future retirees who are young workers now.

But that, of course, depends on whether Premier Kathleen Wynne’s minority Liberal government survives a budget vote with a pension idea borrowed from the NDP and opposed by the Progressive Conservatives and the Canadian Federation of Independent Business as too costly and a potential job killer.

Sousa said the province had no choice given the federal government’s rejection of a push to enhance the Canada Pension Plan and warnings that too many people will face hard times after they stop working.

“We have a duty and must do more to ensure that people have adequate savings in their retirement years,” Sousa told the legislature in his budget speech.

His plan is a bet that workers won’t mind paying upfront now for more income later in life.

Progressive Conservative Leader Tim Hudak warned the cost of premiums could cost 100,000 jobs in the first 10 years as the premiums paid by employers add to their costs at a time when too many Ontarians are unemployed.

“Before you can have retirement security you need job security,” he told reporters during a news conference in the budget lockup. “It’s pretty darn hard to save for retirement when you can’t pay your hydro.”

NDP Leader Andrea Horwath did not show up for her traditional press conference after Hudak’s.

The mandatory Ontario plan — details of which remain sketchy — would supplement the Canada Pension Plan, with a goal of replacing at least 15 per cent of pre-retirement income.

It’s aimed at the two-thirds of Ontarians who do not have jobs with pension plans.

For a worker earning $45,000 annually, the yearly contribution would be $788 for a maximum annual payout of $6,410. That would rise to $1,263 annually and a maximum annual payout of $9,970 for someone making $70,000. For a $90,000 earner, annual premiums would be $1,643 for a maximum annual payout of $25,275.

Those annual contributions would be matched by employers, raising an estimated $3.5 billion a year for a pension pool. Lower-income workers would be exempt, but a threshold — such as the $3,500 set by the CPP — has not been decided.

Workers in company pension plans won’t be allowed to join unless the government determines the benefits provided aren’t adequate — a level that has not yet been set.

“Those already participating in a comparable workplace pension plan would not be required to enrol,” Sousa said.

Finance ministry officials said older workers will get smaller payouts that reflect what they have paid into the plan, meaning the biggest benefit of the scheme would be to Ontarians who have decades of working years ahead of them.

Legislation to create the Ontario pension plan is not part of the budget bill and would be introduced later this year.

A number of details remain to be worked out, such as an age of eligibility for payouts and which body would administer the plan.

Finance ministry officials said the government is considering a merger of smaller pension plans for public sector workers and will consider consolidating them with the Ontario Retirement Pension Plan to keep costs down and provide a broader scale for investments.

The aim is to have management expenses far below the level of most mutual funds, whose costs have long been blamed for eating dramatically into returns for investors.

Sousa said he remains hopeful the federal government will change its mind on enhancing the CPP and, if that happens, the Ontario plan could be integrated with it.

Failing that, the government is looking at ways other provinces could join the plan in future.
Janet McFarland of the Globe and Mail reports, Ontario’s proposed pension plan excludes half of workers:
A new made-in-Ontario pension plan will expand retirement incomes for three million workers in the province, but exclude millions of others who already have workplace plans or are in federally regulated industries such as banking.

Ontario’s Liberal government unveiled its Ontario Retirement Pension Plan (ORPP) in Thursday’s provincial budget, saying it will act as a top-up to the Canada Pension Plan to improve retirement incomes for most workers. The initiative will be introduced in conjunction with a new voluntary savings program known as the Pooled Registered Pension Plan as a further boost to Ontario residents’ options to save for retirement.

Unlike the CPP, not all workers will be eligible for the ORPP, the government said.

It will cover about half of Ontario’s six-million-person work force, excluding the self-employed, all workers whose companies have workplace pension plans, and those in federally regulated sectors like banking, transportation and telecommunications.

Ontario Finance Minister Charles Sousa said the ORPP will help the people who face the greatest income reduction in retirement.

“This will target those most at risk of under-saving, particularly middle-income workers,” Mr. Sousa told reporters.

Conservative Leader Tim Hudak said the ORPP will be expensive for employers because it will create a new payroll tax to cover their share of contributions, and will do nothing to help Ontarians get better jobs in the first place.

“It’s pretty darn hard to save up for retirement when you can’t pay your hydro [bill],” he said.

The province decided to act alone in creating the new top-up program for the CPP after the federal government said last year that such a plan would be too detrimental to the economy.

Ontario has invited other provinces to participate, and Prince Edward Island and Manitoba have joined the advisory body designing the program. Alberta, British Columbia, Newfoundland, Nunavut and Northwest Territories are in talks with Ontario about the proposal.

The government plans to launch the ORPP in 2017 and phase it in over two years, the government said.

Workers would contribute 1.9 per cent of their incomes, which will be matched by employers, up to a $90,000 income maximum. It aims to pay out about 15 per cent of income before retirement.

Jim Keohane, who heads the $52-billion Healthcare of Ontario Pension Plan, said the ORPP is a “step in the right direction” for pension reform in Canada because it is not just a voluntary savings plan but will provide a guaranteed benefit.

“When you know how much pension income you are going to have – when the amount is defined – you can spend with more confidence,” he said. “You know you are getting a cheque each month, a set amount.”

Also on Thursday, the government said it plans to create a new pension plan manager for contributions made to the ORPP, which are expected to top $3.5-billion annually. The new pension manager could also handle funds for other public sector entities and pension plans.

The Workplace Safety and Insurance Board and the Ontario Pension Board, which together manage $40-billion in assets, have agreed to participate.

The new pooled registered savings plan that will supplement the ORPP will be voluntary for companies, and employees, although automatically enrolled, may opt out. Participants’ payroll deductions would be managed by private-sector investment firms.

Lawyer Mitch Frazer, who advises companies on their pension plans, said the new programs will clearly improve retirement savings, but he has not sensed a large demand from employers for a PRPP program.

“I think maybe some will pick it up over time if it is seen as a low-cost benefit they can offer to employees,” he said.
A few thoughts on Ontario's new supplemental pension plan. First, it's not enhanced CPP, and thus falls short of covering all workers, which is what Canada should aim for. Second, never mind what Tim Hudak and the CFIB claim, raising pension premiums to bolster our retirement system isn't detrimental to the economy. This is a silly argument akin to the one that raising the minimum wage isn't good for the economy. When more people have more money in their pocket to spend, the net effect on economic activity and public debt is positive.

In fact, the benefits of defined-benefit pensions are grossly under-appreciated. People will bitch that they will be forced to save more, employers will bitch that they have to match contributions but I say "tough luck, suck it up" and realize that over the long-term this is what's in their best interests and what's best for the country and long-term debt reduction (demographic shift means more people spending in their old age, more collected in sales tax revenues, better for debt reduction).

There are other benefits worth considering. Mark Firman, pension and benefits lawyer at McCarthy, tweeted this: "For employees, ORPP pros: indexed to inflation (could be very valuable); pooling longevity/investment risk; portable across (Ont.) employers."

CARP put out this press release welcoming the new plan:
CARP members will welcome the leadership of Ontario in proposing a province wide pension plan to allow Ontarians to better save for their retirement. CARP calls on the other provinces to provide similar plans to provide access for all Canadians

In Budget 2014, Ontario announced that it will establish a province wide pension plan to allow Ontarians to supplement their retirement savings. The Ontario Retirement Pension Plan will be designed to provide a predictable lifetime pension benefit that will replace an additional 15% of pre-retirement income and extend coverage up to $90,000 of salary. Together with the CPP, the ORPP is designed to replace from 30% to 40% of pre-retirement income. The ORPP will be modeled on the CPP with mandatory employer and employee contributions using a payroll deduction mechanism and managed by an independent body with professional investment expertise.

“The time is long past for debating whether we need a supplementary pension plan, so it is welcome news that Ontario and at least two other provinces will start the process of constructing a national pension scheme to help Canadians save for a decent retirement. The design of the new Ontario Plan mirrors the successful CPP and several provincial plans in providing the best chance to save for a predictable lifetime pension.

“CARP members have been calling for just such a plan – CARP’s Universal Pension Plan – for years because they know exactly what it takes to get by in retirement and a decent pension is a priority. The proposed pension plan will benefit their children and grandchildren, not themselves directly, but it is a ballot question for them.” said Susan Eng, VP, Advocacy for CARP

Two-thirds of working Canadians do not have a workplace pension plan and few other options to adequately save for their retirement. A significant proportion of middle income Canadians are not saving enough to maintain their standard of living in retirement and need to start saving immediately– a caution reinforced by the former Governor of the Bank of Canada, David Dodge in his recent paper Macroeconomic Aspects of Retirement Savings.

The federal, provincial and territorial finance ministers failed to get federal agreement to a modest increase to the CPP at their December 2014 meeting. That would have been a welcome step in the right direction to providing access to a national supplementary pension plan.

Any new pension scheme should be available to all Canadian workers regardless of where they live and pension benefits should be portable among workplaces across Canada. This may be achievable if all provinces follow the lead of Ontario, Manitoba and Prince Edward Island in enacting parallel legislation with reciprocal provisions.

CARP has called for a Universal Pension Plan, modelled on the CPP, but not necessarily part of the CPP, with key features to provide for an adequate retirement income – including payroll deductions, mandatory enrolment and contributions, professional management and a governance board independent of government and the employers, on which employees’ interests are represented, and designed to provide an adequate and predictable retirement benefit.

The Pooled Registered Pension Plans (PRPPs) proposed by the federal government acknowledge that Canadians are not saving enough but have been criticized by pension experts and CARP members as not being up to the task of providing an adequate pension. In any event, provincial enabling legislation is not yet in place across Canada.
Finally, the Healthcare of Ontario Pension Plan (HOOPP) put out a press release saying it is encouraged by Ontario's plan for more retirement security:
The Healthcare of Ontario Pension Plan (HOOPP) is encouraged by today’s announcement, in the Ontario budget, of a new pension solution for Ontarians.

HOOPP President & CEO Jim Keohane says that the proposed Ontario Retirement Pension Plan “is a step in the right direction” for what he calls the real issue of pension reform – Ontarians who lack a workplace pension. He applauds the decision to make the plan a defined benefit (DB) program, modelled on the Canada Pension Plan.

“At a time when we have an aging population, one that will grow more dependent on government services like healthcare, it is alarming that more than 60 per cent of the population has no workplace pension coverage,” says Keohane, who is a member of Ontario’s Technical Advisory Group on Retirement Security.

Keohane says “the vast majority of people are better served by a structure such as a defined benefit (DB) pension plan.”

He says he is pleased that the new Ontario plan will use the DB model, which is “the best and most efficient way to deliver retirement security.” The made-in-Ontario plan will feature mandatory contributions, investment pooling, and expert professional management, and will be run as a not-for-profit entity independent of the government.

HOOPP, with more than $51.6 billion in assets, is one of Canada’s largest DB pension plans and is currently fully funded with a growing surplus.

Keohane says increased retirement security is beneficial to the economy. “When you know how much pension income you are going to have – when the amount is defined – you can spend with more confidence,” he says. “You know you are getting a cheque each month, a set amount.”

He cites a recent study of defined benefit (DB) pensioners by the Boston Consulting Group that showed Ontario DB pensioners spend about $27 billion a year on goods and services, paying $3 billion in income taxes. A further $3 billion of their spending goes to sales and property taxes.

 “Retirement security means less dependence on taxpayer-funded income support programs,” adds Keohane. HOOPP has been speaking about the value DB plans play in delivering that security. To learn more, follow HOOPP on Twitter – the handle is @HOOPPDB.
Below, a nice weekend story from Bloomberg. Marsha Tate set a goal of owning Berkshire Hathaway class A stock before she was 40. When she was 39 1/2 and worried that she might not reach her goal, she wrote Warren Buffett a letter asking to attend his annual shareholder's meeting despite not owning any shares. To her surprise, she received a letter from Warren Buffett and a ticket to the meeting. It was a letter that would change her life forever.