Introduction

The Canadian Bankers Association (CBA) is pleased to provide comments on the Ontario government’s consultation document titled Ontario Retirement Pension Plan – Key Design Questions which was issued for public comment in December 2014.

The CBA works on behalf of 60 domestic banks, foreign bank subsidiaries and foreign bank branches operating in Canada and their 280,000 employees. The CBA advocates for effective public policies that contribute to a sound, successful banking system that benefits Canadians and Canada's economy. The Association also promotes financial literacy to help Canadians make informed financial decisions and works with banks and law enforcement to help protect customers against financial crime and promote fraud awareness.

The CBA has long been supportive of the goal of promoting adequate retirement income security for Canadians and has engaged in research and advocacy over the years to support this goal. The CBA has written several papers on this subject such as Modernizing Canada’s Retirement Savings System (2009) and Enhancing Canadians’ Savings Options: Strengthening the Third Pillar in Canada (2010). The CBA has also supported the creation of the Pooled Registered Pension Plan (PRPP) as a means of appropriately targeting an expansion of the options available to Canadians to save for retirement.

Banks provide Canadian households and businesses with products, services and advice to assist them with saving and investing all throughout their lifecycle − from saving for education and purchasing homes to starting businesses and planning for retirement. Banks are trusted advisors and stewards of Canadians’ wealth, relying on strong relationships to help them make important financial decisions tailored to the personalized needs of each client.

The banking industry understands that its workforce has an important role to play in offering advice and information to Canadians. Banks are widely recognized leaders in Canada in providing their employees with a competitive and comprehensive package of compensation and benefit programs, including generous defined benefit plans and defined contribution pension plans. The marketplace for employees is highly competitive and banks must ensure that these programs are attractive in order to recruit and retain this talent. While banks’ employee retirement strategies vary among institutions and, in some cases, among subsidiaries within each bank financial group, the objective is always the same – to ensure that employees are given resources to help adequately finance their retirement.

It is within this context that we are concerned about the proposal by the Ontario Government to exclude defined contribution plans (DC plans) from the definition of “comparable plans”. While pension plans sponsored by federally regulated industries such as banks would be exempt from the ORPP, banks’ investment, trust, wealth management, and insurance subsidiaries that are provincially regulated would be subject to the ORPP proposals. Furthermore, the ORPP will have an impact on other types of retirement savings vehicles such as group and individual registered retirement savings plans (RRSP), deferred profit sharing plans (DPSP), and the pooled registered savings plans (PRPP) – a savings vehicle for which the provincial government recently introduced legislation.

Defined Contribution Plans

There is concern that a certain segment of Canadians are not saving enough for retirement, particularly those middle-income earners without a workplace pension plan. In attempting to target the segment of the population that do not participate in workplace pension plans, the ORPP has also captured workers of all incomes that are participating in DC plans. Employees that are provided with a comprehensive package of compensation and benefit programs, including generous DC plans, are not the identified segment of the population that is in need of augmented retirement savings.

The government’s current proposal to exclude DC plans from the definition of “comparable plan” appears to rest on the assumption that defined benefit pension plans (DB plans) and target benefit multi-employer pension plans are exclusively able to assist employees in adequately preparing to meet their retirement income needs. We do not believe this is the case. Well-designed DC plans can appropriately assist employees in meeting their retirement needs. Such well-designed DC plans would include a combination of features such as: a minimum employer contribution rate; an employer matching program that incents employees to save; targeted replacement rates; an advisory and educational component; an appropriate investment menu accounting for longevity and investment risks; cost-effective administration; estate planning flexibility (including access to acquire an annuity); among other features.

DC plans can provide opportunities for individualized investor choice, education, customized product features and advice. Not only can these opportunities be tailored to educate the plan member on features of the DC plan itself, they can also educate the member about how the DC plan fits into that individual’s overall retirement strategy. This educational and advisory component of DC plans works collaboratively with the broader financial literacy objective that is central to ensuring that Canadians are adequately saving for their retirement. Access to education, customized products and advice can help individuals plan for the long-term, set realistic and reasonable goals for post-retirement income, balance risk and return in an efficient manner and consider taxes, liquidity requirements and investment time horizons, helping the employee tailor their respective retirement plans to their current circumstances and needs.

There are certain categories of workers, such as young workers, who may have financial priorities that are more important to them in the near-term than retirement savings. Such workers may prefer to allocate more disposable income towards education payments or savings for a first home. With a DC plan, such employees would receive some retirement benefit in the form of contributions from their employer without having to contribute their own savings. In contrast, mandatory contributions to the ORPP could take away from the savings that some employees have allocated to what they view as their near-term financial priorities.

Policymakers will also need to consider the impact of ORPP contributions on total contributions and the registered plan deduction limit of participants enrolled in DC plans, as well as other registered retirement savings vehicles. In some cases, employees might choose to reduce other retirement savings in light of their ORPP participation. In other cases, employees who are already at their permissible tax-sheltered limit, will be forced to reduce their contributions and employers would be forced to adjust their plans. If a critical mass of employees did this, employers would be compelled to reduce contributions or other features, or eliminate these pension plans altogether to account for the ORPP.

The government’s consultation paper asks about different options to “make DC plans comparable” to the ORPP. While the banking industry believes that the well-designed DC plans that are offered to their employees should be considered as comparable to the ORPP, we nonetheless offer the following commentary in response to specific questions posed in the consultation paper:

  • Requiring plan members to convert a portion of savings in a DC plan to an annuity upon retirement would considerably limit the flexibility of plan members to make choices about their retirement savings based on their personal circumstances, the prevailing interest rate environment, estate planning needs and other pertinent factors. Rather, DC plan sponsors can provide their plan members with the option to enroll in an annuity at various points over the course of a member’s participation in the plan. This would enable the DC plan member to take into account their own particular circumstances, and the economic environment. In establishing a minimum employee/employer contribution rate for DC plans, all the features of pension plans should be considered including those that have been highlighted above.
  • It is proposed that ORPP benefits would be indexed to inflation and there is a presumption that this would make DC plans non-comparable with the ORPP. It is important to note that inflation indexation is not a feature of many private sector DB plans. Furthermore, a well-designed DC plan with a wellcalibrated minimum employee/employer contribution rate could deliver retirement benefits just as generous as a DB plan, even one that provides inflation indexation. Like all other features, inflation indexation is costly to provide and means that participants in an indexed plan must pay higher premiums during their working lives or be guaranteed a lower basic benefit when they retire. Consequently, well-designed DC plans should be viewed as comparable for the purposes of the ORPP.

Ultimately, DC plans offered by some bank subsidiaries are more generous than the ORPP, which is being designed to top-up individuals with insufficient savings for retirement. If the provincial government proceeds with excluding DC plans from the “comparable plan” definition, it risks forcing employers of well-designed DC plans to migrate their employees over to the ORPP.

Pooled Registered Pension Plans and Other Retirement Savings Options

Careful consideration needs to be given to the impact of the ORPP on other retirement savings vehicles such as individual and group RRSPs and DPSPs. The CBA believes that it is essential to ensure that all Ontarians will continue to have access to the diversity of retirement savings options currently available to help prepare for their retirement.

The government’s proposed package of pension reforms includes two new initiatives – the creation of the ORPP and the creation of PRPPs. The PRPP is aimed specifically at firms, mostly small and medium-sized enterprises (SMEs), and the self-employed who do not have an employer pension plan. It is a targeted, administratively simple, low-cost product that offers a new opportunity for the self-employed or SMEs to participate in a structured pension plan. This is a product that the Government of Ontario clearly supports with the introduction of Bill 57, the Pooled Registered Pension Plans Act in 2014. We believe that to achieve the government’s objective of having both approaches available to Ontario residents, it is important that the two work in a complementary fashion. This can only be achieved if well-designed PRPPs are considered as a comparable plan.

Conclusion

As discussed above, we believe that the overly restrictive definition of “comparable plan” could result in negative consequences for Ontarians and thus limit the benefits that the government seeks to achieve. There are a wide variety of DC plans across workplaces and a well-designed DC plan can meet the goal of retirement income security that the government is striving for with the introduction of the ORPP. We are also concerned about the downstream impact of “comparable plan” definition on other retirement savings options. As noted above, the banking industry has been strongly supportive of the PRPP and we believe that well-designed PRPPs should be considered comparable.