June 13, 2014 Tom Murray
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Ontarians voted heavily last night in favour of the Liberals Kathleen Wynne and her Ontario Retirement Pension Plan (ORPP). The plan was included in the budget that toppled Wynne’s previous minority government and was made a central plank in the ensuing election campaign. Now that the Ontario Liberals have a majority in the provincial legislature, (looking like an 11-seat majority at time of writing), it is certain that the ORPP will be brought into existence very quickly.

There is quite a bit of confusion about the plan. When it was unveiled it was described by those who had worked on the design, as a targeted or ‘defined ambition’ plan, in that it the pay-out would be dependent not only upon contribution but also upon the performance of the underlying investments. The primary benefit was the province-wide pooling of such a large number of contributions, which should make the fund quite sizeable very quickly, thereby enabling it to run on a low-cost basis.

However, targeting is not necessarily what the voters will expect. The election brochure issued by the Ontario Liberals stated that 'The ORPP will pay a secure and predictable income in retirement'. To the majority of people, this sounds exactly the same as the Canadian Pension Plan (CPP) pay out, which will make it very difficult for whoever is running the ORPP to reduce pensions if the investments aren’t performing too well.

There are also some contradictions that have to be resolved. The election literature promises that the ORPP will be administered at arm’s length from the government and that it will seek to make the plan yield the best possible returns. At the same time, it promises that the money will be invested in Ontario and will therefore boost the provincial economy. I suspect that the investment board, when they try to meet the first criteria by investing money outside Ontario or refusing to put money into an Ontarian project, will find out that the provincial government has very long arms indeed. One can easily foresee the pressures that will come upon politicians to deliver infrastructure at the expense of poor returns to the fund – thereby pushing the problem away from their project and onto those running the pension scheme.

Ms Wynne is to be congratulated for taking the issue of retirement lifestyles seriously but it is a pity that she has taken such a narrow view of the future that she believes old style structures can build a solution for the modern world. The bottom line is that in the world of pensions there is always risk. The risk has to fall somewhere. In defined benefit schemes, it falls on the employer who has to stump up if the fund is insufficient to cover its liabilities. In defined contribution schemes, it is the retiree who carries the risk as, if the fund does not perform well then he or she will have less money to retire on.

However, with the ORPP, the risk must ultimately lie with the taxpayer. No matter how "arm's-length" the governing body is, if the investments do not reach the level of growth required then there is only two options – slash the liabilities i.e. the pensions that are to be paid (which sound completely unviable politically) or either openly or clandestinely pour taxpayers money into the fund to plug the gap. No prizes for guessing which option will ultimately be chosen.

Premier Wynne is viewing the pension issue purely in terms of the needs of the retirees – and not in terms of those who will ultimately have to pay for it. If there were currently excessive consumption in Ontario, perhaps there would be a good case for taking some of that excess and deferring the spending of it until the future. But when the provincial economy is as stagnant as Ontario’s is, even that argument doesn’t hold water.

‘The devil is in the detail’ is an old cliché but it has merit. Perhaps when the bill is published, we will see an amelioration of some of these issues and the overpromise of the election brochures will be rolled back into something that is more realistic. Otherwise the danger is that the winners from this pension plan will be far outweighed by the losers.

Tom Murray

Twitter: @TomMurrayDublin or @Exaxe

Google Plus: TomMurray

What do you think? Let us know in the comments below!

Photo Credit: Wynne pic by Uiaeli

canadian pension plan, ORPP, Pensions, Canada, Liberals, Kathleen Wynne, CPP, Life and Pensions, Ontario Retirement Pension Plan, news, Ontario Liberals

Tom Murray

Tom is Head of Product Strategy at Exaxe with primary responsibility of overseeing product direction. Tom has extensive experience of managing web based insurance software from conceptual design through to commercial release and beyond. Tom has been leading the development of the Exaxe Internet insurance architecture since August 1999.

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