ORPP creates new challenges for advisors

ORPP creates new challenges for advisors

ORPP creates new challenges for advisors Advisors might have to change their approach and consider the ORPP as yet another hurdle to overcome when it comes to financial planning for your client’s retirement, said Rona Birenbaum, a wealth advisor with Caring for Clients.

“This is going to be another element. Advisors need to educate their clients, will it be enough? This is also about preparing them for the inevitable hit it will put on their cash flow,” she said.

“This is going to reduce your capacity to save outside of these plans and that’s why advisors need to be aware of the fact that their clients are going to see less money on their regular pay. It could impact the plans they’ve set up.”

Her comments come following a report released by Morneau Shepell, a retirement and health consulting firm in Toronto, which cites Ontarians will not have enough to save for retirement after the new Ontario Pension Plan begins in 2017.

The report, titled Retirement Security for Everyone, stresses the need for government, unions and business citizens to work together on the Plan as roughly half of Ontarians won’t be sufficient come retirement due to the three existing federal plans (Canada Pension Plan, Old Age Security and the Guaranteed Income Supplement).

This could cause trouble for advisors as they attempt to steer their clients through the new requirements and undoubted implications it will have on the way some Ontarians save for retirement, according to a wealth advisor in Toronto.

“If a client starts participating in the plan, it’s going to save for retirement but it will reduce your net pay,” said Birenbaum. “If there were already saving, they may not have the capacity to do so once contributions kick in.

“It’s going to be important for advisors to be able to illustrate to the client what potential income will be derived from their contributions. It’s not a panacea; it won’t bail out individuals who underfunded on their retirement savings overall.”

When it’s launched, the Ontario Pension Plan will force anything employee not enrolled in a defined-benefit plan to contribute 1.9 per cent of their earnings on the $90,000 income and will also ensure that employers match that figure.

For approximately 5.5 million Ontarians making $50,000 or less, the combined income from the government plans will provide the suggested 60 per cent replacement income required to maintain one’s standards of living in retirement, according to the report and numbers from Statistics Canada.

The Ontario Pension Plan came to action after failed attempts by Premier Kathleen Wynne and her cabinet to encourage the federal government to enhance the Canada Pension Plan to include lower-income Canadians and Ontarians who aren’t saving for life after retirement.

“It aims to replace 15 per cent of an individual’s earnings for life. Contributions would be made on earnings up to $90,000 in 2014 dollars less the $3,500 minimum earnings threshold. This matches the CPP minimum threshold,” according to Mitzi Hunter, associate Finance Minister in Ontario.

“In addition to pooling longevity risk, the plan also allows individuals to share the “investment risk” of lower-than-expected returns by spreading that risk across a larger group of people diversified by age. The funds are locked-in meaning they can’t be accessed until retirement age preventing the withdrawal of funds for short-term financial pressures that usually pass.”

Plan came to action after failed attempts by Premier Kathleen Wynne and her cabinet to encourage the federal government to enhance the Canada Pension Plan to include lower-income Canadians and Ontarians who aren’t saving for life after retirement.

“It aims to replace 15 per cent of an individual’s earnings for life. Contributions would be made on earnings up to $90,000 in 2014 dollars less the $3,500 minimum earnings threshold. This matches the CPP minimum threshold,” according to Mitzi Hunter, associate Finance Minister in Ontario.

“In addition to pooling longevity risk, the plan also allows individuals to share the “investment risk” of lower-than-expected returns by spreading that risk across a larger group of people diversified by age. The funds are locked-in meaning they can’t be accessed until retirement age preventing the withdrawal of funds for short-term financial pressures that usually pass.”