Employers with Ontario employees face tough choices about their retirement plans now that the province has adopted legislation to establish a government-led defined benefit plan.

The Ontario Retirement Pension Plan Act (Strengthening Retirement Security for Ontarians), adopted June 2, would be mandatory for employers and employees without a comparable workplace defined benefit or defined contribution plan. Both parties would be required to contribute a maximum of 1.9% of the employee's annual earnings up to 90,000 Canadian dollars ($69,093).

Certain employers and employees are ineligible or exempt from mandatory participation, including those working for the federal government. Nonexempt employers, however, would have to show that their plans are comparable to avoid compulsory participation.

An existing defined benefit plan with an annual accrual rate of at least 0.5% based on an employee's earnings history would be considered comparable. A defined contribution plan would need a contribution rate of at least 8%, with employers contributing at least half, to be considered comparable.

“I think most defined benefit plans will meet that requirement,” said Lorraine Allard, a Toronto-based partner at McCarthy Tétrault L.L.P. “I think that a lot of defined contribution pension plans will not meet the (4% employer and 4% employee) requirement.”

A defined contribution plan rate of 3% is typical for employers, who could increase their rate to 4% and have employees contribute the rest. That, however, would require many employers to move to mandatory employee contributions because voluntary contributions would not count toward the 8%, experts said.

Another complicating factor is that many Canadian employers have retirement arrangements that are not registered pension plans so they would not be considered comparable. For example, employers that offer deferred profit sharing plans in which the employer makes all the contributions in combination with group registered retirement savings plans to which the employees contribute would have to decide whether to maintain or reduce them while contributing to the government plan or closing their plans to participate in the provincial plan.

However, employers moving to the provincial plan would need to consider employment law mandates, such as required notice periods or collective bargaining agreements, said Kim Ozubko, a Toronto-based partner at Miller Thomson L.L.P.

“There are a lot of issues employers will have to wrestle with over the next couple of years,” she said.

Although Ontario's Liberal government has committed to launching the pension plan, it could reverse course if it reaches agreement with the federal and other provincial governments on enhancing the Canada Pension Plan. Previous talks stalled largely due to conservative opposition, but last year's Liberal Party election victory could give new momentum to efforts to enhance the national pension plan — the preferred course for Ontario officials and stakeholders who do not want Ontario to move forward independently.

“It is important that the solution to the so-called pension crisis be national rather than regional,” said Michel St-Germain, Montreal-based vice chair of the Association of Canadian Pension Management's national policy committee. “I do not think it would be good for Canada, for the pension industry and for Canadians if each province started to have its own pension plan with different features. It would be very confusing and difficult to administer.”

However, enhancing the national plan would be lengthy and complicated since it would require two-thirds of Canadian provinces, including Quebec, representing two-thirds of the population, to agree.

And if the national plan is enhanced after the provincial plan is implemented, there would be challenges in reconciling the programs.

“Nobody knows if this (Ontario) plan will possibly exist for three years and then shut down,” said Natasha vandenHoven, a Toronto-based partner at Stikeman Elliott L.L.P.