Sept. 7, 2016 – It was a surprise to many when Canada’s federal and provincial finance ministers came to an agreement in principle on enhancements to the Canada Pension Plan (CPP), at their June meeting in Vancouver.
Much was at stake, particularly for Ontario who vowed to proceed with its implementation of the controversial Ontario Retirement Pension Plan (ORPP) if a consensus on enhancements to the CPP was not reached. On June 20, 2016, with only Quebec and Manitoba withholding their agreement, the federal government announced that an agreement in principle had been reached to enhance the CPP. At that time, Manitoba’s newly elected government suggested it needed more time to consider the changes and Quebec indicated it would take a more targeted approach to enhancements to the Quebec Pension Plan. In early July, Manitoba announced that it would support the CPP expansion.
Our Constitution requires at least seven provinces representing at least two-thirds of the Canadian population, be onside before a change can be made to the CPP. On July 15, the Minister of Finance announced that nine provincial Finance Ministers have signed the agreement and met the target date of consensus agreed upon in June. While reaffirming support of the enhancements, British Columbia indicated that it needed more time before it could formally sign the agreement. Despite this, the Federal Finance Minister indicated that the process remains on track for the Government to table federal legislation in the fall, and we expect enhancements will be phased in starting January 1, 2019 and will be fully implemented by 2025.
Current state The current CPP is meant to replace 25 per cent of earnings up to an annual ceiling (the Yearly Maximum Pensionable Earnings – YMPE). Under the current program, employees and employers each pay 4.95% of income between $3,500 and $54,900 (the current YMPE). Those earning more than the YMPE do not contribute to the CPP above this threshold, and do not earn any additional pension benefit. The maximum CPP benefit is about $1,092 per month, or $13,110 per year. The average annual payment to a current retiree is approximately $7,975.
How the CPP will be enhanced While many details have not been officially announced, we know that the CPP enhancements will increase the target income replacement from approximately one-quarter to one-third of pensionable earnings. This enhancement will be introduced through a seven-year gradual phase-in completed in two phases:
The contributions for the enhanced portion of the CPP will be accounted for separately and will be tax deductible for employee – unlike current CPP contributions, which are treated as a non-refundable tax credit.
The federal government will also enhance the federal Working Income Tax Benefit to offset the impact of increased contributions on low-income workers. It remains to be seen though how the expanded CPP contributions will interact with the Guaranteed Income Supplement (GIS), a government social program aimed at low-income seniors and whether more generous CPP payments could result in greater claw backs of GIS.
It’s worth noting that to earn the full CPP enhancement, a person needs to contribute for 40 years at the new levels once the program is fully phased in by 2025, which means the main beneficiaries will be the youngest employees in the workforce today and those who follow them. Teens today will be the first generation to receive the full increase by 2065. Others will benefit, albeit to a lesser degree, depending on how close they are to retirement.
The end of the ORPP With the pending ratification of the CPP changes, Ontario has officially stated that it will not proceed with implementation of the ORPP. For employers who would have been impacted by the ORPP, the CPP expansion will be a lower cost option since the contribution rate is lower than the 1.9% increase that would have applied in the ORPP. Additionally, the $82,700 ceiling under the enhanced CPP is considerably lower than the earnings ceiling of $90,000 (in 2017 dollars) under the ORPP. The seven-year phase-in schedule also provides a much longer implementation window than what Ontario was proposing for their provincial plan.
What about the Quebec Pension Plan? Quebec operates a separate, but similar plan. Currently the Quebec Pension Plan (QPP) has a contribution rate of 5.325 per cent of pensionable earnings each for employers and employees. Public consultation for potential enhancements will take place in the coming months and the feedback will determine whether the QPP design will deviate further from the CPP. Quebec is considering an extended phase-in as well as having the contribution increase apply to income above $27,500 so as to minimize the impact for low-income workers.
Working together, we voiced concerns about the implications of the ORPP on employers across the country and their Ontario employees – in particular the high threshold for ORPP exemption for employers who already offer a workplace defined contribution pension plan. And it worked. A significant benefit that the CPP enhancement will bring employers across Canada is the end to planning and preparing for ORPP implementation.
That planning and preparing wasn’t in haste. It prompted many plan sponsors to look at their current plan designs to determine where they could be simplified and enhanced to drive even better outcomes for their employees. It provoked discussion on what could be done to expand coverage in the workplace and get more non participating employees taking advantage of an important workplace benefit. Let’s continue this momentum and use it as an opportunity to spark new conversations around plan design that will contribute to the enhanced retirement readiness of Canadians saving at work.
