On June 20, 2016, the federal Minister of Finance Bill Morneau, together with eight of the 10 provincial finance ministers, agreed in principle to expand the Canada Pension Plan (CPP). All provinces except Quebec and Manitoba have agreed to the new CPP deal. A change to CPP requires the agreement of a minimum of seven provinces representing two-thirds of the Canadian population – a threshold which has tentatively been met (subject to ratification by the provinces). These enhancements to the CPP represent the most significant increase to CPP benefits since the CPP was first established in 1965.
Under the enhanced CPP, the income replacement ratio will be increased to one third (from one quarter) of pensionable earnings. The proposed changes to the CPP include an increase in the Year’s Maximum Pensionable Earnings (YMPE), which is the maximum annual income subject to CPP contributions and accruals. The 2016 YMPE is $54,900, and the CPP enhancements will increase that earnings limit by approximately 14 percent beginning in 2024, with the YMPE for 2025 expected to be $82,700 upon full implementation in 2025. The changes also include a one percent increase in employer and employee contributions to the CPP, resulting in an increase to 5.95 percent from the current 4.95 percent contribution rate for both employers and employees, to be phased in over a 5-year period beginning on January 1, 2019.
As a result of the CPP deal, the Ontario government has announced that the Ontario Retirement Pension Plan (ORPP), which was scheduled to come into effect in that province beginning on January 1, 2018, will be abandoned – assuming that the new CPP deal is ratified by the provinces by July 15, 2016.
What This Means For Employers
What started as the Ontario government’s ambitious plan to increase retirement savings for working Ontarians through its introduction of the ORPP will likely end with an enhanced CPP instead. While the ORPP was a plan for Ontario employees only, the enhanced CPP, although providing a more modest benefit, will benefit all employees (and the self-employed) in Canada outside of Quebec. While it is estimated that the changes to the CPP will provide only about one-half of the benefit that would have been provided by the ORPP (for employees earning at or less than the enhanced CPP earnings limit), they come at about one-half of the cost of the ORPP.
Due to the lengthy phase-in period for the enhancements, employers will have time to adjust to the impact of the proposed CPP changes on their cost of doing business and to consider the impact on the design of their employer-sponsored plans.