On June 20, 2016, Canada’s finance minister and several provincial finance ministers announced their agreement in principle to enhance the Canada Pension Plan (CPP) starting January 1, 2019. All Canadian provinces, except for Manitoba and Quebec, executed this historic agreement in support of an expanded CPP. The two non-signatory provinces agreed to remain part of the ongoing discussions to enhance the CPP.
Currently, the CPP covers earnings up to the Yearly Maximum Pensionable Earnings (YMPE) threshold, which is set at $54,900 for 2016. For earnings up to the YMPE, the pension provided under the CPP is designed to replace 25% of pre-retirement income, which means that the maximum CPP pension is $13,100 per year. CPP contributions are currently 4.95% of earnings up to the YMPE for both the employer and the employee.
The enhanced CPP aims to increase the income replacement from 25% to 33.3%, and to raise the YMPE income threshold from $54,900 to $82,700 upon full implementation in 2025. To cover the cost of the increased benefits, the contribution rate is estimated to go up 1% to 5.95% for each of the employer and the employee.
To ensure that these changes are affordable for businesses and their employees, Finance Canada announced a number of measures:
a long and gradual 7-year phase-in starting on January 1, 2019 to give time for all stakeholders to prepare for and adjust to the new CPP, consisting of
- a 5-year contribution rate phase-in below the YMPE, followed by
- a 2-year phase-in of the upper earnings limit
an enhanced federal Working Income Tax Benefit to offset the impact of the increased contributions on low-income employees
a tax deduction for employee contributions associated with the enhanced portion of the CPP in order to avoid increasing the after-tax cost of savings for Canadians
For low- and middle-income contributors whose earnings are under the current CPP earnings threshold, the new CPP will increase income replacement up to 33.3%. For the higher-income contributors whose earnings are above the current $54,900 YMPE earnings threshold, the increase of the YMPE earnings to $82,700 by 2025 means that they will also have income replacement of 33.3% for earnings in between $54,000 and $82,700 that were not previously covered by the CPP.
The end of the ORPP
The Ontario Premier indicated that the Ontario-made retirement savings program, the Ontario Retirement Pension Plan (ORPP), will not proceed if the CPP enhancements that have been agreed upon go ahead. This means the end of the ORPP assuming the final agreement between the federal and provincial governments to boost the CPP is ratified in July 2016.
Although the benefits that would be provided under the enhanced CPP are less than those proposed under the ORPP framework, the CPP will have a much wider impact for Canadians because it is a national solution to the problem of inadequate retirement savings.
Implications for employers
Ontario employers will welcome the regulatory simplicity of complying with only one mandatory government sponsored pension plan. Even though the ORPP is not moving forward, employers still have to pay attention to the CPP expansion details.
Employers that sponsor workplace pension plans with a CPP offset need to review the details of their plans and make the necessary adjustments. In the unionized environment where changes to the pension plan are subject to collective bargaining, we expect that the gradual phase-in of the CPP expansion will allow sufficient time for the negotiation and implementation of any changes. Employers that sponsor pension plans that do not currently integrate with the CPP may want to consider this option.
The expansion of the CPP is an impressive achievement for the current federal and provincial governments. It is noteworthy that any changes to the CPP require the consent of two-thirds of the provinces representing two-thirds of Canada’s population. The joint statement of the federal and Ontario governments indicates that approval by the provinces of the proposed CPP enhancement agreement in principle must occur by July 15, 2016. This means that in less than one month, the federal and provincial governments could make history by agreeing on the most significant pension reform of our generation. We applaud the collaboration of both levels of government to ensure that future generations of Canadians can count on a strong public pension system in their retirement years.