With just about a month to go until the federal government’s long-awaited Canada Pension Plan enhancements kick in on Jan. 1, 2019, Scott Perkin is relaxed about the prospect.
Although the changes have been billed as one of the biggest shakeups to the CPP since its introduction in the mid-1960s, Perkin, the director of pension and economic affairs at the Ontario Teachers’ Federation, says he and his counterparts at the provincial government — co-sponsors with the OTF of the Ontario Teachers’ Penson Plan — are in no rush to react.
“Our discussions with our government partner and the folks at the pension plan are at a very preliminary stage,” says Perkin. “We haven’t made any changes to the plan yet, but we’ll have to have further talks as time unfolds.”
Read: CPP enhancements to increase total benefits by 44% by 2070: study
The attitude sounds familiar to Michael Millns, the retirement operations leader for Canada at Willis Towers Watson. “When all’s said and done, many sponsors are doing nothing and leaving things the way they are,” he says.
Employer indifference
That’s despite the fact that doing nothing will actually result in significant additional costs for many plan sponsors by the time the changes are fully implemented in 2025.
In the first stage of enhancement, employees and employers will see their CPP contribution rates climb from the current level of 4.95 per cent each to 5.95 per cent each by 2023, for a total of 11.9 per cent up to the year’s maximum pensionable earnings. At the same time, the YMPE is projected to rise from $55,900 to $72,500 by 2025.
A second phase of the enhancement begins in 2024, creating a secondary contribution rate for earnings up to 14 per cent over the annual YMPE, with employers and employees each liable for contributions equal to four per cent of earnings over the YMPE but below the secondary upper limit.
Read: Maximum pensionable earnings for 2019 and other CRA updates
The result will be to boost the CPP’s maximum annual pension benefit from around one-quarter of pre-retirement eligible income to one-third. But it will also mean that an earner at the upper pensionable earnings limit in 2025, expected to be around $83,000, will cost an employer around $1,100 more in CPP contributions compared with a worker on the same salary in 2018.
“In effect, employees and employers are both paying a bit more, and eventually, that will result in a better benefit at retirement,” says Millns, who also serves on the national policy committee for the Association of Canadian Pension Management.
One of the reasons for plan sponsors’ indifference so far, he suggests, is the gradual implementation of the contribution rises. He says few employees or employers will notice the deduction of an additional 0.15 per cent for CPP in 2019.
Read: How can employers prepare for the CPP expansion?
“One could argue that was a deliberate feature,” says Millns. “Plan sponsors have been less focused than if it had all been done in one go.”
That may change over time, he adds, when steeper contribution rises force employers to make a more active choice between offsetting or absorbing the extra CPP-related costs.
Are you ready for this?
17% of employers have started to make plans to accommodate the CPP changes.
68% are concerned about the higher costs associated with the enhancements, while 53% are worried about the higher costs for employees and 46% are concerned about the impact on their retirement programs.
69% of respondents said they don’t know how they’ll manage the financial impact.
37% said they expect to start preparations this year, while 32% said they don’t know when they’ll do so.
57% of respondents said they understand the overall payroll costs resulting from the CPP and QPP enhancements.
6% of employers have communicated the coming changes to employees, but more than half are planning to do so before the end of the year.
Source: Aon survey, April 2018
Taking action
Andrew Hamilton, Ontario retirement practice leader at Aon, says those employers that have already taken the time to understand the pay-roll implications of the CPP changes have put themselves in the best position to deal with the amendments.
“If you’re going to make a change to your benefits program, it’s probably advisable to do it sooner as opposed to later,” he says. “Assuming you’re offsetting the additional costs, it’s far easier to prepare in advance and make the changes in lockstep, instead of cutting back later.”
Read: Use caution when changing benefits to account for CPP enhancements, report warns
Earlier this year, a nationwide survey of 325 of Aon’s employer clients found just 17 per cent had started planning for the changes, despite the passing of almost two years since provincial and federal financial ministers agreed to the deal in principle in June 2016. Almost 70 per cent said they either planned to turn their minds to the issue before 2019, or had no plans at all to do so.
Still, Hamilton says employers shouldn’t reflexively cut back on their pension and benefits offerings to employees, explaining that any action should be guided by the company’s philosophy towards retirement and the adequacy of workers’ projected post-employment benefits.
“We’ve had a huge move over the last 15 to 20 years from defined benefit to defined contribution, particularly in the private sector,” he says. “This might be a good time to pause, take a more holistic look at your program, and see if employees are accruing enough.”
In the design
According to Fred Vettese, an actuary and former partner at Morneau Shepell Ltd., most sponsors conducting an assessment of their employees’ income replacement rate following retirement should be comfortable absorbing the extra cost of additional CPP contributions, especially if they run a defined contribution plan.
Read: Study highlights cost differences between CPP, private pension plans
“If you have a basic plan where employees contribute four per cent and the employer matches it, that’s not going to provide enough income in retirement, so the CPP enhancement just gets them closer to an adequate pension,” says Vettese.
However, employers whose workers are already replacing enough of their income in retirement, or who wish to recoup the CPP costs, have a number of options, he adds.
For employers that are willing to add a layer of complexity to their contribution formula, Vettese says they can integrate the CPP enhancement by imposing a cut to company contributions on earnings below the YMPE, with the old rate retained on earnings over that amount.
Read: Just 17% of employers starting plans for CPP, QPP changes
One tricky issue for plan sponsors considering plan design changes is timing, due to the gradual implementation and non-retroactivity of the CPP enhancements, says Stephanie Kalinowski, a pension and benefits lawyer at Hicks Morley Hamilton Stewart Storie LLP.
“No employee will feel the full effect of the enhancements for 40 years,” she says. “If you introduce changes to your plan too early, you could be taking away more than you intended from the current workforce.”
In addition, Kalinowski says employers should factor in their employees’ reaction to higher CPP contributions before cutting back on their own plans. With more money coming out of their pay packets each month, employees may be inclined to cut their voluntary contributions to DC plans, in turn losing out on the matched portion from their employers, she says.
Read: Latest CPP additions to cost $900 million by 2050: chief actuary
“Through those choices, they may end up with less retirement income because the extra CPP benefits will not be enough to offset those kinds of decisions.”
Outside the plan
In numbers
Beginning Jan. 1, 2019, employers and employees will see their CPP contri-
butions climb from the current level of 4.95% each to 5.95% each by 2023, for a total of 11.9% up to the year’s maximum pensionable earnings. At the same time, the YMPE is projected to rise from $55,900 to $72,500 by 2025.
In 2024, during the second phase, a secondary contri-
bution rate for earnings up to 14% over the annual YMPE comes in, with employers and employees each liable for contributions equal to 4% of earnings over the YMPE but below the secondary upper limit.
An earner at the upper pensionable earnings limit in 2025, expected to be around $83,000, will cost an employer around $1,100 more in CPP contributions compared with a worker on the same salary in 2018.
Some employers may prefer to offset the extra CPP costs using savings options outside of the pension plan, says Hamilton. For example, changes could be made to overall compensation or to health and medical benefits to reduce costs, he says, or employers could cut the credits available to employees in flexible benefits programs.
Employers with a DB plan face a different challenge, since most plan sponsors already build some form of integration into their contribution or benefit calculations accounting for CPP. Depending on how directly they currently integrate, Millns says DB sponsors could struggle to incorporate the enhancements, due to the increased complexity of the CPP benefit calculation and the new secondary contribution rate.
However, Vettese says he’s concerned by the lack of action among the one group he believes should definitely be offsetting the cost of the additional CPP burden: public sector DB plan sponsors.
Read: Why aren’t Canada’s public sector pension plans integrating enhanced CPP?
A failure to fully integrate the changes could exacerbate the existing gap between retirees who spend their careers in public service compared with those working for a private sector company, he says. “They have no need for the enhancement,” says Vettese, adding that long-serving workers in the public sector can often already expect gross income replacements ratios of more than 70 per cent.
Without a dollar-for-dollar reduction to a plan’s pension promise to match the CPP boost, public sector workers will be in for “a windfall,” he says.
“In reality, there has been a bit of a conspiracy of silence so far. Usually these plans know for two years in advance what they’ll be doing, but when I asked around, none seem to be planning to change their integration formula.”
Lines of communication
Whenever employers make changes to their benefits plan in response to the CPP changes, they should formulate a communications plan to inform employees about what’s happening, says Simon Nelson, a principal at Eckler Ltd.
Read: Majority of Ontario small employers want CPP hike scrapped, delayed: survey
“It has to be explained in a very careful way,” he says. “Otherwise, you run the risk of giving the impression that you’re making a cut or pocketing savings, while the government and employees pick up the tab.”
According to Hamilton, plan sponsors making cuts to offset the additional costs of CPP can prevent employees from viewing them as cutbacks by detailing the rationale. “Employers have to manage communication of the changes. It’s easy to forget that we all make contributions as employees, and to lose sight of the fact that employers are also making the same contributions.”
As well, Hamilton warns that employers acquiescing to the enhancements, whether consciously or unconsciously, could be missing a trick if they fail to update employees on what it means for them. “If you absorbed the cost of the enhancement, you should be touting it to your employees, because it’s not for free,” he says. “In the absence of any changes, this is a rather significant benefit improvement for workers, but the government gets all the credit, even though it’s the employee shouldering half of the cost and the employee the other half.”
Read: Almost all families to have more coming off pay due to CPP, tax changes: report
With its new, heftier look, both in terms of contributions and potential benefits level, the CPP may have crossed a threshold in the public imagination by the time the enhancements are fully implemented, says Millns.
“Historically, I think a lot of employers and employees have looked at it as more of a payroll tax,” he says. “But over time, as sponsors look to the design of their own plans, they’re more likely to look at things holistically, and cast the CPP explicitly as a pension plan that we pay half the cost of.”
Michael McKiernan is a freelance writer based in St. Catharines, Ont.