Use caution when changing benefits to account for CPP enhancements, report warns

As the average income replacement rate for capital accumulation plans continues to trend downwards, can employers mitigate this movement with the Canada Pension Plan’s incoming enhancements?

According to a new report by Eckler Ltd., CAP replacement rates fell to a new low at March 31, 2018, settling at 58 per cent for men and 56 per cent for women. These numbers have steadily decreased since 2006, according to the report, which showed replacement rates in December that year were 85 per cent for men and 81 per cent for women.

Read: DC Plan Summit: Company harnesses inertia to get majority of workers to 75% income replacement

But as the CPP enhancements take effect on Jan. 1, 2019, aiming to boost gross income replacement rates from 25 to 33 per cent of pre-retirement income, many employers are struggling with how to handle the costs of the additional contributions.

The report noted that employers are currently asking themselves whether they’ll be able to absorb the cost of the increased contributions or whether they’ll need to reduce employee benefits to offset the extra cost.

Older workers should play into these considerations, the report noted. For instance, where an employer chooses to reduce its contributions to a CAP to offset the CPP enhancements, older workers are likely to be unfairly impacted because they’ll have less time to accumulate the enhanced rate while also receiving lower employer contributions into their workplace plan. Subsequently, some workers could delay retirement in order to ensure they’re able to build up sufficient savings to retire on track, the report suggested.

Read: CPP enhancements to increase total benefits by 44% by 2070: study

As such, employers should consider strategies that would mitigate these potentially problematic outcomes, according to the report. These could include delaying any plan changes until the contribution increases are implemented or providing employees with the information they need to make informed choices and plan ahead.

What strategy will you take? Have your say in Benefits Canada‘s weekly online poll here.

Last week’s poll asked if employers should share the potential tax burden of a national pharmacare program. Two-thirds (65 per cent) of respondents said yes, a tax on both employers and individuals could be partially offset by anticipated savings on insurance premiums. On the other side, 35 per cent said no, employers are already facing enough cost challenges in their health benefits plans.