In 2016, the Government of Canada reached an agreement with the provinces that provides for significant enhancements to the Canada Pension Plan, with an announcement of similar changes to the Quebec Pension Plan following in 2017.
When the changes were announced, employers took note of the pending increases in the target benefit and contribution rates under the two programs, but most took no action at the time. However, the changes will be gradually phased in beginning Jan. 1, 2019, which is now mere weeks away. It’s important that employers renew their focus on these changes, so that they’re ready in time for the new year.
The key changes to the CPP and QPP are:
- Target retirement benefit: Currently, the CPP and QPP target a maximum retirement benefit of 25 per cent of average employment earnings, with employment earnings limited to the year’s maximum pensionable earnings. In 2019, the YMPE will be $57,400 and is indexed annually with increases in the average industrial wage.
The changes will increase the targeted maximum retirement benefit from 25 to 33.3 per cent of average employment earnings. Also, the limit on the pensionable earnings used to calculate CPP and QPP benefits will increase by 14 per cent, from $57,400 to $65,400 in 2019 dollars. The new higher earnings limit is referred to as the year’s additional maximum pensionable earnings.
Once fully phased in, the maximum retirement benefit payable under the CPP and QPP will increase by 52 per cent. In 2019 dollars, this represents an increase in the maximum benefit from $13,855 to $21,060 per annum.
- Contribution rates: The CPP currently requires that both an employer and employee contribute 4.95 per cent of employment earnings between $3,500 and the YMPE. This would result in maximum 2019 employer and employee contributions of $2,668 each. Contribution rates under the QPP are currently 5.4 per cent, which would result in maximum employer and employee contributions of $2,911 in 2019.
To pay for the increase in retirement benefits, contributions on employment earnings between $3,500 and the YMPE will increase by one percent, to 5.95 and 6.4 per cent under the CPP and QPP, respectively. Also, both employers and employees will be required to contribute four per cent on an employee’s earnings between the YMPE and YAMPE.
Once fully phased-in, the maximum annual employer and employee contributions under the CPP will increase from $2,668 to $3,527 in 2019 dollars. The comparable increase under the QPP will be from $2,911 to $3,770.
The changes to the CPP and QPP benefits are prospective in nature. This means that Canadians who entered the workforce prior to 2025 and who will retire after 2024 will receive a retirement benefit that’s calculated as a blend of the old and new formulas. Canadians who enter the workforce in 2025 or later will receive a benefit that is based entirely on the new formula.
The employer and employee contribution rate on earnings up to the YMPE will each increase by 0.15 per cent in 2019, with the phase in of the full one per cent increase occurring by 2023. Contributions on earnings between the YMPE and YAMPE will be phased in during 2024 and 2025.
There are a number of short-term actions related to the changes that will need attention:
- Beginning in 2019, the additional CPP/QPP contributions of 0.15 per cent of earnings must be deducted from employee earnings and remitted, along with the matching employer contributions. The increase in employee contributions resulting from the increase in contribution rates are tax deductible, while the rest of the employee contributions continue to attract only a tax credit.
- Every pension plan should review its provisions to confirm whether or not the plan is directly integrated with the CPP/QPP. A plan is directly integrated if the plan benefit formula or contribution formula makes a direct reference to the CPP/QPP benefits or contributions. For example, a defined benefit plan may provide a lifetime annual pension of 1.7 per cent of final average earnings minus 0.7 per cent of the projected pension payable by the CPP, for each year of pensionable service.
It should be noted that, while there are pension plans that are directly integrated with the CPP/QPP, there are many more plans that have indirect integration. Plans with indirect integration are intended to integrate the plan benefits or contributions with the benefits and contributions under the CPP/QPP, but the benefits and contributions under these plans won’t automatically change due to the enhancements. For example, a plan may provide a lifetime annual pension of one per cent of final average earnings up to the YMPE, plus 0.7 per cent of final average earnings above the YMPE, for each year of pensionable service. Since the definition of YMPE isn’t changing, the pension benefits payable by this plan aren’t automatically affected by the enhancements.)
- For plans that are directly integrated, administration of the plan benefits or contributions must begin reflecting the CPP/QPP changes. These plans’ funding and accounting actuarial valuations should also reflect the enhancements.
- Pension plan administrators should review and update their pension communications to reflect the changes. This could include revising estimated plan benefits or contributions for directly integrated plans, and revising any descriptions and estimates of the retirement benefits and contributions under the CPP/QPP. Communication vehicles that should be reviewed include annual member statements, online pension communication, retirement planning tools and pension plan summaries/booklets.
- Employers may also wish to proactively communicate the changes to employees to ensure they understand the changes and how they’ll affect retirement benefit adequacy, take-home pay and employer costs.
In addition to the short-term actions mentioned above, strategic considerations should also be addressed.
The increase to the CPP/QPP contributions represents a rise in employer costs and a decrease in employee take-home pay. Also, the increase in the CPP/QPP target retirement benefit should improve the retirement benefit adequacy of employees.
Employers should assess the effect of the CPP/QPP changes on the retirement benefit adequacy of their workforce. This will be impacted by a number of factors, including the characteristics of any retirement programs they currently sponsor. They will also need to decide whether or not they’re prepared to absorb the additional costs associated with the increase in contributions.
The outcome of this assessment could lead to reductions to the benefit and contribution formulas under the employer’s current pension arrangements or a reduction to other components of the employees’ total rewards package. Unionized employers should also consider the changes when developing their collective bargaining strategies.
With the changes now upon us, employers should be turning their attention to these changes if they haven’t already done so, as both short-term actions and long-term strategic considerations need immediate attention.