Now is the time for employers to start looking at the Canada Pension Plan enhancements and their potential affects on workplace pension plans, said lawyer Stephanie Kalinowski during an event in Toronto on Wednesday.

“Especially for [defined contribution] plans, in particular, it’s really an opportunity to step back and look at your overall plan design.”

The first step is assessing the effect of any additional payroll costs, which will obviously vary from employer to employer, noted Kalinowski, a partner at Hicks Morley Hamilton Stewart Storie LLP, during an Association of Canadian Pension Management event on the CPP changes. “If your workforce tends to be, on average, paid somewhere around the existing [year’s maximum pensionable earnings], then this change may not be quite as significant for you, versus if your workforce is more highly paid and earning on average more than the YMPE, which means you’re going to be contributing more.

“Stepping back and running some numbers and having a look at what really is the bottom-line change for you from a cost perspective is a starting point.”

Read: How can employers prepare for the CPP expansion?

Once they’ve determined the potential affect of additional payroll costs, employers must next figure out whether their pension plan is integrated with the CPP. Defined benefit pension plans typically are, said Kalinowski, so those employers will have to determine just how integrated their plan is and whether they’ll have to make changes to plan design.

For defined contribution pensions, there’s another element to think about. “A lot of DC plans are designed with a voluntary member component with an employer match,” said Kalinowski, noting that employees who are hearing they have to contribute more to the CPP may opt to contribute less to their defined contribution plan. “And so their contributions will go down and, in turn, the employer match will go down as well. There may be some interesting behavioural implications of this change for . . . DC plans, in particular if you have a voluntary component to them.”

Read: ‘Exciting time for retirement’ as CPP deal signals premium boost to 5.95%

Allan Shapira, a senior partner in Aon Hewitt’s retirement and investment practice in Toronto who also spoke at Wednesday’s event, doesn’t believe swapping contributions from a defined contribution plan to the CPP is necessarily a negative move. “On the DC side, if people aren’t saving enough and if this is a tool to help them save more, a reconfiguration of the savings by moving it from one bucket to the other bucket helps a little bit because you’re changing the nature of the savings from defined contribution to defined benefit.

“But at the end of the day, it doesn’t do what I think some of this is intended to do, which is put more savings towards retirement. . . . If it’s just an exchange of dollars, I don’t think, for people in DC plans, it will accomplish what this was trying to accomplish.”

Read: Employer preparations for CPP reform off to slow start, survey finds

Another consideration for employers is plan design, which could include adjusting the benefit formula, decreasing member contributions or keeping it as is, said Kalinowski. The issue could be particularly relevant for employers with defined contribution plans. “DC plans, I’ve found from talking to clients, were often designed from more of a total compensation perspective. So they looked at it as a percentage cost of total comp, as opposed to looking at the DC design from the perspective of, how much income is this going to deliver to my employees in retirement?”

Employers in a unionized environment will also have to consider whether they can undertake any changes they’d like to make unilaterally or whether they’re subject to collective bargaining, added Kalinowski. “That’s going to affect how you approach amendment. This is a complex issue, especially if you’re looking at a DB plan with integration issues. There’s some difficult concepts, so you may want to have discussions with the unions sooner rather than later.”

Read: Actuarial report on enhanced CPP contains some interesting tidbits for plan sponsors

Ultimately, since the government has touted the CPP enhancements as a way to confront Canada’s retirement income inadequacy issues, it’s important to recall that most pension plans were designed in a completely different world, said Shapira.

“They were designed on a completely different expectation of investment return, maybe even a different expectation of inflation and, certainly, a different expectation about longevity. So it is a good time to start back and look at target pay replacement.”

Read: CPP enhancements receive final sign-off

Copyright © 2019 Transcontinental Media G.P. Originally published on benefitscanada.com

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