It may not happen this year, or next year, or even the year after that.
But sometime between now and 2025, Canadian employers will almost certainly need to re-think their retirement policies in response to Canada Pension Plan expenses that began to go up in January.
Canadian pension experts say higher mandatory contributions to the CPP and the Quebec Pension Plan will inevitably ripple through human resource budgets over the next six or seven years. “When a corporation designs a pension plan . . . they take into account government pensions,” says Faisal Siddiqi, associate partner, people advisory services at EY Canada. “I would think every plan sponsor would be looking at this.”
Under the enhanced CPP authorized by Ottawa and the provinces, expenses go up in two ways.
One way involves a series of higher contribution rates from 2019 to 2023 and the other will involve a higher ceiling on how much annual income is subject to contributions in 2024 and 2025. By 2023, the employer’s contribution rate will be 5.95 per cent of an employee’s pensionable earnings, up from 4.95 per cent in 2018 and prior years. In 2024 and 2025, the ceiling on maximum pensionable earnings will be raised.
Siddiqi predicts that every plan sponsor will have to look at these costs. “Then they have to make a decision . . . to fully offset, partially offset or not offset these changes.”
However, he and other pension experts say that only a few early adopters have begun that process.
Andrew Hamilton, who leads the Ontario retirement practice for Aon, a consulting firm, says there’s anecdotal evidence that organizations are beginning to consider the impact of the CPP enhancements. “But very few, if any, have actually made any design or structural changes to their programs to reflect the changes.”
That’s because the additional CPP cost faced by employers in 2019 is very modest and each year’s incremental costs will also be relatively small until all the increases are implemented in 2025. “I think some organizations look at that and there probably isn’t a sense of urgency to do something now,” says Hamilton says. “But they may feel differently when we’re closer to being fully implemented and they’re feeling the full impact of the increase in costs.”
Jean-Philippe Provost, senior partner at Mercer Canada’s wealth business, notes the employer portion of contributions will be a full percentage point higher in 2023 than in 2018 before the increases began. “If you’re working in an industry that has very, very low margins, a per cent can make a big difference — especially if people costs [are] the lion’s share of your expenses.”
Surveys conducted prior to implementation of the enhanced CPP indicate pension plan sponsors have been looking at what’s being considered by other companies, but few have taken action yet.
“I would say a very small minority of our organizations have used that . . . to re-open design,” says Provost.
Ryan Silva, head of the pension segment at RBC Investor and Treasury Services, also says higher contribution rates haven’t affected private plans yet but he thinks they will “somewhere in the future.”
“At the end of the day, it’s a simple formula _ matching the assets to the liabilities. And the increasing contributions essentially adds to the liability and so they will have to consider it.”
Provost says a majority of Canadian organizations set an annual budget for HR expenses. “Part of that budget goes towards salary increases for employees. Part of it . . . pays for the cost of the retirement plan. Part of it’s for the benefit plan. Part of it’s for perks. It can be sliced and diced in various ways.”
EY Canada’s Siddiqi says employers are always trying to find the right balance between their HR needs and their overall financial costs. He adds that once those costs have been assessed, the bigger challenge will be to communicate effectively so the changes are understood throughout the workforce and unintended consequences are minimized.
“A change to a pension plan design is a pretty big deal . . . because it impacts the entire organization.”