Finally, Canada Pension Plan (CPP) Enhancement
August 8, 2016
On June 20, 2016, Canada’s Finance Ministers reached an historic agreement to improve core retirement income benefits under the CPP. The agreement followed years of tumultuous pension politics, including an outright refusal in December 2013 by the Harper Government to consider any changes to the CPP.
Following the breakdown in federal-provincial CPP discussions, the Wynne Government campaigned on a commitment to CPP reform or, if Ottawa exercised its veto, to a made-in-Ontario “Ontario Retirement Pension Plan” (“ORPP”).
Ontario did in fact introduce three pieces of legislation to establish the ORPP. It created the ORPP Administration Corporation (“ORPPAC”), appointed a Board of Directors, created a plan text and a funding policy and commissioned an initial valuation of the Plan. The ORPPAC Board hired a CEO and staff, leased premises, issued RFPs for key services and prepared to bring the ORPP on stream effective January 1, 2018.
In the meantime, the Canadian Labour Congress (CLC) and many trade unions continued their decades long advocacy for CPP reform, culminating in forceful media campaigns and a very effective political lobby. By June 2016, and for some time before, Canadians well understood the retirement income gap, and pressed for change.
Ultimately, the labour movement and the Province of Ontario changed the conversation about public pensions in Canada. By June 2016, the status quo was no longer tenable. Either the ORPP would proceed, or the CPP would be enhanced. Inaction was no longer an option, and was no longer supported by Canada’s new federal government.
The outlines of CPP reform remain bare. However, the following is clear:
- Ontario will not be going forward with the ORPP;
- the current CPP replacement rate, which operates on income up to the “Years’ Maximum Pensionable Earnings” (“YMPE”), will increase, between 2019 and 2023, from 25% to 33.3%;
- then, in 2024 and 2025, the YMPE will be increased by 14% to an estimated $82,700 in 2025;
- the enhanced CPP will be fully funded, but decisions have not yet been announced as to how enhanced CPP contributions will be managed and invested;
- increased CPP contributions (roughly 1% for employees and matching contributions for employers) will be tax deductible – an improvement over the current tax credit; and
- the working income tax benefit will be enhanced, as a way to assist low-income earners with increased contribution rates.
Although CPP enhancement was agreed in principle on June 20, 2016, the Government of the Province of British Columbia has initiated a public consultation about it, and did not formally ratify the agreement by the July 15, 2016 deadline. It is widely believed, however that British Columbia will confirm its agreement to the enhancement.
We do not expect that CPP contributions will be subject to limits on registered pension plan (RPP) or RRSP contributions, nor will the RPP/RRSP tax rules be changed or limited to offset an enhanced CPP.
The precise schedule of contribution increases and accrual rate improvements over the 2019-2023 period is yet to be specified. Administrative, investment and governance decisions have not yet been confirmed.
Employer and trade union sponsors will no doubt consider the economic impact of the CPP enhancement on existing retirement benefits. They will decide whether to integrate the CPP enhancement into existing benefit arrangements, or to add the enhanced benefit to existing offerings. In some cases, plan terms may provide a clear enough starting point for considering the impact of the CPP enhancement on existing programs, while in other cases existing provisions concerning the CPP will provide no guidance as to how the enhancement will affect existing plan provisions.
We may expect additional details with respect to the CPP enhancement in the coming weeks, and may also expect legislation to be introduced in the Federal Parliament this autumn.
Pension and Benefits