What Does The Future Hold? The CPP Enhancement Hosted by the - - PowerPoint PPT Presentation

Ontario Regional Council

What Does The Future Hold? The CPP Enhancement

Hosted by the Ontario Regional Council March 29, 2017 TWENTY Toronto Street Conferences and Events Toronto, ON

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Stephanie Kalinowski

Partner Hicks Morley Hamilton Stewart Storie LLP

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Allan Shapira

Managing Director, Senior Consulting Actuary Aon Hewitt

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• Introduction
• CPP Enhancement Overview
• Integration and Pension Plan Design Implications
• Human Resources Implications
• Questions

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Highlights of Today’s Session

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Source: Department of Finance Canada, “Backgrounder: Canada Pension Plan (CPP) Enhancement”, September 19, 2016

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Why Expand the CPP?

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Source: Department of Finance Canada, “Backgrounder: Canada Pension Plan (CPP) Enhancement”, September 19, 2016

Why Expand the CPP?

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Who Will Benefit?

Source: Department of Finance Canada, “Backgrounder: Canada Pension Plan (CPP) Enhancement”, September 19, 2016

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CPP Enhancement: Overview

How

• Agreement in principle signed by 9 provinces
• Ratified by all 9 provinces

What

• Higher target benefit rate
• Increased maximum earnings limit
• Increased contribution rates

When

• Implementation begins January 1, 2019
• 7-Year Transition Period

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▪ Contributions are currently made on earnings between $3,500 (“Year’s Basic Exemption” or YBE) and the year’s maximum pensionable earnings (YMPE) Pensionable Earnings ▪ YMPE in 2017 is $55,300 (it increases each year) Current Maximum ▪ Employees and employers each contribute 4.95% of pensionable earnings ▪ CPP benefit aims to replace 1/4 (25%) of annual earnings up to YMPE for members who contribute over 35-40 years: ̶ Adjustments are made for years with lower earnings ̶ Adjustments are made if you don’t start CPP at age 65 Cost Benefit

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Refresher – Current CPP

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What: Higher CPP Benefit Formula

• Higher target benefit (income

replacement as a portion of indexed career pensionable earnings)

– 25% now – 33 1/3% enhanced

33 1/3% Enhanced CPP 25% Existing CPP

% of Indexed Career Pensionable Earnings

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What: Higher Pensionable Earnings Limit

• Maximum pensionable

earnings increase by 14%

– New concept of YAMPE (earnings above YMPE) – Projected to be $79,400 in 2025

2017 YMPE $55,300 2024 YAMPE $72,400 2024 YMPE $67,700 2025 YAMPE $79,400 2025 YMPE $69,700

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What: CPP Formula and Earnings Enhancement

Increased retirement benefits Increased maximum amount of income subject to CPP

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What: Higher Contributions – Up to YMPE

4.95% Employers 4.95% Employees

Now

5.95% Employers 5.95% Employees

2023

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What: Higher Contributions – Above YMPE

4.0% Employers 4.0% Employees Over YMPE ($67,700) Up to YAMPE ($72,400)

2024

4.0% Employers 4.0% Employees Over YMPE ($69,700) Up to YAMPE ($79,400)

2025

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New Tax Deduction

• Tax deduction (instead of tax credit) for employee contributions associated with the

enhancement

• The extra 1% on earnings up to the YMPE
• The new 4% on earnings above the YMPE up to the YAMPE
• Federal Working Income Tax Benefit enhanced to offset the impact of increased

contributions on low-income workers

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Phase-In of CPP Enhancement Contribution Rates

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When: By 2025

YAMPE $69,700 – $79,400 4% (new) Earnings up to YMPE $3,500 – $69,700 5.95% (1% increase) Exemption $0 – $3,500

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Key Dates

2023 – 2025

2-year phase-in of YAMPE

2019 – 2023

5-year contribution rate phase-in below YMPE

January 1, 2019 – January 1, 2025

Gradual implementation

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Impact of CPP Expansion

Higher employer payroll costs Lower employee take-home pay Pension plans with benefit and/or contribution formulas that integrate the YMPE may see changes in employee and employer contribution levels and benefit accruals

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Current Integration With CPP

Initial integration with CPP benefits for defined benefit plans was based on replacing 25% of earnings over 35 years, which would be 0.71%; or 25% over 40 years, which would be 0.625%: ▪ Result is a common step-rate benefit formula under DB plans of 1.3% or 1.4% below the average YMPE and 2.0% above the average YMPE

DC Plans

Often not integrated with CPP or not directly integrated

DB Plans DB Plans

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Integrating Pension Plans With CPP Enhancement

▪ Pension plans typically define the YMPE as the Year’s Maximum Pensionable Earnings under CPP ▪ YMPE will still be a concept under

• CPP. YAMPE is a new term under

Bill C-26. Therefore, integration with YAMPE would not be automatic ▪ There are two aspects to integrating a DB plan with CPP Enhancement for future service: Expansion of earnings covered by CPP (i.e., deal with new YAMPE) Increase of the benefit accrued on pensionable earnings (i.e., deal with new accrual rate)

STEP ONE STEP TWO

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RPP Integration Example – Current CPP

Below YMPE Between YMPE and YAMPE Above YAMPE Benefit Rate Contribution Rate Benefit Rate Contribution Rate Benefit Rate Contribution Rate CPP 0.6% 4.95% 0.0% 0.0% 0.0% 0.0% RPP 1.4% 7.00% 2.0% 10.0% 2.0% 10.0% TOTAL 2.0% 11.95% 2.0% 10.0% 2.0% 10.0%

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RPP Integration Example – Enhanced CPP

Below YMPE Between YMPE and YAMPE Above YAMPE Benefit Rate Contribution Rate Benefit Rate Contribution Rate Benefit Rate Contribution Rate CPP 0.6% 4.95% 0.0% 0.0% 0.0% 0.0% Enhancement 0.2% 1.00% 0.8% 4.0% 0.0% 0.0% RPP 1.4% 7.00% 2.0% 10.0% 2.0% 10.0% TOTAL 2.2% 12.95% 2.8% 14.0% 2.0% 10.0%

Should reintegrate with YAMPE May or may not reintegrate with enhanced CPP

Between YMPE and YAMPE CPP 0.0% 0.0% Enhancement 0.8% 4.0% RPP 1.4% 7.0% TOTAL 2.2% 11.0% 23

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General Comments About Integration

▪ Need to consider that under exchange of benefits from DB plan to CPP enhancement, there are no unreduced early retirement benefits under CPP ▪ Phase-in of benefits and contributions under CPP enhancement complicates integration discussion ▪ New disparities between CPP and QPP may also complicate matters ▪ If DB provisions are closed, consider whether worthwhile to change integration ▪ If DC provisions are not currently integrated, provisions could still be amended to lower employer contributions to make up for increase in contributions required for CPP enhancement ▪ Need to consider overall philosophy on target level of benefits

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Quebec Pension Plan

• separate consultation took place January 2017
• consultation addresses 2 main themes:
• enhancing the Québec Pension Plan and
• strengthening its sustainability, with controlling the contribution rate a

necessary goal

• QPP contributions are higher than CPP
• ACPM participated in the consultations
• 3 proposals:
• status quo
• adopt CPP enhancement
• enhancement proposed by Québec

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Quebec Pension Plan

• enhancement proposed by Québec:
• increase target income replacement from 25% to 33.3% earnings over

$27,450

• increase YMPE from $54,900 to $62,600
• increase the contribution rate from 2019 to 2025, except for workers whose

income is less than $27,450

• increase QPP benefits for individuals whose employment income is $27,450

and higher

• provide an additional income exemption for the purpose of calculating the

Guaranteed Income Supplement (GIS) in order to immediately increase the income of low-income seniors.

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Steps that Employers Should Take Now

Assess impact of additional payroll costs Determine if pension plan is integrated with CPP Consider impact of CPP enhancement on retirement savings plan design (including SERPs) Identify whether any changes must be collectively bargained and expiry date of current collective agreement

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CPP: Cost Considerations

Expanded CPP Offset Cost Reduce compensation (salary, bonuses) Reduce benefits Restrict hiring Absorb Cost Do nothing

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CPP: Cost Considerations

Change Plan

Adjust benefit formula Decrease contributions

Absorb Cost

No change to plan design or contributions

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CPP: Design Considerations

• What was plan’s intended retirement income replacement target?
• Is it now too high?
• Is it too low?
• Was it only focused on employer cost or industry benchmarking?
• Does the employee / employer contribution rate continue to make sense?
• Will employee behaviour change due to higher CPP contributions?

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CPP: Human Resources Considerations

For Non-Union Employees

Impact on total compensation/ constructive dismissal risk Contractual commitments Common law and statutory notice requirements RPP notice and filing requirements

For Unionized Employees

Degree of plan incorporation Collective agreement

• bstacles

Bargaining strategy Applicable timeline for changes Language revisions

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Review

Educate Test Your Retirement Plan Determine Strategy

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Questions?

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