Don’t Forget About the Upcoming Changes to CPP

Many employers operate in industries where it is necessary to control and be ever-vigilant with respect to rising expenses.  Many industries offer slim profit margins and, as with the minimum wage increases in various jurisdictions in 2018, this can have an impact on profitability as well as planned staffing levels for many employers.   With this in mind, there seems to be little attention being paid to the upcoming increases in employer and employee contributions to the Canada Pension Plan (“CPP”)[1] to commence effective January 1, 2019.

What are the CPP contribution increases about[2] – Put very simply, starting in 2019 (albeit phased-in) CPP benefits will increase in two broad ways.  First, the basic CPP benefits will increase from a target replacement ratio of 25% of a contributor’s average “pensionable earnings” over an estimated 40 years of contributions to 33.3%.  Secondly, starting in 2024, an extra tranche of earnings will be added to what constitutes pensionable earnings so that approximately $10,000/year more is considered pensionable earnings.  Of course all of this comes with a cost and both employer and employee CPP contribution increases are just around the corner starting in 2019.  Because these are being phased-in over a fairly long period of time, initally the increase will be small (e.g. the first element will yield increases in the contribution rate for employers in 2019 from 4.95% of covered earnings to 5.10%).  The estimates are that the increased annual contribution for an employer under the first set of changes will be no more than $650/year.  The second element of changes is also to be phased in, starting in 2024 and will require additional employer contributions equalling 4% of the incremental amount of additional earnings that will be covered by the CPP.

Two things for employers to think about – While the increased contributions employers will bear are not immediately large, over time they become more significant and also yield a higher CPP benefit for employees contributing to the program.  Accordingly, employers who have not already done so, may wish to start thinking about two things.  The first is whether they want to take these increased expenses into account when developing compensation models for employees (i.e. in its simplest form, reducing annual wage increases starting in 2019 or later to absorb these costs) in an effort to control costs.  Clearly, the latter will have to take into account obligations and timing of renewals of collective bargaining agreements with respect to unionised employees as well as risks of constructive dismissal for non-union employees.  The second is only for those employers with some form of defined benefit (“DB”) or defined contribution (“DC”) retirement savings program.  In the case of those employers, it probably makes sense to review the outcomes expected for their employees under enhanced CPP and determine whether there should be a reduction in the accrual rates (for DB) or the contribution rates (for DC) of their programs so that there is no over-saving.  That is, some commentators believe that in the fullness of time some participants in CPP will be over-saving for retirement and essentially will see earnings that could be spent on current needs or desires needlessly curtailed if no changes are made to savings patters and the individual ends up applying finite resources to savings that will prove to be excessive.  Accordingly, subject to factoring in obligations under collective agreements and potential risks relating to constructive dismissal, a thoughtful review of employer’s programs may well result in design changes or caps on benefits or contributions (particularly where employees share the cost burden with the employer) that will result in more current earnings finding there way into the pockets of their employees.

 

[1]      Similar changes are occuring in the Quebec Pension Plan.

[2]      The information on the CPP changes are derived from the Government of Canada materials, particularly those found here: https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-enhancement.html.

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