An Expanded Canada Pension Plan (and a Very Questionable Future for the Ontario Retirement Pension Plan)
The Ontario Retirement Pension Plan (ORPP) seemed like a sure thing—until it wasn’t.
Yesterday, Bill Morneau, the federal Minister of Finance, and eight of ten provincial finance ministers did what many to this point thought was impossible: reach an agreement in principle to expand the Canada Pension Plan (CPP).
The agreement represents the first significant increase to CPP benefits since the program’s creation in 1965. It will affect almost all employers in Canada with employees outside Quebec.
While it looks likely that the agreement in principle will translate to formal finalization, many details remain to be released publicly. We are continuing to monitor.
Here is what we know so far—and what this means for the future of the ORPP.
Proposed CPP Expansion
- CPP benefits will be increased, with an aim to replace an individual’s pre-retirement income from one-quarter to one-third of pensionable earnings (likely subject to a limit).
- Employer and employee contributions will be increased, by about $7 per month in 2019 for an average worker earning $55,000, and thereafter according to a schedule that has yet to be finalized (B.C. has published a summary schedule here).
- The Year’s Maximum Pensionable Earnings (YMPE), which is the maximum annual income subject to CPP contributions and accruals, will be increased by 14% to approximately $82,700 by 2025 (from the current $54,900 in 2016).
These CPP changes are proposed to come into effect on January 1, 2019 and phased in gradually over seven years. The increase to employer and employee CPP contributions will be phased in over five years, beginning January 2019. The increase to the YMPE will be phased in over two years, presumably beginning in January 2024.
As well, in conjunction with the CPP changes, the federal government announced the following two tax changes:
- an increase to the Working Income Tax Benefit, a refundable tax credit for eligible low-income working individuals and their families; and
- a new tax deduction for employee contributions associated with the enhanced portion of CPP (a tax credit—but not a deduction—is currently available for employee CPP contributions).
Although it did not sign the agreement in principle, Quebec publicly supported the CPP enhancements and announced that it will consider enhancing the Quebec Pension Plan. Manitoba also did not sign the agreement in principle, but will be bound by the result if the other provinces agree.
Doubtful Future of the ORPP
The Ontario government developed the ORPP in response to the prior Conservative federal government’s public statements that it would not support changes to the CPP.
However, since the ORPP’s inception, the Ontario government consistently hinted that it would abandon the ORPP if CPP reform became realistic in the future. We are now living in that future. In a joint federal-Ontario release, federal Finance Minister Bill Morneau and Ontario Finance Minister Charles Sousa committed that the agreement in principle must be approved by all signatories no later than July 15, 2016. This statement, as well as other comments, strongly suggest that, provided the CPP enhancements are finalized by July 15, Ontario will scrap the ORPP entirely.
Employers should now consider how to address the increased payroll costs of an expanded CPP and whether amendments to their own pension and other retirement plans will be required to accommodate the more generous CPP benefit.
Many private pension plans provide offsets against CPP contributions and benefits, but the wording of these plans may not automatically track changes to the CPP like the ones just announced. If amendments are needed, employers should consider their powers of amendment under their plans as well as common law and contractual advance notice requirements.
If you have any questions with respect to these important developments, please contact the members of our Pensions & Benefits Group.
Canada Pension Plan CPP Ontario Retirement Pension Plan ORPP Pensions