June 29, 2016
CPP Enhancement Means Demise of ORPP
What will the changes mean for Canadian companies and their employees?
On June 20, 2016 the federal government announced that 8 of the 10 Canadian provinces reached an agreement in
principle to amend the Canada Pension Plan (CPP). In Ontario, discussions about pension reform have been ongoing
ever since Kathleen Wynne’s Liberal party began campaigning back in 2014. This provincial government has maintained
that the low retirement savings rates of many Canadians is a risk to both the citizens, who will not have enough money to
retire, and the governments of Canada who will need to help support them in old age.
The Ontario government lobbied for an expansion of CPP coverage,
but the federal Conservative government in place at the time had no
appetite for CPP reform and refused to entertain conversations
with the other provinces. As a fallback plan, the Ontario
government began implementing the Ontario Registered Pension
Plan (ORPP) which was designed to operate and function similar
to the CPP. While the government promoted the ORPP as a major
advancement for Ontario employees, they believed it was the
second best option available. CPP expansion was always their
first choice and could achieve many of their objectives in a more
cost effective manner and with the least complicated
administration. On several occasions the Ontario government
stated that if CPP expanded to acceptable levels, they would halt
the implementation of the ORPP.
When the federal Liberal government was elected in 2015, they
agreed to entertain discussions about CPP expansion. A meeting
of the provincial finance ministers occurred in December 2015
which resulted in an agreement to come back to the table with
ideas on CPP reform in June 2016. To the surprise of many, this
meeting produced an agreement in principal to expand the CPP.
The federal government has given the provinces until July 15,
2016 to formally sign on to the proposal.
Government of Canada - Department of Finance Press Release
Example of proposed changes for someone earning
$50K and someone earning $90K
$5,000
$4,514
$4,500
$4,000
$3,500
$3,064
$3,000
$2,544
$2,544
$2,500
2016
$2,000
2025
$1,500
$1,000
$500
$0
CPP Premium
YMPE max for someone
(employee/employer)
earning $90k/yr
for someone earning
$55K/yr
Signed CPP Proposal
While the proposed benefit enhancement is about half of that targeted by the ORPP (the costs to employees and
employers are also about half), the Ontario government has decided that it is sufficient to shelve the implementation of
ORPP; assuming the CPP deal is formally accepted by the July 15 deadline. The threshold required to amend the CPP is
the consent of at least 7 provinces, representing at least 2/3rds of the population. At the conclusion of the meeting of
finance ministers, 8 provinces agreed in principal which exceeded the minimum requirement. There are still a few weeks
for provinces to change their mind and/or lobby for changes to the proposal.
So, what is the proposal? While there are still pieces that need to be clarified (such as the impact to Old Age Security,
Guaranteed Income Supplement, etc.) a great deal of information has been provided.
The Contribution: Currently employees and employers each contribute 4.95% of the members’ earnings, up to the
Year’s Maximum Pensionable Earnings (YMPE). The YMPE, which is indexed annually, currently stands at $54,900 for
2016. Starting January 1, 2019, the contribution amount will increase to 5.10% and will continue to increase each year
until 2023 when the contribution rate (premium) will reach 5.95%. For low income earners, there will be an enhancement
to the federal Working Income Tax Benefit (WITB) (details pending) to offset the cost of the increase in contributions.
Beginning in 2024 there will be a new Upper Earnings Limit above the YMPE that will attract an additional 4% contribution
from both the employee and employer. These contributions will be tax deductible for both parties. The Upper Earnings
Limit will be increased in 2025 and it is expected that going forward the number will be indexed similar to the YMPE.
The Benefit: Currently CPP is designed to replace 25% of a Canadian’s pre-retirement pensionable earnings (max.
pension $13,100 in 2016), assuming that they’ve worked in Canada for at least 40 years (those who have worked fewer
than 40 years will receive a lesser benefit). Going forward, under the new enhanced CPP, the benefit is targeted to
replace 33% of pre-retirement pensionable earnings.
So, what will all this mean to employees and employers in Canada? Since the full implementation of the enhancements
will not be in place until 2025, most people currently in the workforce will notice little impact to their retirement benefit
(remember that you will need 40 years of contributing under the new formula to merit the 33% income replacement ratio).
The full benefit will be realized by today’s youth who will enter the workforce after 2025.
In terms of cost (refer to Figure 1), the increase of 1% premium to CPP, plus the additional 4% contribution on the Upper
Earnings Limit, will mean increased costs for both employees and employers. For someone earning $55,000 per year,
the 2016 employee and employer CPP contribution will be approximately $2,544. For that same salary in 2025, the
contributions will increase by approximately $520 to $3,064.
In 2025, the YMPE will increase to $72,500, and the new contribution premium of 5.95% will be applied. In addition, for
those earning over the YMPE, an additional 4% will be applied to amounts up to $82,700. For someone earning $90,000
per year, the 2016 employee and employer CPP contribution will be $2,544. For that same salary in 2025, the
contribution will increase by approximately $1,970 to $4,514.
While some companies will struggle with ways to absorb the increased costs of the expanded CPP program, the good
news is, beyond an increased benefit, that the costs are being phased in over a 7 year period and they won’t begin to take
effect until 2019. Whether it’s ORPP or enhanced CPP, additional costs are coming and it is important for everyone to
have a plan and communicate with their employees.
Figure 1:
Year
Basic CPP Premium
(contribution rate for each of
employee and employer)
Base YMPE
(Yearly Maximum
Pensionable Earnings)
Enhanced CPP Premium
(applied on earnings between
Base YMPE and Upper
Earnings Limit)
2016
4.95%
$54,900
-
-
-
2017
4.95%
indexed
-
-
-
2018
4.95%
indexed
-
-
-
2019
5.10%*
indexed
-
-
-
2020
5.25%*
indexed
-
-
-
2021
5.45%*
indexed
-
-
-
2022
5.70%*
indexed
-
-
-
2023
5.95%*
indexed
-
-
-
2024
5.95%*
$70,100
4%
$74,900
$4,800
2025
5.95%*
$72,500
4%
$82,700
$10,200
Upper Earnings Limit
*Additional Basic CPP premium in excess of 4.95% will be eligible for the enhanced WITB for low income earners
**Tax deductible for each employee and employer
New maximum additional CPP
premium**
(paid by each of employee and
employer)
There may be further edits to the enhanced CPP proposal between now and July 15th. Stay tuned for further updates.
For additional guidance on this and other corporate retirement plan matters, and/or to ensure you receive updates,
contact us at [email protected] or (416) 445-0000 ext. 5250.
Jamie Martin, Consultant
People Corporation, Group Retirement Division
At People Corporation, we advise corporate clients and multi employer pension plans totaling nearly $7 billion of assets
under administration.