Recently, Canada's finance minister and all of the
provincial finance ministers, except for Quebec and Manitoba,
announced their agreement in principle to enhance the Canada
Pension Plan (CPP). Under the terms of the
agreement in principle, the CPP enhancement would be phased in
starting January 1, 2019 and fully implemented by 2025. A deadline
of July 15, 2016 has been set for formal ratification so a historic
pension reform may be only a week away.
Proposed CPP Enhancements
Currently, employers and employees contribute to the CPP at a
rate of 4.95% of each employee's income between $3,500 and
$54,900, which is the yearly maximum earnings threshold for 2016.
Currently, CPP replaces about 25% of an employee's
pre-retirement income up to the threshold. The maximum CPP pension
in 2016 is $13,110.
The agreement in principle provides for an enhancement of the
yearly maximum earnings threshold by 14%, which is projected to be
approximately $82,700 in 2025. The agreement also proposes to
enhance the percentage of pre-retirement income replacement to
33.3%, which means that the maximum CPP pension would be
approximately $27,539 in 2025. To cover the cost of the increased
benefits, contribution rates for employers and employees are
estimated to increase by 1% to 5.95%.
To ensure these changes are affordable for employers and
employees alike, the finance ministers are considering a number of
measures, including enhancing the federal Working Income Tax
Benefit to offset the impact of the increased contributions on
low-income employees and a tax deduction for employee contributions
associated with the enhanced portion of the CPP in order to avoid
increasing the after-tax cost of savings.
Further information about the CPP enhancement will become
available in the coming months (provided the agreement in principle
is ratified by the July 15, 2016 deadline).
Elimination of the Ontario Retirement Pension Plan (ORPP)
In recognition that the CPP does not provide Ontarians with
enough financial security during retirement, the province created
the ORPP, a retirement savings plan intended to supplement the CPP
thereby providing Ontarians with an enhanced pension. The ORPP is
scheduled to begin enrolling employers in 2017, with the first
phase of contributions beginning January 1, 2018. By 2020, every
eligible employee in Ontario would be required to be enrolled in
the ORPP or a comparable workplace pension plan. Eligible employees
and employers would contribute an equal amount, capped at 1.9% each
(3.8% combined) on an employee's annual earnings up to
The Ontario government's announcement regarding the
agreement in principle to enhance the CPP is silent on the future
of the ORPP. However, if the agreement is ratified by July 15,
2016, the implementation of ORPP would almost certainly grind to a
halt. If not ratified, then Ontario would likely continue with its
current ORPP implementation plans.
Implications for Employers and Pension Administrators
We will continue to keep employers and pension administrators
informed of all developments related to the CPP enhancement and the
ORPP in the coming months. With ratification anticipated next week,
employers may wish to conduct a preliminary review of the impact of
the proposed CPP enhancement on their plans and assess the
necessary adjustments that may need to be made following
ratification. Otherwise, employers and pension administrators
should continue to administer their current plans as per usual and
wait for further information about the impending federal and
provincial pension reform.
The foregoing provides only an overview and does not
constitute legal advice. Readers are cautioned against making any
decisions based on this material alone. Rather, specific legal
advice should be obtained.
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