CPP Expansion—What’s New and What’s Next?

Joe NunesPresidentActuarial Solutions Inc.Lakeside, Ontario

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Disclaimer

Effort has been made to ensure the accuracy of this presentation. The presenter and his/her employer accept no liability for any error. This presentation is intended to provide information and before making any decision appropriate professional advisors should be consulted.

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Agenda1. CPP 101

2. CPP Expansion

3. Impact on Employees

4. Impact on Employers

5. Impact on Taxpayers

6. Action Plan

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CPP 101—Benefits• Started 1965 — 10 year phase in of benefits.

• Benefit equal to 25% of career average earnings*.

*Earnings covered limited to amounts earned between theYear’s Basic Exemption (YBE) and the Year’s Maximum Pensionable Earnings (YMPE).

• 2016 YBE $3,500 —2016 YMPE $54,900.

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CPP 101—Contributions• Contributions set at 1.8% of earnings for each of employee and

employer.

• It was understood at the time that contribution rate would need to rise in the future.

• Governments delayed changes in contribution rate until 1987.

• Contributions now stable at 9.9% — 4.95% employee/employer.

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CPP 101—Actuarial• 26th CPP Actuarial Report as at December 31, 2012.

• Benefit promise ‘sustainable’ at 9.9% contribution rate.• Benefits paid expected to exceed contributions by 2022.• Fund expected to continue rising beyond 2090.• Chief actuary is making best guess—Required contributions could be

anywhere from 8.97% to 10.73% depending on investment performance.

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CPP Expansion—Process• CPP Expansion discussed off and on for decades.• Very hard to pull off —2/3rds of provinces representing 2/3rds of

population must agree.• Previous agreement requires any expansion be ‘fully funded’

which prevents governments from another ‘give away.’

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CPP Expansion—Motivation• Employers are tired of the cost uncertainty of providing secure

pensions—Shift from DB to DC.• Unions are tired of relying on employers for secure pensions.

- DB often underfunded.- DC unpredictable and requires self-discipline.

• Both employers and Unions think they get what they want with expanded CPP—Fixed costs—Guaranteed benefits.

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CPP Expansion—Motivation• Economies are fragile—Why now?• Ontario Liberal Government promised CPP expansion or Ontario

Retirement Pension Plan (ORPP).• Federal Conservative Government blocked expansion and ORPP

was well underway.• New Federal Liberal Government promised expansion and Ontario

created pressure for getting on with it.

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CPP Expansion—Benefits

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CPP Expansion—Contributions• Expanded CPP will be new ‘tier’ of contributions and benefits.• New contributions will be tax deductible (current are not).• Official agreement does not specify new contributions.• Reported to be 1% employee/1% employer below YMPE and 4%

ee/er above YMPE to new earnings limit.• Chief Actuary will decide.

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Impact on Employees• Only 5-years to phase-in an increase in the benefit from 25% to

33.3%.• Career average nature of benefit means 40-years for full

improvement to take effect.

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Additional Annual CPP Benefits for Different Age Cohorts and Income Levels

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Impact on Employers• Additional 1% employer contribution phased in over 5-years.• Additional 4% contribution on covered earnings over YMPE takes

effect in 2024.• Earnings covered by extra 4% phased in $5,000 a year for two

years—Ultimately about an extra $400 and then indexed—Only affects workers earning over the YMPE.

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Impact on Employers• In theory more benefit from CPP means less responsibility for

employers.• Should employers be reducing their current pension plan

commitments or is the CPP expansion filling a gap in the existing program?

• Is it possible to have too much retirement income?

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Impact on Taxpayers• CPP funding is intended to be self-sustaining.• In theory taxpayers not on the hook for shortfalls.• Financial difficulties result in reduced benefits or increased

contributions.• Critical objective is managing inter-generational equity among

cohorts of contributors.

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Action Plan for Plan Sponsors• Don’t panic—We have time—Don’t procrastinate, changing

compensation plans takes time.• Call payroll! Make sure we have a supplier or programmer ready

to make changes.• Review retirement plan goals and consider if improved CPP

changes the targets for the company plan—Change if needed.• Communicate, communicate, communicate.

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Employee Communication Checklist• What are the changes to CPP?• What changes is the company making or not making to other

programs and to employee compensation?• What is the impact to paycheques?• What are the timelines?

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Questions?

Thank you!

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