Additional Canada Pension Plan enhancements adopted
On June 21, 2018, Bill C-74 received royal assent. Among other things, this bill provides for the enhancements to the Canada Pension Plan (CPP) agreed upon by the Finance Ministers in December 2017. These enhancements are in addition to the agreement made in 2016 to expand the CPP by increasing the contribution and income replacement rates. Effective January 1, 2019, these additional features will provide enhanced death and disability benefits in specific cases, as well as further protection of the value of benefits for caregivers of young children.
Improved death benefits
Under the current CPP provisions, there is a 10% reduction for each year a survivor is under the age of 45 unless disabled or raising dependent children at the time of the contributor’s death. Effective January 1, 2019, reductions applied to a survivor’s pension for survivors under the age of 45 will be removed.
Under the current provisions, the death benefit payable to a deceased CPP contributor’s estate is equal to six months of their CPP benefit payable at age 65, to a maximum of $2,500. Effective January 1, 2019, the CPP will provide a flat guaranteed payment of $2,500 to the contributor’s estate regardless of the contributor’s monthly CPP amount.
Expanded disability provisions
Under the current provisions, if a CPP recipient is deemed disabled after commencing their pension prior to age 65, the CPP recipient is not eligible for a CPP disability pension. As part of the adopted changes, a CPP recipient who meets the requirements for a CPP disability will receive an additional payment while continuing to receive their regular CPP benefit, adjusted for early commencement.
Earnings drop-in for parents of young children and for disabled CPP contributors
The additional CPP benefits to take effect in 2019 will be improved with the introduction of “drop-in” income during periods of low or no earnings for parents of children under the age of seven. For the purpose of calculating the additional CPP benefits, an amount equal to the average earnings during the five years prior to the birth or adoption of the child will be “dropped-in” if they are higher than the parent’s actual earnings for the years until the child turns seven. The traditional “drop-out” model will continue to apply to base CPP benefits.
A similar mechanism will be applied to CPP contributors who have low or no earnings during periods of disability. A “drop-in” amount equal to 70% of the average earnings in the six years prior to the onset of the disability will be used to calculate the additional CPP benefits during disability periods.
Impact of the additional CPP enhancements
A supplemental actuarial report for the CPP has been released in light of these additional enhancements. The purpose is to show the effect that these changes will have on the CPP’s long-term financial state.
The additional contributions required as a result of the new CPP tiers, effective January 1, 2019, will be held and valued in a separate account called the Additional Canada Pension Plan Account. Accordingly, the report values the impact on the base, or traditional, CPP and the enhanced, or additional, CPP separately.
The report estimates that these additional enhancements will increase total base CPP expenditures by $230 million and total additional CPP expenditures by $679 million by 2050. For perspective, these amounts represent only 0.1% and 2.4% of total base and additional CPP expenditures, respectively. The report also confirms that the contribution levels legislated in 2016 (including increases phased in from 2019-2024) are sufficient to cover these improvements in the long term.
Although these new amendments can have a sizeable impact on the ultimate CPP benefit of many contributors, it is the first phase of CPP expansion amendments that will have the biggest impact on all employees and employers. To recap, from 2019 to 2023, an increase of 1% (from 4.95% to 5.95%) in employer and employee contributions on earnings up to the YMPE will be phased in, while new contributions of 4% on earnings above the YMPE up to the Year’s Additional Maximum Pensionable Earnings (YAMPE) are to commence in 2024. Refer to our June 2016 Special Communiqué and our November 2016 News & Views for more details.
An increase from 25% to 33.33% in the replacement rate for pensionable earnings will be phased in from 2019 to 2024. This enhancement will only apply to years after the implementation of the increased contributions; it is not retroactive. Specifically, starting January 1, 2019, the basic monthly pension will increase incrementally, according to a pre-determined schedule, from 25% to 33.3% of the contributor’s average monthly pensionable earnings.
As the 2019 implementation date for the CPP expansion approaches, plan sponsors should review their plan designs to ensure that retirement programs still meet their organization’s objectives. For example, the sponsor of an integrated plan intended to provide a specific replacement ratio may want to adjust the contribution formula to reflect the improved CPP retirement benefit. Another important consideration is whether the plan sponsor is willing to absorb the increased cost of CPP contributions or would rather remain cost neutral by reducing the retirement program to offset the additional expense.
Regardless of whether or not plan sponsors decide to alter retirement programs in light of the CPP expansion, consideration should be given to communicating the CPP changes to employees, especially as these changes will reduce take-home pay. Providing employees with advance notice could be better than fielding questions in January 2019, when the increased CPP contributions are reflected in take-home pay reductions.