Upcoming CPP reforms a ‘convenient time’ to consider more complex DC design

…While many defined contribution plans operate on a relatively simplified basis by providing for employer-employee contributions of, say, five per cent each, the approach may not always be ideal. As Michelle Loder, a partner at Morneau Shepell Ltd., points out, the approach provides for full CPP and workplace pension plan coverage for lower-income employees who earn less than the year’s maximum pensionable earnings. For those earning above that threshold (currently $55,300), they don’t get CPP coverage on their full income. Thus, the lower-income employee may, in fact, have a higher replacement rate in retirement. Loder notes integration in many defined benefit plans typically does consider CPP coverage. The theory, she says, is that members would need less from their workplace pension to replace income up to the yearly earnings threshold since they’d also be receiving CPP benefits. They’d thus get more from their workplace pension in order to replace earnings above the threshold.

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