What Does The Future Hold? The CPP Enhancement Hosted by the - PowerPoint PPT Presentation

What Does The Future Hold? The CPP Enhancement Hosted by the Ontario Regional Council March 29, 2017 TWENTY Toronto Street Conferences and Events Toronto, ON Ontario Regional Council

Stephanie Kalinowski Partner Hicks Morley Hamilton Stewart Storie LLP Ontario Regional Council 2

Allan Shapira Managing Director, Senior Consulting Actuary Aon Hewitt Ontario Regional Council 3

Highlights of Today’s Session • Introduction • CPP Enhancement Overview • Integration and Pension Plan Design Implications • Human Resources Implications • Questions Ontario Regional Council 4

Why Expand the CPP? Source: Department of Finance Canada, “Backgrounder: Canada Pension Plan (CPP) Enhancement”, September 19, 2016 Ontario Regional Council 5

Why Expand the CPP? Source: Department of Finance Canada, “Backgrounder: Canada Pension Plan (CPP) Enhancement”, September 19, 2016 Ontario Regional Council 6

Who Will Benefit? Source: Department of Finance Canada, “Backgrounder: Canada Pension Plan (CPP) Enhancement”, September 19, 2016 Ontario Regional Council 7

CPP Enhancement: Overview • Agreement in principle signed by 9 provinces • Ratified by all 9 provinces How • Higher target benefit rate • Increased maximum earnings limit What • Increased contribution rates • Implementation begins January 1, 2019 • 7-Year Transition Period When Ontario Regional Council 8

̶ ̶ Refresher – Current CPP ▪ Contributions are currently made on earnings between $3,500 Pensionable (“Year’s Basic Exemption” or YBE) and the year’s maximum pensionable Earnings earnings (YMPE) Current ▪ YMPE in 2017 is $55,300 (it increases each year) Maximum Cost ▪ Employees and employers each contribute 4.95% of pensionable earnings ▪ CPP benefit aims to replace 1/4 (25%) of annual earnings up to YMPE for members who contribute over 35-40 years: Benefit Adjustments are made for years with lower earnings Adjustments are made if you don’t start CPP at age 65 Ontario Regional Council 9

What: Higher CPP Benefit Formula • Higher target benefit (income replacement as a portion of indexed career pensionable earnings) % of Indexed – 25% now Career – 33 1/3% enhanced Pensionable Earnings 33 1/3 % Enhanced CPP 25% Existing CPP Ontario Regional Council 10

What: Higher Pensionable Earnings Limit • Maximum pensionable earnings increase by 14% – New concept of YAMPE (earnings above YMPE) 2025 – Projected to be $79,400 in YAMPE 2024 $79,400 2025 YAMPE 2025 $72,400 YMPE 2017 YMPE 2024 YMPE $69,700 $67,700 $55,300 Ontario Regional Council 11

What: CPP Formula and Earnings Enhancement Increased Increased maximum retirement amount of benefits income subject to CPP Ontario Regional Council 12

What: Higher Contributions – Up to YMPE Now 2023 4.95% 5.95% Employers Employers 4.95% 5.95% Employees Employees Ontario Regional Council 13

What: Higher Contributions – Above YMPE 2024 2025 4.0% 4.0% Employers Employers 4.0% Employees 4.0% Employees Over YMPE Over YMPE ($67,700) ($69,700) Up to YAMPE Up to YAMPE ($72,400) ($79,400) Ontario Regional Council 14

New Tax Deduction • Tax deduction (instead of tax credit) for employee contributions associated with the enhancement • The extra 1% on earnings up to the YMPE • The new 4% on earnings above the YMPE up to the YAMPE • Federal Working Income Tax Benefit enhanced to offset the impact of increased contributions on low-income workers Ontario Regional Council 15

Phase-In of CPP Enhancement Contribution Rates Ontario Regional Council 16

When: By 2025 YAMPE $69,700 – $79,400 4% (new) Earnings up to YMPE $3,500 – $69,700 5.95% (1% increase) Exemption $0 – $3,500 Ontario Regional Council 17

Key Dates January 1, 2019 – January 1, 2025 Gradual implementation 2019 – 2023 5-year contribution rate phase-in below YMPE 2023 – 2025 2-year phase-in of YAMPE Ontario Regional Council 18

Impact of CPP Expansion Higher employer payroll costs Lower employee take-home pay Pension plans with benefit and/or contribution formulas that integrate the YMPE may see changes in employee and employer contribution levels and benefit accruals Ontario Regional Council 19

Current Integration With CPP Initial integration with CPP benefits for defined benefit plans was based on replacing 25% of earnings over 35 years, which would be 0.71%; or 25% over 40 years, which would be 0.625%: DB Plans DB Plans ▪ Result is a common step-rate benefit formula under DB plans of 1.3% or 1.4% below the average YMPE and 2.0% above the average YMPE DC Plans Often not integrated with CPP or not directly integrated Ontario Regional Council 20

Integrating Pension Plans With CPP Enhancement ▪ ▪ There are two aspects to integrating a DB plan Pension plans typically define the with CPP Enhancement for future service: YMPE as the Year’s Maximum Pensionable Earnings under CPP Expansion of earnings covered by CPP ▪ YMPE will still be a concept under STEP ONE (i.e., deal with new YAMPE) CPP. YAMPE is a new term under Bill C-26. Therefore, integration with YAMPE would not be automatic Increase of the benefit accrued on pensionable earnings STEP TWO (i.e., deal with new accrual rate) Ontario Regional Council 21

RPP Integration Example – Current CPP Below YMPE Between YMPE and YAMPE Above YAMPE Contribution Contribution Contribution Benefit Rate Benefit Rate Benefit Rate Rate Rate Rate CPP 0.6% 4.95% 0.0% 0.0% 0.0% 0.0% RPP 1.4% 7.00% 2.0% 10.0% 2.0% 10.0% TOTAL 2.0% 11.95% 2.0% 10.0% 2.0% 10.0% Ontario Regional Council 22

RPP Integration Example – Enhanced CPP Below YMPE Between YMPE and YAMPE Above YAMPE Contribution Contribution Contribution Benefit Rate Benefit Rate Benefit Rate Rate Rate Rate CPP 0.6% 4.95% 0.0% 0.0% 0.0% 0.0% Enhancement 0.2% 1.00% 0.8% 4.0% 0.0% 0.0% RPP 1.4% 7.00% 2.0% 10.0% 2.0% 10.0% TOTAL 2.2% 12.95% 2.8% 14.0% 2.0% 10.0% May or may not reintegrate with Should reintegrate with YAMPE enhanced CPP Between YMPE and YAMPE CPP 0.0% 0.0% Enhancement 0.8% 4.0% RPP 1.4% 7.0% TOTAL 2.2% 11.0% Ontario Regional Council 23

General Comments About Integration ▪ Need to consider that under exchange of benefits from DB plan to CPP enhancement, there are no unreduced early retirement benefits under CPP ▪ Phase-in of benefits and contributions under CPP enhancement complicates integration discussion ▪ New disparities between CPP and QPP may also complicate matters ▪ If DB provisions are closed, consider whether worthwhile to change integration ▪ If DC provisions are not currently integrated, provisions could still be amended to lower employer contributions to make up for increase in contributions required for CPP enhancement ▪ Need to consider overall philosophy on target level of benefits Ontario Regional Council 24

Quebec Pension Plan • separate consultation took place January 2017 • consultation addresses 2 main themes: • enhancing the Québec Pension Plan and • strengthening its sustainability, with controlling the contribution rate a necessary goal • QPP contributions are higher than CPP • ACPM participated in the consultations • 3 proposals: • status quo • adopt CPP enhancement • enhancement proposed by Québec Ontario Regional Council 25

Quebec Pension Plan • enhancement proposed by Québec: • increase target income replacement from 25% to 33.3% earnings over $27,450 • increase YMPE from $54,900 to $62,600 • increase the contribution rate from 2019 to 2025, except for workers whose income is less than $27,450 • increase QPP benefits for individuals whose employment income is $27,450 and higher • provide an additional income exemption for the purpose of calculating the Guaranteed Income Supplement (GIS) in order to immediately increase the income of low-income seniors. Ontario Regional Council 26

Steps that Employers Should Take Now Assess impact of additional payroll costs Determine if pension plan is integrated with CPP Consider impact of CPP enhancement on retirement savings plan design (including SERPs) Identify whether any changes must be collectively bargained and expiry date of current collective agreement Ontario Regional Council 27

CPP: Cost Considerations Reduce compensation (salary, bonuses) Offset Cost Reduce benefits Expanded CPP Restrict hiring Absorb Cost Do nothing Ontario Regional Council 28

CPP: Cost Considerations Change Plan Absorb Cost No change to plan design or Adjust benefit formula contributions Decrease contributions Ontario Regional Council 29

CPP: Design Considerations • What was plan’s intended retirement income replacement target? • Is it now too high? • Is it too low? • Was it only focused on employer cost or industry benchmarking? • Does the employee / employer contribution rate continue to make sense? • Will employee behaviour change due to higher CPP contributions? Ontario Regional Council 30