The expansion of the C$278.9 billion ($218.2 billion) Canada Pension Plan, Ottawa, should be cleared for approval by mid-July, with all but two provincial legislatures expected to vote in favor of the agreement.
“It’s going to pass,” said Jean-Philippe Provost, senior partner and leader of the Canadian retirement practice at Mercer LLC, Toronto.
Under Canadian law, a change to the CPP would require approval of seven provinces representing two-thirds of Canada’s population; the approval of eight of the country’s 10 provinces would be more than enough to enact the change.
Ministers from the eight provinces and Finance Minister William Morneau agreed in principle on June 21 to expand the CPP by raising benefits to one-third of pensionable earnings from 25%, increasing the maximum annual earnings cap to C$82,700 by 2025 from the current C$54,900, and boosting employer and employee contributions by up to one percentage point each by 2025.
The contribution increase — to as much as 5.95% from the current 4.95% — would be phased in beginning in 2019.
The quick vote on expansion is being pushed by Charles Sousa, Ontario finance minister, who set a July 15 deadline for passage of the national proposal in order for the province to halt its own proposed supplemental plan, the Ontario Retirement Pension Plan, which is scheduled to begin its first phase on Jan. 1, 2017.
“One of Ontario’s requirements for a CPP enhancement was that the timelines were reasonable compared to the ORPP design,” said Clancy Zeifman, Ontario finance ministry spokesman. “We agreed to the enhancement because the proposed timelines met our expectations.”
Each provincial legislature still has to introduce, and vote on, legislation approving the proposal. That is expected to happen quickly.
Jeff Kissack, senior consulting actuary at Willis Towers Watson PLC, Toronto, said the short time frame for passage shouldn’t be a huge problem as the ministers have been working on the details of CPP expansion since the start of this year. “The lion’s share of the work has already been done,” Mr. Kissack said. “They’ve been working hard since New Year’s to bring this together. Part of that process was Sousa saying to get done by mid-July. There’s no way the ORPP will get done now.”
Mercer’s Mr. Provost said that while Prime Minister Justin Trudeau said during his election campaign last year that he would push for expanding the CPP, “the fact that Ontario took an active role in creating its own supplement put pressure on the other governments. … The fact that it was so close to when ORPP would be implemented certainly made a national expansion easier to do.”
Mr. Kissack said of the two holdouts to the agreement, Quebec, which does not participate in the CPP, eventually will make some sort of enhancement to its C$57 billion Quebec Pension Plan, while Manitoba will be required to participate in the expansion even though it abstained from the voting because its new provincial government said it wanted more time to study the issue.
An earlier attempt to reach an agreement to enhance the CPP in late 2013 was unsuccessful, with the Conservative government of former Prime Minister Stephen Harper not supporting any enhancement.
If approved, an expanded CPP won’t mean any foreseeable change in how its assets are managed by the Canada Pension Plan Investment Board, Toronto, said CPPIB spokeswoman Mei Mavin, who called the potential expansion “an historic moment for the CPP.”
“It is important to keep in mind that even without any enhancement, the fund has been and will continue to be on a path of continuing growth over an exceptionally long period,” Ms. Mavin said. “So, modest changes to the plan along a multiyear transition phase, as contemplated, is unlikely to have a significant impact on the overall investment-related dimensions of the program.”
Messrs. Provost and Kissack both said the country’s corporate defined benefit and defined contribution plan sponsors will weigh the impact of CPP enhancement on their plans’ funding and benefits, because many of them integrate those factors based on contributions to the national pension plan and the benefits that plan provides.
“Most employers with pension plans, whether DB or DC, will wait to take a closer look,” Mr. Provost said. “They may not change, but they may decide to scale back their benefits in some cases. Their benefits are sometimes integrated either directly or indirectly with CPP benefits. Also, union agreements often include overall benefit packages, so this expansion will give sponsors and unions an opportunity in negotiations to see if any adjustments will be necessary.”
Said Mr. Kissack, “Most DB plans are set up with the CPP benefit in mind. … On the face of it, the agreement is not enough to make sponsors freeze their pension plans unless they’ve already been considering that. This might give them a little extra kick.”
However, Mr. Kissack said Canadian companies might look at decreasing their contributions to their DC plans as a result of increased CPP contributions.
