The increase in Canada Pension Plan benefits and contributions could change plan designs, contributions and benefit formulas of many of the country's other retirement plans, sources said.
The enhancement to the C$316.7 billion ($254 billion) CPP, slated to begin in January 2019, will gradually increase mandatory employer and employee contributions up to 1 percentage point each by 2025, to as much as 5.95% from the current 4.95%. The increase will allow benefits to rise to one-third of pensionable earnings from 25% and raise the maximum annual earnings cap to C$82,700 by 2025 from C$54,900.
With the contribution increase, sources said, employers are likely to treat their overall benefits contribution as a zero-sum game. Plan sponsors will contribute the same total amount, but could reduce their employer-sponsored plan contribution to offset the higher CPP contributions.
Plan sponsors are "taking a step back and saying that CPP expansion gives them pause for thought about three things," said Michael Millns, retirement practice leader, Willis Towers Watson PLC, Toronto, and member of the Association of Canadian Pension Management's national policy committee.
"First, does their pension plan and the government benefit in total align with the employer's philosophy on retirement? Second, they're asking where they are in relation to the market. If their benefits are already above the market and now the benefits of the CPP will be enhanced, they're asking whether (their benefits) should be that high. And third, employers are putting together everything — CPP, Old Age Security (Canada's social security system), the employer's pension plan — and asking if they're providing the appropriate level of benefits to employees. … With all of that, employers are now wondering, 'Where do we go from here?'"
One possibility, sources said, is that the pending CPP expansion could be an opportunity for defined benefit plan sponsors to change their design, possibly to a shared-risk or target-benefit model, where benefits can be decreased in the event funded status drops below 100%, or to terminate the DB plans and replace them with defined contribution plans.
Allan Shapira, managing director, Aon Hewitt Canada, Toronto, said he thinks the greater impact will be on existing defined contribution plans. "Defined contribution sponsors do see benefits as a pie with portions to be divided up," Mr. Shapira said. "I think we will see some reduction in employers' DC contributions to offset their increase in CPP contributions. Also, some employers might say they'll absorb the cost of the contribution increase but instead of taking it from the DC contribution, they'll say it means less money for salary increases. If that happens, that kind of defeats the purpose of CPP enhancement. But in the DB world, I think it'll be difficult for plan sponsors to use this as a lever to change their pension plans."
Jana Steele, partner, pensions and benefits, at the law firm of Osler, Hoskin & Harcourt LLP, Toronto, agreed the CPP change might not lead to a shift among pension plan sponsors to shared risk. "I'm not sure the CPP enhancement would be a tipping point," Ms. Steele said. "It's a company-specific question. There are already many factors involved in going to a shared-risk plan — low interest rates, effects of the 2009 financial crisis, a plan's funding status. ... I think it's wait-and-see. I think people will look at enhancement and ask if that's enough of a reason to make a change."
Added Scott McEvoy, partner with law firm Borden Ladner Gervais LLP, Toronto, "I'm not sure in and of itself that the CPP expansion will lead to pension infrastructure changes; I'd have thought DB plans would move to DC plans and DC plans would grind down their contribution rates. There was a lot of pushback from companies about the CPP expansion. … I'm not sure it means DB will go to shared risk. It'd be more of freezing the DB plan, go to a DC plan; or in an existing DC plan, reducing the contributions."