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Pension Funds

Canadian employers not prepared for pension plan design changes

Consultants surprised by lack of action ahead of CPP, QPP enhancements

Willis Towers Watson’s Michael Millns: ‘I would have thought (the CPP enhancement) would have been an impetus for change, but it hasn’t been.’

Canadian employers generally have made no changes to their retirement plan designs to fund increased contributions to the Canada Pension Plan and Quebec Pension Plan that begin in January, which could mean funding ultimately could come from reductions in staffing or payroll, sources said.

The lack of changes in plan design came as a shock to consultants. "I'm surprised," said Michael Millns, managing director, retirement practice leader, at Willis Towers Watson PLC, Toronto. "As a consultant, I would say that now was the time to take a look at whether your plan is doing what it planned to do. A lot of them already moved from DB to DC 10 years ago. I would have thought (the CPP enhancement) would have been an impetus for change, but it hasn't been."

The enhancement to the C$368.3 billion ($278.7 billion) CPP, Ottawa, which begins at the start of 2019, will gradually increase mandatory employer and employee contributions up to 1 percentage point each by 2025, to as much as 5.95% each 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.

In Quebec, which is not covered by CPP, the C$72 billion Quebec Pension Plan, Quebec City, will also increase employer and employee contributions starting Jan. 1, but they'll gradually rise to a 6.45% of pay each vs the current 5.45%, because of the higher number of those age 65 and above in Quebec vs. the rest of Canada.

Those incremental increases in CPP and QPP contributions, rather than a large one-time jump, "led plan sponsors to put this on the back burner," added Jason Malone, partner, retirement and investment at Aon PLC, Montreal. "Of 10 priorities they may have, this is ninth or 10th. If you're increasing payroll by 1.5%, am I going to put this in the top 10 priorities? The answer is no. Over the next three or four years, when these contributions start creeping up, there might be more action."

Only 17% getting ready

In an April survey of 325 Canadian employers conducted by Aon, only 17% said they had started planning for the CPP and QPP enhancements. "The results were disappointing," Mr. Malone said. "There was no improvement on the decision-making process of clients. More than 80% hadn't done anything yet, and 37% said they planned to start doing something before year-end 2018. But I bet if we were asking the same questions now, we'd get the same results."

If plan design changes aren't made to fund the higher contributions, sources said, employers could target other costs — like pay and staffing.

"In my view, there will be additional costs" because of the CPP and QPP contribution increases, said Jana Steele, partner, pensions and benefits group, at the law firm of Osler, Hoskin & Harcourt LLP, Toronto. "And they'll be addressed by employers through total compensation. You're likely to end up seeing lesser salary increases than there might have been without the contribution increases."

There hasn't been any proactive move seen in changing compensation among Canadian plan sponsors, Ms. Steele said, but "that will happen as the contributions rise."

Contribution increases could be paid for "through a fractional change in salary," said Mr. Millns of Willis Towers Watson. "And because those sponsors aren't being hit with a huge one-time increase in (CPP) contributions, the impact can be spread out. They don't see it as a 1% decrease in their benefits for a 1% increase in CPP; they could cover that through cutting back on payroll costs, either through smaller pay increases or fewer employees. With larger organizations, they can absorb that cost. But the 10-person employer cutting back to nine because of it, that would be a bigger impact to them."

Derek Dobson, CEO and plan manager of the C$10.8 billion Colleges of Applied Arts & Technology Pension Plan, Toronto, said Canadian DB and DC plan sponsors "do look at a total compensation budget... Pension plans that are coming to us (seeking to merge with CAAT) haven't looked at pensions as 'it'll cost what it'll cost,' not taking into account any other benefits or pay. Contributions to CPP will either be paid for by reduced hiring or by lower wages."

Aon's Mr. Malone said, "The first reaction of employers is, if we have to pay out more again, we'll do cutbacks. But when the employer looks at the impact and intent of the CPP enhancement and what the ultimate goal of their benefits is, they might ask if we're just passing on one payment for another. That doesn't mean they won't eventually decide to cut benefits, but it more likely could mean changes to overall compensation to align to their model."

No sudden rush

CAAT's Mr. Dobson said that while payroll and staffing will be a target for future cuts to pay for additional contributions, he doesn't expect there to be a sudden rush to change as the impacts of the contributions are felt.

"When the provinces and the federal government drew the enhancement up, it was with the intent of implementing it more gradually," Mr. Dobson said. "I don't think that'll mean there'll be pent-up demand for changes as the enhancements continue. It's not like a lobster in a pot not noticing a one-degree change."

CAAT has been actively courting private-sector companies to merge their retirement plans with CAAT's DBPlus plan design, which uses the same governance structure, investment asset mix and administration as its original DB plan. Mr. Dobson said that, by design, DBPlus has a fixed contribution rate not tied to federal plan contributions.