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Changes to the Canada Pension Plan: a field guide for Ontario employers

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Are you an employer who is uncertain about what you should be doing to prepare for the changes to the Canada Pension Plan (CPP)?  This guide will help you.

The changes were announced by the federal government a year ago, and formal rules became law at the end of 2016.  Unlike the infamous Ontario Retirement Pension Plan, these government-run pension changes are here to stay.

Here is a summary of the changes.

 Mandatory contributions to the CPP by employers and employees will increase, starting January 2019.  The increases will be phased in gradually over several years.  By 2023 employers and employees will each be paying 5.95% of their eligible income to the CPP.  Right now they are each contributing 4.95% of eligible income.

It’s a significant increase in contributions.  The combined employer and employee mandatory contributions to the CPP will go from 9.9% of employees’ eligible income to 11.9% of their eligible income.  That’s a 21% increase.

And it’s an even bigger hit for higher-income employees and their employers.  Anyone with an annual salary of more than $70k (approximately), and their employers, will have to make additional contributions commencing 2024.

The upside is that the amount of the CPP benefit paid to Canadians will increase.  It is expected that the annual benefit paid by the CPP will increase by as much as 50%.  In today’s dollars, the maximum CPP annual payout would go from $13,370 to $20,000.  This full enhancement to the CPP benefit probably won’t be seen for approximately 40 years.

If you have Quebec employees, beware:  the CPP does not apply.  Changes to the Quebec Pension Plan are being considered, but it’s not known whether or when any changes will be made.

January 2019 is not far away.  If you will be making changes to retirement and savings plans as a result of the CPP changes, you may want to communicate those changes to employees in the next year or so.

As a starting point, here are some high-level strategic suggestions:

 If you have a Group RRSP or defined contribution pension plan:

  • Consider whether to reduce the amount of required employee contributions to your plan, so that there will be little or no impact on your employees’ take-home pay.
  • Consider reducing employer contributions to your Group RRSP or defined contribution pension plan, so that the overall employer costs of contributing to the CPP and your employer-sponsored plan remain level.  If you decide to do so, communicate the changes to employees now, so they are well aware in advance of any changes.

If you have a defined benefit pension plan:

  • Find out if there is anything in your pension plan that relates to the CPP.  Are employee contributions computed based on how much they contribute to the CPP?  Is there a “bridge benefit” that relates to the CPP?
  • Ask your actuary whether the liabilities of your pension plan will increase as a result of any provisions that relate to the CPP.
  • Consider amending your pension plan to lessen the impact of the CPP changes, if any, on the design of your plan.

If you have a union:

  • Find out if there are sections of the collective agreement that will restrict you from making changes to your retirement savings plans.  Consider letting the union know, in collective bargaining, that changes may be made due to CPP changes.
  • If the term of the collective agreement goes beyond 2018, formulate a plan to communicate to the union the fact that employee take-home pay will go down as a result of higher CPP contributions.

Please contact a member of the Dentons Canada pension and benefits group for assistance in understanding how the CPP changes will impact your organization.  Be prepared.

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