A rollout of higher Canada Pension Plan costs will inevitably cause a ripple effect across human resource budgets over the next years.
Canadian pension experts say higher mandatory contributions to the Canada Pension Plan (CPP) and the Quebec Pension Plan will inevitably cause a ripple effect across human resource budgets over the next six or seven years.
Under the enhanced Canada Pension Plan, authorized by Ottawa and the provinces, expenses will go up in two ways.
One way involves a series of higher contribution rates from 2019 through 2023. The other will involve a higher ceiling on how much annual income is subject to contributions by 2025.
By 2023, the employer’s contribution rate will be 5.95% of an employee’s pensionable earnings, up from 4.95% in 2018 and prior years. In 2024 and 2025, the ceiling on maximum pensionable earnings will be raised.
However, pension experts say that only a few early adopters have begun that process.
Andrew Hamilton, who leads the Ontario retirement practice for Aon, a consulting firm, says there’s anecdotal evidence that organizations are beginning to consider the impact of the CPP enhancements. “But very few, if any, have actually made any design or structural changes to their programs to reflect the changes,” he said.
That’s because the additional CPP cost faced by employers in 2019 is very modest and each year’s incremental costs will also be relatively small until all the increases are implemented by 2025.
Jean-Philippe Provost, a senior partner at Mercer Canada’s wealth business, notes the employer portion of contributions will be a full percentage point higher in 2023 than in 2018 before the increases began.
Surveys conducted prior to the implementation of the enhanced CPP indicate pension plan sponsors have been looking at what’s being considered by other companies, but few have taken action yet.
Ryan Silva, head of the pension segment at RBC Investor and Treasury Services, also says higher contribution rates haven’t affected private plans yet, but he thinks they will “somewhere in the future.”
Provost says a majority of Canadian organizations set an annual budget for human resource expenses. “Part of that budget goes towards salary increases for employees. Part of it pays for the cost of the retirement plan. Part of it’s for the benefit plan. Part of it’s for perks. It can be sliced and diced in various ways”, he said.
EY Canada’s Faisal Siddiqi says employers are always trying to find the right balance between their human resource needs and their overall financial costs.
Siddiqui adds that once those costs have been assessed, the bigger challenge will be to communicate effectively so the changes are understood throughout the workforce and unintended consequences are minimized. “A change to a pension plan design is a pretty big deal… because it impacts the entire organization,” he explained.