By Sheryl Smolkin

Well, the earth moved and in late June at a meeting of provincial/federal finance ministers, Bill Morneau got the consensus he needed from eight provinces including Saskatchewan for the phase in of modest enhancements to the Canada Pension Plan. As a result Ontario has agreed to shelve its plans for a home-grown Ontario Registered Pension Plan.

The feds plan to start collecting higher premiums beginning January 1, 2019. Many details still have to be ironed out, but here are 10 things you need to know about how enhanced CPP benefits will impact both employers and employees.

1. The Canada Pension Plan Act says that once a sufficient number of provincial governments have indicated support, the federal government can move forward and lock in the reform with an Order in Council—no new Parliamentary debate or legislation is required. From that point forward, the expansion will be fixed in place unless amended through a subsequent agreement of two-thirds of provinces to reverse the expansion—which is very unlikely.
2. If you are already retired or close to retirement you will not benefit from the changes. Someone retiring in 2020 who made one year of the increased contribution would get a tiny amount. Someone retiring in 2030 would have 10 years of extra contributions.
3. Canadians who work a full 40 years will see their benefits increase (in 2016 dollars) to a maximum of $17,478 instead of $13,000. Therefore the replacement rate will inch up from 25% of the Year’s Maximum Pensionable Earnings (YMPE) to one-third.
4. The maximum amount of income subject to CPP will increase 14%  from $54,900 this year to $82,700.
5. Increased premiums of one percent will be phased in over seven years beginning in 2019. That means depending on the income levels of individual Canadians, up to $408 will come off their pay cheques.
6. The refundable tax credit known as the federal working income tax credit will be expanded to help low-income Canadians offset the increase in premiums.
7. Changes will not impact RRSP (and SPP) contribution room.
8. To avoid increasing the after-tax cost of the added premiums, Ottawa will provide a tax deduction for the additional contributions rather than a tax credit.
9. Company pension plans are not always offered – particularly Defined Benefit plans. Therefore it makes sense that young people and mid-career employees will benefit.
10. Participation is mandatory and from the limited information released to date, it appears that even companies that do have a pension plan will have to make additional contributions and their employees will not be exempt.

By Sheryl Smolkin

Next week Federal Finance Minister Bill Morneau will again be meeting with provincial and territorial finance ministers to talk about options for improving Canada Pension Plan benefits. This protracted discussion has been going on for as long as I can remember, but the hurdles remain the same.

CPP changes require the support of Ottawa plus seven of the 10 provinces representing two-thirds of the population. When the finance ministers last met in December 2015, Ontario which is currently going at it alone, PEI, Manitoba, Nova Scotia and New Brunswick gave CPP improvements a “thumbs up.” Quebec, B.C. Saskatchewan and Alberta vetoed the idea.

Here are some links to recent articles in the mainstream media that will bring you up-to-date on the various arguments made by stakeholders in the debate.

Larry Hubich, president of the Saskatchewan Federation of Labour says the proportion of their incomes that Canadians put into CPP, and will someday get back as pension payments, “is not enough.” Nevertheless he is optimistic since many Canadian politicians — including Prime Minister Justin Trudeau — agree there’s a pension problem because many Canadians can’t retire on what they’ll get from the CPP under current rates.

After the finance ministers met in December 2015, Dan Kelly, president and CEO of the Canadian Federation of Independent Business (CFIB), and Marilyn Braun-Pollon, Saskatchewan vice-president of CFIB told the Regina Leader-Post that small business owners are relieved that Canada’s finance ministers have put plans to expand the Canada Pension Plan (CPP) on hold. “They are relieved but they’ve expressed a desire to see a shift in the conversation,” Braun-Pollon said.

The Globe and Mail reports that a coalition of business groups and youth advocates is calling for an expanded Canada Pension Plan, but only if it is targeted at middle-income levels. The coalition argues that higher premiums to pay for more generous retirement benefits should kick in at annual earnings of about $27,500. They argue helping Canadians who earn less than that is better accomplished through Old Age Security and the related Guaranteed Income Supplement.

The Ontario government recently announced it is delaying the introduction of its Ontario Retirement Pension Plan until 2018 while it negotiates with the federal government and other provinces on an enhanced CPP. However, at this point, the government says it still intends to proceed with the ORPP as it’s unlikely that all provinces can agree on a CPP enhancement large enough to take the place of the ORPP. Here’s what you need to know about the ORPP:

And Fred Vettese, the Chief Actuary of Morneau Shepell writes in the Financial Post that he is actually in favour of CPP expansion if it is done right. He says one thing it will certainly do is to raise the under-savers (and there are many of them) closer to the standard of living they enjoyed while working. The unanswered question is how much closer should they be without having to save on their own?

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By Sheryl Smolkin

At this point it is not clear how the Ontario Registered Pension Plan (ORPP) that will come into effect in 2017 will affect Saskatchewan says Katherine Strutt, General Manager of the Saskatchewan Pension Plan.

“I don’t believe the provincial government is interested in a mandatory pension plan,” she says.

The ORPP is a plan that will require employer and employee contributions to generate additional government benefits in excess of monthly Canada Pension Plan benefits. The average amount of CPP for new beneficiaries in January 2015 was $618.59/month. The maximum monthly CPP benefit in 2015 is $1,065.

Key features of the ORPP as set out in the consultation paper Ontario Retirement Pension Plan: Key Design Questions are as follows:

• The plan would be phased in beginning in 2017 with the largest employers. Contribution rates would be phased in over two years.
• Employees and employers would contribute an equal amount, capped at 1.9% each on an employee’s annual earnings up to $90,000. Earnings above $90,000 would be exempt from ORPP contributions.
• Earnings below a certain threshold would be exempted to reduce the burden on lower income workers.
• Contributions would be invested at arm’s length from the government. ORPP would pool investment and longevity risk and aim to replace 15% of an individual’s earnings.
• Participation would be mandatory, but workers who already participate in a “comparable workplace pension plan” would not be enrolled in ORPP. The government says its preferred definition of a comparable plan includes defined benefit and target benefit multi-employer pension plans.
• Additional conversations will be held on the best way to assist the self-employed.

An article on the International Foundation of Employee Benefits Plans website aptly summarizes some of the controversy that still surrounds the new program:

“The ORPP proposal has raised concerns among many plan sponsors of defined contribution (DC) plans because the government is proposing that they may not be considered comparable workplace pension plans. Many DC plan sponsors say they already provide adequate contributions. If those plans are not considered comparable, some question whether employers will continue them and/or lower their contributions in order to fund both ORPP and a DC plan.

Another concern is that mandatory contributions will reduce take-home pay and may result in the reduction of other workplace benefits. In the paper, the government said “ . . . some employers may take stock of their current approaches and make decisions about the right compensation mix going forward . . .’”

Both the federal Liberals and NDP parties have publicly supported a CPP enhancement. If either of these parties forms the newly-elected federal government in October, Ontario might opt to hold off on ORPP implementation until a similar national program can be adopted.

By Sheryl Smolkin

Today, I’m pleased to be interviewing Greg Hurst for savewithspp.com. Greg is a pension consultant and pension innovator based in Vancouver. He’s held many roles in the pension industry with large international and small regional consulting firms and a major Canadian insurer.

He’s a member of both the editorial advisory board of Benefits and Pensions Monitor and Benefits Canada’s online expert panel. In fact, two of his articles were among the five most widely-read Benefits Canada pension articles of 2013.

Today, Greg is going to share his thoughts with us on the federal government’s  surprising pre-election proposal to study allowing Canadians to voluntarily contribute to the Canada Pension Plan (CPP) to supplement their retirement savings.

Thank you for joining me today, Greg.

Glad to be here Sheryl.

Q: Were you surprised to hear of the federal government’s announcement in May that they are going to reconsider a voluntary top-up to the Canada Pension Plan?
A: It was totally unexpected. Since 2011, the federal government has consistently said it’s not the right time for changes to the CPP, and even more recently – in fact, just before the announcement – they characterized CPP contribution rate changes as a “pension tax hike.”

Q: Interesting. So, why do you think that the Minister of Finance, Joe Oliver, announced these consultations after the government and the provinces previously rejected similar proposals?
A: Well, an election is coming up. The federal Conservatives recognize that CPP expansion will be a significant election issue. In the 2014 Ontario election pensions were front and center, and Kathleen Wynne’s Liberals won with her promise of the Ontario Registered Pension Plan (ORPP), which grew out of the federal government’s refusal to consider CPP expansion in spite of a consensus amongst the provinces. Canadians have come to love the CPP. It delivers on its benefit promises and the CPP Investment Board consistently delivers good news on its investment returns.

Q: Now, in an article you wrote that was published May 27th on the Benefits Canada website, you suggest that “the devil is in the details.” The closing date for the consultations on a voluntary CPP top-up is September 10th and the election will be held on October 19th. Do you think a detailed blueprint for adding a voluntary tier to CPP will be available for public scrutiny prior to the election?
A: It is unlikely. October 19th is the next fixed election date, and that would leave less than six weeks to build and publish the blueprint. It would also require input from the provinces. It would be very irresponsible for the federal government to publish proposals for CPP changes without first consulting the provinces.

Q: Ontario has gone ahead and passed legislation to establish the ORPP. What do you think of those proposals?
A: Well, I really favor mandatory employer and employee contributions for pension benefits. It’s taken a lot of political courage and leadership from Ontario, which has been absent elsewhere in Canada for many, many years to implement the ORPP. But there again, the devil is in the details. I might have different ideas on how to build the ORPP, but I really don’t have any interest in criticizing those who exhibit this leadership in pensions.

Q: In your view, is it likely that other provinces will jump on the bandwagon once the Ontario plan is up and running?
A: I think there’s a good chance of that, particularly if the Conservatives win the upcoming federal election, because they’ve been consistently intransigent in their opposition to workplace pensions with mandatory employer contributions. But if the Liberals or NDP wins, they’re more likely to build on the leadership of Ontario and proceed with CPP expansion, which I think would make the ORPP unnecessary.

Q: Were you surprised by the federal announcement that the Harper government would not help Ontario administer the ORPP?
A: I was quite surprised. To me, it amounted to a juvenile temper tantrum. It seems to be extremely bad policy for the federal government to torpedo any provincial pension initiative, particularly in this way. Administration of contributions could easily be accommodated in the same way as provincial income tax collection. And in terms of tax deductibility, the feds could readily accommodate ORPP contributions in the current tax-assisted framework like they already do for the Quebec Pension Plan and the Saskatchewan Pension Plan.

Q: Do you believe a voluntary supplement to the CPP should be an option for Canadians to save for retirement? Is this something you would use to increase your retirement savings?
A: Well, to answer questions about the concept of a voluntary CPP supplement, I first have to suspend my disbelief that the federal government – and particularly a Conservative government – would actually choose to compete with the financial services industry, which already has a wide spectrum of products and services designed for retirement savings.

I think that the expectations amongst the public with this announcement are that it would be a savings and investment vehicle, in which case my answer would be, no, I wouldn’t use it to increase my retirement savings and, no, I don’t think they should bother.

Q: Why do you say that?
A: Well, although many Canadians might be excited by the possible opportunity to share in the investment results that the CPP Investment Board has achieved — particularly if the cost of investing is similar to the Board’s current cost — that’s not what they would get from a voluntary supplement under the CPP. It would require a different investment mandate from the CPP Investment Board, with the degree of difference dependent upon how much administrative flexibility the plan has. It would be far more expensive at the end of the day and would likely not have much to differentiate it from retirement investment options already available in the marketplace.

Q: And what about the design of a potential voluntary top-up? What do you think? Should the money be locked in? And should there be basic required contributions, or some variability? I mean what should this thing look like?
A: Well, you know, it depends on how they actually design it. They could do it as a standard savings and investment vehicle, or they could do it as a prepaid annuity vehicle, which might be more interesting. So, I think, first off, Canadians would generally choose good, old-fashioned RRSPs over CPP supplements as a savings and investment vehicle, unless the CPP had the same flexibility with no locking-in, in which case the cost would be almost the same as traditional RRSPs. But if a voluntary CPP supplement were designed around the prepaid annuity concept, contributions could be flexible so you could buy as many prepaid annuities as you want, perhaps within some limits; and full locking-in would perhaps be appropriate under that kind of a design.

Q: Now, in a previous question, you referred to the integration of a voluntary CPP into the current income tax rules. Do you think that that’s problematic, or it would be fairly easy to do?
A: I think it could be fairly easy to do within the current income tax rules. If you really wanted to make it work as a prepaid annuity concept, you could put it on top of the existing RRSP limits. It would just be another added-value pension saving that wouldn’t impact your RRSP limits.

Q: That might make it more attractive to particularly people who have topped up their RSP limits already.
A: Absolutely.

Q: So, who do you think should be responsible for investing the contributions made to a voluntary CPP supplement?
A: If it was designed around a prepaid annuity concept, it would be the CPP Investment Board.

Q: How important is keeping costs low to the success of this proposal?
A: Well, it’s fundamentally important if it’s a savings and investment vehicle, which means that it would be very difficult to do without having some sort of subsidy from the government. MERs aren’t really applicable to paid up annuities. But certainly the cost would then likely be comparable to the current costs of the CPP Investment Board services.

Q: When you discuss a “prepaid annuity,” what do you mean? Do you mean that it would operate like a defined-benefit pension as far as the consumers are concerned?
A: Yes. Once you purchase it – so, you come in with “this is the amount of contribution I have. This is my age.” And then that would purchase a certain amount of fixed pension payable at your retirement date of age 65, or maybe 67, assuming that becomes the new normal retirement date. So, when you buy the annuity, you would know how much you’re getting when you reach that retirement date — like a defined-benefit plan.

Q: Do you think that this voluntary top-up to CPP is ever going to see the light of day? Will that depend on who forms the next government?
A: No. Even if it’s a prepaid annuity, I don’t think there will be enough of a market appetite for the concept to proceed. If it were a saving and investment type of program, it would have costs that are too high to really compete with the current, private-sector marketplace. But if the Liberals or the NDP form the government, I believe then we’d see a mandatory form of CPP expansion.

Q: Thank you very much, Greg. I really appreciated talking to you today.
A: My pleasure, Sheryl.
—
This is the edited transcript of an interview conducted by telephone in July 2015.

By Sheryl Smolkin

As part of the ongoing series of podcast interviews on savewithspp.com, today I’m talking to lawyer Ari Kaplan, a partner in the Pension and Benefits Group of the Toronto law firm Koskie, Minsky, L.L.P.

Ari is the author of Canada’s leading textbook on pension law, and he has acted as counsel in some of Canada’s most widely known pension cases before the Supreme Court of Canada. In addition, he teaches pension law as an adjunct professor of law at both the University of Toronto and Osgoode Hall Law School.

In his spare time, Ari heads up licensing and publishing at Paper Bag Records, a leading, independent record label and artist management company also based in Toronto.

Today, we are going to talk about the Canada Pension Plan. In the ongoing national debate regarding how Canadians can be encouraged to save more for retirement, Ari is a staunch advocate for an expansion to the Canadian Pension Plan.

Welcome, Ari, and thanks for talking to me today.

My pleasure, Sheryl. Thanks for having me.

Q: How many Canadians currently have workplace pension plans?
A: Well, that’s a good question to put everything in perspective. Over 60% of working Canadians actually have no workplace pension plan, and they must rely solely on CPP and their own personal savings for their retirement income. 

Q: Why do you think that an enhanced Canada Pension Plan is the best way to give Canadians a more robust retirement income?
A: Very simple. It’s currently the only universal and mandatory savings scheme in the country. It’s portable from job to job. If you’re a student, you can work for the summer in British Columbia and then come back to a full-time job in Ontario, and your CPP credits will go with you. Also, it doesn’t just cover employees. It applies to self-employment, which most workplace pension plans don’t.

Q: As early as 2008, industry guru Keith Ambachtsheer wrote a C.D. Howe Institute commentary about the benefits of enhancing the Canada Pension Plan. Yet, in December 2013, the conservative government in several Canadian provinces voted against this proposal. Why do you think this occurred?
A: Every respected economist in the country supports a CPP expansion. The reason why the current government did not support it is political, not principled.

There was political pressure from business lobby groups who did not want to be forced to contribute employer revenue toward their employees’ retirement. There was political pressure from the financial services lobby, because they do not benefit at all when the retirement savings of Canadians is held in the CPP Trust Fund.

And finally, there’s fear among Canadian voters, who’ve been led to believe that anything opposed by business must be bad for them, too. Some of them also don’t want to be forced to save for retirement.

Q: Instead of expanding the CPP, the late finance minister, Jim Flaherty and the provinces endorsed pooled registered pension plan legislation as the way to encourage Canadians to save more for retirement. What are the key features of PRPPs?
A: Good question. PRPPs are basically like voluntary employer-sponsored group RRSPs. The funds are locked in, so it resembles a registered defined contribution plan. Your funds can also be ported to another plan and there are survivor benefits. So, it’s basically like an “RRSP-plus.”

Q: Why do you think that PRPP’s are not the answer?
A: Well, I think PRPPs are just a prime example of what I said earlier ­­­– political lobbying by business and the financial industry.

1. The employer is not required to contribute a dime even if the company voluntarily sponsors a PRPP.
2. An employee can opt out, or voluntarily set their contribution rate to zero, which gives zero benefit to the employee.
3. There’s very little benefit security. Like I said, it’s like a DC plan, so you get to choose member-directed investment funds. If you don’t invest your money well, then you won’t get a good pension.
4. The cost structure is really not that much different than a 500-member group RRSP. The management expense ratio (MER) will be much higher under a PRPP than under a large workplace pension plan or, for that matter, under CPP, where the efficiencies of scale are such that the costs are very, very, very low.
5. It will create a huge windfall to insurance companies and other financial institutions who manage these funds, because there’s very few cost controls. There are lots of problems in group RRSPs with so-called “hidden fees” and there’s no indication that that will change with PRPPs.

I can go on, but I think you get the idea.

Q: Groups such as the Canadian Federation of Independent Business say that required employer contributions to an expanded CPP would amount to a significant payroll tax that could slow down economic growth. How would you respond to this statement?
A: To be quite blunt, this is a false and misleading statement. Anyone who tells you it’s a tax is not telling you the truth. This is employee money. It goes into a pension fund. It then goes back to the employee.

Q: Ontario Premier, Kathleen Wynne’s government is currently holding consultations on the design of an Ontario Retirement Pension Plan. What are some of the key features of that plan?
A: At the end of December of last year, the Ontario government introduced the first reading of the bill for the Ontario Retirement Pension Plan intended to commence at the beginning of 2017. The reason for the delay period is because there’s hope that the next federal government may agree enhance CPP, which could make the ORPP redundant.

But the key features are that it’s a mandatory plan. It’s like an adjunct to CPP. So, it would be mandatory in all Ontario workplaces, except where the employer already has a workplace pension plan for its workforce, and it would be integrated with the CPP.

Q: Several other provinces, like PEI, may jump on the same bandwagon, so why do we still need a national CPP enhancement?
A: Well, it would better if the federal government came on board to make it nationwide. I mean if we just have it province by province, then it’ll be more of a patchwork. This could influence inter-provincial mobility. We don’t want to discourage full inter-provincial mobility by Canadians.

Q: Well – and, of course, the other issue is – just like pension legislation across the country, which is similar, but actually very different when it comes to the details – we run the risk of getting ten or 11 completely different plans.
A: And that would result in over-regulation and an increase in transaction costs although the whole point of this is to minimize and optimize the costs of running the fund — which is why CPP is good model.

CPP is viewed as one of the best universal, mandatory state-sponsored pension plans in the world. It would be a shame for us to have to rely on province-by-province, patchwork participation in such a scheme.

Also, you know, at the end of the day, this is really something that benefits all Canadians, regardless of what age or generation they are in. One way or the other, taxpayers will be taking care of older Canadians who are poor. It’s better that Canadians have their own resources to take care of themselves; and that’s an optimal use of taxpayer resources.

So, I just really think it’s a good idea, and I really think that this is the ballot question for the upcoming federal election this year. We saw this 50 years ago when CPP was introduced. I believe this year there will be a renaissance of that issue.

Q: Thanks, Ari. It was great to talk to you.
A: My pleasure, Sheryl. Be well.

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This is an edited version of the podcast posted above which was recorded on February 3, 2014.