In June OMERS provided information about the agreement in principle to enhance the Canada Pension Plan (CPP). At that time, we said that we would be updating our members, employers, sponsors and other stakeholders as more information became available.
On July 15, 2016, the federal government announced that eight provinces have formally approved the agreement in principle to expand the CPP. The government of British Columbia has delayed its formal approval pending public consultations. While the threshold of provincial support has not been met, federal Finance Minister Bill Morneau said the federal government still intends to introduce legislation on the enhancement in the fall, as previously planned. In addition, the Ontario government confirmed on July 28th that the ORPP will be officially cancelled with the repeal of legislation this fall.
The federal Department of Finance has also released additional information on the agreement, including the expected contribution rate increase starting on January 1, 2019, of:
- 1% up to the Year's Maximum Pensionable Earnings (YMPE) threshold; and
- 4% between the YMPE and the new upper earnings limit (estimated to reach $82,700 by 2025).
The actual contribution rates will be confirmed in future
Although the OMERS plan benefit is integrated with the current CPP, the change in CPP does not directly impact OMERS plan benefit or contributions as it is currently contemplated administratively. The change in CPP will result in higher total (OMERS + CPP) contributions and higher combined pensions (OMERS + CPP).
OMERS has analyzed the effect of the CPP enhancement on OMERS members and employers, based on the understanding that:
- The CPP income replacement level increases from 25% to 33%
- A new upper earnings limit will be 1.14 multiplied by the YMPE (estimated to be $82,700 in 2025)
- CPP contribution rates are expected to be 5.95% up to the YMPE and 4% between the YMPE and the new upper earnings limit, from each of the employee and employer
- The contribution increase will be gradual, starting in 2019 and spread over 7 years.
Our analysis shows that:
- Once fully phased-in, at a maximum employer and employee annual contributions will each increase by $820 (in current dollar terms) for members with earnings at or above the upper earnings limit. The impact is less for those with lower earnings and varies due to the difference in CPP contribution rates above and below the YMPE.
- The income replacement rate from CPP and OMERS combined will increase from roughly 70% to roughly 80% for those whose earnings are less than the upper earnings limit (i.e., 114% of the YMPE). The impact is smaller for those whose earnings exceed the upper earnings limit. Note that it will be many years before benefits are impacted to this extent, since this estimate reflects an entire working career under the enhanced CPP. And, we understand the benefit enhancements will not be fully phased-in until 2025.
At this point, no additional information has been provided on how the benefits will become effective. As more information is released, we will update our analysis and share it with you.