Why HR needs to pay attention
By Patrick Culhane, B.Comm., CAE, FCPA, FCMA
In June 2016, after years of discussions, the federal government reached an agreement, in principle, with provincial and territorial finance ministers to strengthen the Canada Pension Plan (CPP).
For the past eight years, the Canadian Payroll Association (CPA) has conducted market research of Canadian employees for its National Payroll Week (NPW) campaign, querying working Canadians on their spending, savings, debt and retirement plans. Research consistently shows that the road to a comfortable retirement is becoming longer and more difficult for many Canadians.
Almost half of Canadians are living paycheque to paycheque, one-third feel overwhelmed by debt and an astounding 76 per cent say they have saved only one-quarter or less of what they feel they will need to retire. A number of governments recognized this need and initiated legislation to establish voluntary pension plans. The Government of Ontario went further, and started to develop the Ontario Registered Pension Plan (ORPP). It is important to note that the CPA played a major role in the postponement and eventual cancellation of the ORPP in favour of a modest CPP enhancement.
The government’s decision to enhance the CPP will help employees by bolstering the financial wellbeing of Canadians through mandatory retirement savings. Research and results show the available voluntary savings programs such as registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs) are not being utilized by many Canadians to fill the retirement savings gap. Enhanced CPP will increase everyone’s retirement earnings; however, it is a modest increase and will remain only a part of Canadians’ savings for retirement.
For those tasked with implementing the CPP enhancement on behalf of their employers – including those in payroll, human resources and accounting – regulatory and administrative compliance will require careful consideration. Beyond that, these professionals will need to be able to clearly explain and communicate changes and challenges of the CPP enhancement to employers and employees.
What we know about the enhancement
The agreement in principle enabled Federal Finance Minister Bill Morneau to table legislation in Parliament to amend the CPP Act. Bill C-26, An Act to amend the Canada Pension Plan, the Canada Pension Plan Investment Board Act and the Income Tax Act, which received Royal Assent on Dec. 15, 2016, will officially usher in changes to the CPP.
Once Bill C-26 comes into force, the enhanced CPP will:
Replace 33 per cent of pre-retirement income, up from 25 per cent
Increase the maximum amount of income subject to CPP by 14 per cent, which is projected to be equal to roughly $82,700 in 2025
Gradually phase in contribution increases over seven years, beginning Jan. 1, 2019
A five-year contribution rate phase-in of an additional 1 per cent up to the Yearly Maximum Pensionable Earnings (YMPE) for both employees and employers, followed by
A two-year phase-in of an additional 4 per cent contribution on a new upper earnings limit for both employees and employers
Increase the Working Income Tax Benefit to help low-income earners
Provide a tax deduction instead of a tax credit for employee contributions associated with the enhanced portion of CPP
How employers should prepare
Employers should anticipate that such changes might affect organizational policies, staff responsibilities and remuneration planning. They will also have to ensure compliance within payroll systems, human resources policies, employee handbooks and pension documents.
The first step is to review the organization’s current payroll, retirement and benefit programs to ensure the required changes can be made efficiently. Organizations should enable their HR, payroll and accounting staff to plan for the changes and assess how the CPP enhancement will affect the payroll operations, employer sponsored pension, retirement and/or savings plans and benefits. Only by assessing where the organization’s offerings currently stand, how they may be impacted and what potential efficiencies can be realized can these staff manage cross-functional planning of future offerings for staff.
For the many HR professionals who have payroll oversight, be mindful that CPP enhancement will require mandatory ongoing payroll system changes in the coming years. Implementation should be planned and discussed well in advance of the actual deadline dates. While the proposed gradual phase-in will provide additional time for organizations to assess for the full financial impact, the CPA recommends employers begin any program adjustments a minimum of 18 months in advance. You may need to consider providing an additional buffer depending on the complexity of your employee scenarios (e.g., employees transferring between jurisdictions, including Quebec). Human resources and payroll professionals are the best people in an organization to work through such employment scenarios in advance of implementation.
The CPA is in ongoing discussions with the Canada Revenue Agency (CRA) and Revenu Québec for Quebec Pension Plan changes to promote effective and efficient administration of these more complex CPP scenarios.
Finally, organizations should ensure that ongoing employee communications address retirement questions that staff may have regarding these CPP changes. When making any changes to employee benefits offerings, organizations should provide clear communication to everyone affected and be available to answer ongoing queries. HR and payroll should draft fact sheets including typical questions and answers that you anticipate arising from the CPP changes. Employees will want to know how the changes will impact them, their pay, pay statements, tax returns and their retirement savings.
Ultimately, careful planning and ongoing education will be crucial for both employees and employers in the wake of CPP enhancements. Start planning now and engage the resources required to ensure that these mandatory CPP changes are well planned and implemented for employees. n
Patrick Culhane, B.Comm., CAE, FCPA, FCMA, is the president and CEO of the Canadian Payroll Association.