Recently several amendments were made to both the Canada Pension Plan (CPP) and the Quebec Pension Plan (QPP) – some with effective dates of January 1, 2011. As these changes impact retirement benefits paid from each program, it is important to review how the amendments could impact both individuals and plan sponsors. The following summary prepared by PBI Actuarial Consultants Ltd. outlines the key changes being made to the CPP and QPP.
Changes to the Canada Pension Plan (CPP)
Early and Late Retirement Adjustment Factors
Commencing January 1, 2011 the retirement adjustments applied to CPP benefits will gradually change in order to restore the factors to actuarially fair levels.
For retirements prior to age 65, the new schedule gradually increases the reduction from the current level of 0.5% per month to 0.6% per month in 2016. Thus, for an individual retiring at age 60, the total reduction will increase from 30% in 2011 to 36% in 2016.
For retirements after age 65, the new schedule gradually increases the CPP postponed retirement adjustment from the current level of 0.5% per month to 0.7% per month in 2013. Therefore, for an individual retiring at age 70, the total increase in CPP will change from 30% in 2010 to 42% in 2013.
Low-Earning Period Exclusions
Starting in 2012, the CPP benefit formula will be enhanced by increasing the number of years of low or zero earnings that are automatically excluded from the calculation of average earnings. Currently, the number of low earning years dropped in the calculation is set at 15% of an individual’s contributing career. This will increase to 17% in 2014. For example, based on the rules in effect prior to 2011, an individual who worked from age 18 to retirement at 65 would have had seven years excluded from the calculation of CPP average earnings. Under the new formula, this will increase to eight years in 2014.
Changes to Accommodate Phased Retirement
Under the pre-2011 criteria, an employee would have to stop working or have significantly reduced earnings for two consecutive months in order to commence their CPP pension prior to age 65. Starting in 2012, this work cessation test will be eliminated and individuals will be able to commence receipt of their CPP pension without any work interruption. These changes are aimed to increase pension coverage and to make phased retirement more flexible.
In addition, under the pre-2011 criteria, working employees in receipt of CPP pension benefits could not make contributions to CPP and as such, had no way of enhancing their CPP pension benefits once commenced. New rules have now been introduced to allow for the opportunity to make additional contributions and to increase CPP retirement benefits for employees who have commenced their CPP pension but have not yet reached the age of 70.
Starting in 2012, an employee who is working while receiving a CPP pension may receive an additional Post-Retirement Benefit by continuing to make CPP contributions. These contributions will provide for a Post-Retirement Benefit, on top of the employee’s original CPP pension amount. The timing of payment of this Post-Retirement Benefit will depend on the age of the employee.
If an employee under 65 is working while receiving a CPP pension, these contributions are mandatory from both the employer and employee. For working employees between the ages of 65 and 70 who are also receiving a CPP pension, however, participation is voluntary and the employee can choose whether to continue to make contributions to the CPP. In the event that the employee elects to make CPP contributions, their employers will also need to make contributions as well. Employees may change their election once per year.
CPP Contribution Rate
Based on the 25th Actuarial Report on the Canadian Pension Plan, the current legislated contribution rate of 9.90% is sufficient to cover CPP expenditures until 2020.
Changes to the Quebec Pension Plan (“QPP”)
In Quebec, the aging of its population due to improving life expectancy and a decline in the employment to population ratio will combine to place a greater financial burden on the QPP system. It is anticipated that based on current contribution rate and benefit levels, the fund will be exhausted by 2039. In light of this, in June 2011, the government adopted provisions from their 2011-2012 Budget which were implemented to ensure the long term financial viability of the QPP.
QPP Contribution Rate
Based on the latest actuarial valuation of the plan conducted on December 31, 2009, the required contribution rate to ensure the long term viability of the plan is 11.02%. Starting at the current rate of 9.9%, the contribution rate will increment by 0.15% per year for the next six-year period reaching an ultimate rate of 10.8% in 2017. Then, starting in 2018, an automatic adjustment mechanism will be implemented resulting in contribution rate adjustments every three years.
Early and Late Retirement Adjustment Factors
The revisions to the QPP also include a provision to improve pension benefits to those who retire later than the normal retirement date. Starting January 1, 2013, this premium will increase from 0.5% to 0.7% per month following normal retirement date, for a maximum of 60 months (age 70).
In addition, the benefit reduction for those who retire earlier will be increased. Commencing in 2014 and ending in 2016, the reduction factor will gradually increase from 0.5% to 0.6% for each month preceding normal retirement date, up to a maximum of 60 months.
For more information about PBI, or this publication, please contact Sonia Massicotte (at 514-317-2342 or ) or your PBI Consultant. Visit PBI at www.pbiactuarial.ca.