Consultations on a Voluntary Supplement to the Canada Pension Plan

Related Document:

Closing date: Thursday, September 10, 2015.

Who may respond: These consultations are open to anybody interested in participating.

Submissions can be emailed to cpp-consultations-rpc@fin.gc.ca.

Written submissions to this consultation are invited and should be forwarded by Thursday, September 10, 2015, to:

Catherine Adam
Federal-Provincial Relations and Social Policy Branch
Department of Finance
15th Floor
90 Elgin St
Ottawa, Canada K1A 0G5

Once received by the Department of Finance, all submissions will be subject to the Access to Information Act and may be disclosed in accordance with its provisions. Should you express an intention that your submission be considered confidential, the Department will make all efforts to protect this information within the requirements of the law.


Consultations on a Voluntary Supplement to the Canada Pension Plan

On May 26, 2015, the Minister of Finance announced the Government's intention to consult on options for a voluntary supplement to the Canada Pension Plan (CPP). This paper provides a description of Canada's retirement income system and outlines the main features of pension plans in other jurisdictions that have voluntary components. It then sets out a number of discussion points and consultation questions.

The Government invites all Canadians to share their views on this important subject. Input received as part of this consultation will inform future discussions with provinces, who are joint stewards of the CPP.

Canada's Retirement Income System

Canada has a strong, diversified retirement income system that is based on a balanced mix of public and private responsibility. It is comprised of three pillars.

Pillar 1: Government Assistance Through Old Age Security (OAS) and the Guaranteed Income Supplement (GIS)

As of July 2015, the OAS program provides a monthly pension of up to $565 to Canadians aged 65 years or older, who meet residency requirements. In order to qualify, seniors must have resided in Canada for at least 10 years after turning 18. To receive the full pension, seniors must have resided in Canada for at least 40 years after turning 18. Employment history is not a factor in determining eligibility. For seniors who have incomes over $72,809, part of the pension (15 cents per dollar of income in excess of $72,809) is repaid through the tax system. The pension is phased out completely for incomes over $117,954.

The GIS benefit is an additional monthly payment for low-income Canadians who receive OAS. As of July 2015, GIS monthly payments are up to $766 per month for single individuals and up to $1,016 per month for couples. In order to ensure the GIS is targeted to those who need it most, it is reduced by 50 cents for each dollar of family income (other than OAS income) such that no payment is made when income reaches $17,136 for an individual and $22,608 for a couple.

Both OAS and GIS benefits increase with inflation on a quarterly basis. In 2013-14, the federal government provided $41.8 billion in OAS/GIS benefits to roughly 5.3 million Canadians. OAS and GIS benefits are paid for out of the general revenues of the federal government.

Pillar 2: Canada Pension Plan (CPP) and the Quebec Pension Plan (QPP)

The CPP is a mandatory public pension plan for all workers throughout Canada, except in Quebec. Workers in Quebec are covered by the QPP, which provides similar benefits.

The CPP is financed by employer and employee contributions. The contribution rate is 9.9 per cent of earnings between a basic exemption of $3,500 and the Year's Maximum Pensionable Earnings ($53,600 in 2015). The maximum CPP contribution in 2015 is $2,479.95 for employees and employers respectively. The self-employed pay both shares.

The CPP provides a "defined benefit" in retirement – that is, a guaranteed monthly amount for the life of the beneficiary. It is based on an individual's contributory history, replacing a maximum of 25 per cent of earnings up to a limit: the five year-average of the Year's Maximum Pensionable Earnings. The current maximum annual CPP benefit for Canadians retiring at age 65 is $12,780. In addition to retirement benefits, the CPP also provides supplemental benefits for disabled workers and the survivors of contributors.

In the 26th Actuarial Report on the CPP (tabled in Parliament in December 2013), the Office of the Chief Actuary estimated that in 2015 there will be 13.8 million workers contributing to the CPP and that the program will pay out $31.8 billion in retirement pension benefits to 5 million beneficiaries.

The Canada Pension Plan Investment Board invests CPP funds in the best interests of Plan members and operates at arm's length from Government. As of March 31, 2015, CPP net assets totalled $264.6 billion. After Canada Pension Plan Investment Board operating expenses are taken into account, as of March 31, 2015, the Fund's 10-year annualized nominal return was 8.0 per cent.

The Government of Canada and the provinces are the joint stewards of the CPP. Changes to the federal legislation governing the CPP or the Canada Pension Plan Investment Board require the formal consent of the Parliament of Canada as well as seven out of ten provinces (including Quebec) with two-thirds of the population of Canada. The province of Quebec governs the QPP.

Pillar 3: Tax-Assisted Private Retirement Savings

The third pillar of Canada's retirement income system is the system of tax-assisted savings opportunities provided through Registered Pension Plans (RPPs), Registered Retirement Savings Plans (RRSPs), Pooled Registered Pension Plans (PRPPs) and Tax Free Savings Accounts (TFSAs).

RPPs are pension plans that are generally sponsored by employers, on a voluntary basis. Employers (and often employees) are responsible for making contributions to the plans. In general, there are two basic RPP plan designs. Defined benefit plans promise a lifetime pension benefit, based on a formula set out in the pension plan. Employers are generally responsible for ensuring the plan has enough assets to fund promised benefits. Defined contribution plans provide retirement income based on accumulated contributions and investment returns.

RRSPs are voluntary, individual, defined contribution savings plans. Employers may provide a "group RRSP" for employees, and may remit a share of contributions on behalf of their employees. In 2012, approximately 9.3 million Canadians saved in an RPP and/or an RRSP, and 3.9 million Canadians aged 60 and over received income from an RPP, RRSP and/or a Registered Retirement Income Fund (an RRIF – to which an RRSP must be converted by the end of the year the RRSP holder attains age 71).

In Budget 2008 the Government introduced the TFSA. Available since January 1, 2009, the TFSA is a flexible, registered general-purpose savings vehicle that allows Canadian residents aged 18 or older to earn tax-free investment income, including interest, dividends and capital gains. Economic Action Plan 2015 announced an increase in the TFSA annual contribution limit to $10,000 for 2015 and subsequent years. As of the end of 2013, nearly 11 million individuals had opened a TFSA.

The Government introduced PRPPs to provide a low-cost and large-scale retirement savings option for Canadians without access to a workplace pension plan. The federal voluntary PRPP framework is fully in force and available to federally regulated employers and employees, which includes industries such as telecommunications; banking; inter-provincial transportation; and employees and self-employed persons in the Yukon, Northwest Territories and Nunavut.

Provinces are working to implement their PRPP frameworks. British Columbia, Alberta, Saskatchewan, Ontario and Nova Scotia have passed voluntary PRPP legislation, and Quebec's mandatory version of PRPPs, the Voluntary Retirement Savings Plan framework, is fully in force. The Government is leading an initiative with the provinces to harmonize the supervision of PRPPs across Canada to achieve lower costs through a multilateral agreement.

Additional Savings Outside the Retirement Income System

Canadians can also accumulate savings for retirement in a number of other financial and non-financial assets. These include, for example, financial assets held outside tax-assisted registered plans, housing equity and small business equity.

In total, Canadian households had, as of 2013, a net worth of $7.7 trillion. Pension assets in Pillars 2 and 3 of the Retirement Income System represent about a third of households' accumulated savings. Non-pension assets amounted to $5.4 trillion, with home equity representing about half of this value (see Table 1 below).

Table 1
Components of household net worth – 2013
Components of household net worth Aggregate (billions)
Pension assets
(Registered Retirement Saving Plans, employer-based pension plans, CPP/QPP net assets, Tax Free Savings Accounts)
$2,970
Real estate equity (net of mortgages)
(residential and other structures and land)
$2,567
Other financial and non-financial assets
(other financial and non-financial assets, excluding financial assets held through registered plans)
$2,807
Consumer Debt
(consumer credit and loans)
($634)
Household net worth and CPP/QPP net asset
(assets less debts)
$7,711
Source: Statistics Canada; Department of Finance Canada calculations

Performance of Canada's Retirement Income System

Overall, Canada's retirement income system is performing well. Canadian retirees achieve relatively high levels of income in retirement, and compare well to retirees in other Organization for Economic Co-operation and Development countries. With support from all three pillars of the retirement income system, the median Canadian senior earns about 91 per cent as much as the median Canadian – well above the Organization for Economic Co-operation and Development average of 84 per cent. Internationally, Canada has one of the lowest low-income rates for seniors.

Canada's system of public pensions is financially sustainable. The Chief Actuary reported in the December 2013 Actuarial Report on the CPP that the Plan is financially sustainable for the next 75 years at the current contribution rate of 9.9 per cent.

Providing More Choice for Canadians to Save for Retirement

A number of recent studies[1] have found that most working-age Canadians are on track to maintain their standards of living in retirement. In particular, low-income workers can generally replace their pre-retirement consumption levels with public pensions (i.e., OAS, GIS and CPP). That said, the Government of Canada is committed to exploring ways to give Canadians more choice in how they save for their retirement. In particular, the Government is seeking the views of Canadians, experts and stakeholders on a proposal to develop a voluntary supplement to the CPP. The Government has been clear that it will not support the expansion of the existing mandatory CPP.

There are a number of ways that a new voluntary supplement to the CPP could be designed to permit participation by Canadians while also minimizing any administrative burden on employers. Under any option, employee contributions would be voluntary. While the Government is open to the possibility of employers making contributions, this too would also be purely voluntary. 

Examples of Pension Plans in Different Jurisdictions with Voluntary Components

A number of jurisdictions have voluntary pension components within their retirement income systems. These plans involve contributions made to individual accounts, which are then pooled and invested by a fund manager. Upon retirement, the payment provided is based on the accumulated contributions and investment returns. There is not a pre-determined level of payment. 

The level of employer participation in voluntary pension plans, as shown below, varies from no participation to a requirement that employers auto-enroll employees and make mandatory contributions should employees choose to participate and contribute. Several of the voluntary pension plans have minimum employee contribution rates with the option for employees to set the contribution rate to zero should they wish. 

Saskatchewan Pension Plan

The Saskatchewan Pension Plan is a voluntary defined contribution pension plan for all Canadians with available RRSP room. The plan administrator is the Saskatchewan Pension Plan Board of Trustees, which reports annually to the Saskatchewan legislature. The Board of Trustees sets the investment policy and employs independent fund managers to invest fund assets.

Employers may, but are not required to, contribute to the plan on behalf of their employees. Plan members and their spouses can contribute to the fund through lump-sum payments by mail, via credit card online or by regular contributions via pre-authorized debit. Members may also transfer up to $10,000 per calendar year into their account from existing RRSPs, RRIFs and unlocked RPPs. Employer and employee contributions are generally locked-in until the member turns 55.

Chile Voluntary Savings Pillar

Chile's retirement income system includes a component which allows employers to make voluntary contributions to employees' individual retirement savings plans. The contribution amount is agreed to by the employer and employee. Employees are also permitted and encouraged to make additional voluntary contributions to their individual retirement savings plans up to a certain limit through options for tax-deductions or a government-matching subsidy. 

Employee contributions may be withdrawn at any time, but depending on the circumstances, may trigger tax and/or fee penalties, while employer contributions are generally locked-in until normal retirement age (age 65 for men and age 60 for women).

United Kingdom National Employment Savings Trust (NEST)

NEST is a voluntary defined contribution pension plan for United Kingdom employees without a workplace pension plan. The fund manager is NEST Corporation, an arm's length public body that reports to the United Kingdom parliament.

Every employer in the United Kingdom with one or more employees must offer and auto-enroll employees in an eligible workplace pension plan.[2]  NEST qualifies as an eligible pension plan to fulfill this requirement. Employees auto-enrolled in NEST may opt-out within a set time period that is usually one month after enrollment. Employers must re-enroll members who have opted out every three years. NEST is part of the United Kingdom's voluntary private pensions system, and is complemented by a basic state pension.

Employers must contribute to NEST for employees who are participating and contributing. The minimum employer contribution rate is currently one per cent and will increase to three per cent by October 1, 2018. Employee contribution rates are currently one per cent and will increase to five per cent.[3]  Employees may temporarily set their contribution rate to zero; during this time, employers are not required to contribute. There is no limit to the number of times this option may be used. Employer and employee contributions are generally locked-in until age 55.

Discussion Points for Consultation on a Voluntary Supplement to the CPP

Participation of Employees

While a new voluntary supplement to the CPP would not require any individuals to participate, views are being sought on possible design features that could facilitate voluntary participation. For example, a simplified enrolment process and/or a contribution model which would allow individuals to establish automatic deductions through their paycheques could be considered. Measures to facilitate participation would, however, need to be balanced with ensuring choice and flexibility for those who do not wish to participate.

The appropriate level of flexibility, as well as the role of employers, as discussed below, are also important design elements that will impact the participation of employees.  

Level of Flexibility

Views are being sought on the level of flexibility that should be permitted for participants in a new voluntary supplement to the CPP. A key issue related to flexibility is the locking-in of contributions. Locking-in of contributions is a common feature of most pension plans. Locking-in provisions are intended to ensure that the funds are only available for retirement income purposes and also to facilitate the management of investments over the long-term.

A second issue is the level of flexibility that would be permitted for individuals and employers to determine contribution amounts. A range of options, from fixed to fully variable contributions exist. Further, consideration could be given to whether the prescribed individual contribution amounts and regularity of contributions should be similar or separate to those prescribed for a workplace contributory model. Flexibility could also be provided through offering contribution holidays, where individuals could temporarily opt-out or reduce their contribution rate for a set amount of time.

Consideration would also need to be given to establishing appropriate limits on contributions. For example, annual contributions to a PRPP must be made within a participant's available RRSP contribution limit and contributions to the Saskatchewan Pension Plan are permitted up to an annual maximum of $2,500, subject to a participants' available RRSP contribution limit.

Consideration would also need to be given to what payment options would be available and how best to provide a secure stream of income in retirement.

Portability

The level of portability should also be considered. Portability across employers and jurisdictions would represent a significant benefit to having a voluntary supplement to the CPP. Portability between savings vehicles would, however, need to be considered. The option to allow individuals to transfer savings between a voluntary supplement to the CPP and other savings vehicles could be explored.

For example, transfers between a voluntary supplement to the CPP and RRSPs, RPPs and PRPPs could be considered.  Also, upon retirement, the funds could be transferred to a RRIF or direct withdrawals could be made from the individual's account. Consideration could also be given to having the fund manager provide the beneficiary with the option to convert their payment to an annuity upon retirement. Setting limits (e.g., either on frequency or the amount) on any possible transfers should also be explored.

Participation of Employers

While mandatory employer participation will not be required, these consultations are seeking views on what role, if any, employers might play in a new voluntary supplement to the CPP. A framework which permits employers to make voluntary contributions to a CPP supplement would help workers to build up their retirement savings. It may also be attractive to certain employers as a means to increase overall compensation and encourage employee recruitment and retention.

Consideration also needs to be given to whether employers of participating employees should be responsible for the collection and remittance of voluntary contributions whether or not the employers themselves make any contributions, and how any associated administrative burden could be minimized.

Alternatively, a voluntary supplement to the CPP could be designed in such a way that both employers and employees could make voluntary contributions directly to the fund manager outside of any payroll structure. 

Fund Manager

Views are being sought on how funds should be managed for a new voluntary supplement to the CPP. Administrative efficiency and maintaining low costs are key considerations in assessing possible fund managers.     

Contributions made though the existing CPP are managed by the Canada Pension Plan Investment Board, which operates at arm's length from government. Consideration could be given to having the Canada Pension Plan Investment Board manage voluntary CPP supplement funds in a similar manner to the existing CPP fund. A voluntary CPP supplement would require the tracking of individual accounts. A voluntary approach would need to take into account the contributor population, timing of withdrawals, and risk tolerance.

Consultation Questions:

  1. 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?
  2. How could a voluntary supplement to the CPP be designed to facilitate participation of individuals who may be at risk of undersaving for their retirement?
  3. How much flexibility should there be for individuals who choose to participate?  For example, what are your views on locking-in funds for retirement and providing variability in the contribution rates?
  4. How could a voluntary supplement to the CPP be designed to provide a secure stream of retirement income?
  5. What retirement income options should be available upon retirement for savings accrued within a voluntary supplement to the CPP?
  6. Should transfers between a voluntary supplement to the CPP and other retirement savings vehicles be permitted? If yes, should there be any limits?
  7. While employers would not be required to contribute, what would be the appropriate role for employers?
  8. Who should be responsible for investing the contributions made to a voluntary supplement to the CPP?

Your views are important to the Government in this process. Thank you for taking the time to participate.

Closing date: Thursday, September 10, 2015.

Who may respond: These consultations are open to anybody interested in participating.

Submissions can be emailed to cpp-consultations-rpc@fin.gc.ca.

Written submissions to this consultation are invited and should be forwarded by Thursday, September 10, 2015, to:

Catherine Adam
Federal-Provincial Relations and Social Policy Branch
Department of Finance
15th Floor
90 Elgin St
Ottawa, Canada K1A 0G5

Once received by the Department of Finance, all submissions will be subject to the Access to Information Act and may be disclosed in accordance with its provisions. Should you express an intention that your submission be considered confidential, the Department will make all efforts to protect this information within the requirements of the law.


1 For example: McKinsey & Company.2015. "Building on Canada's Strong Retirement Readiness."; Hamilton, Malcom. 2015. "Do Canadians Save Too Little?" C. D. Howe Commentary No. 428.; and Mintz, Jack M. 2009. "Summary Report on Retirement Income Adequacy Research." Research Working Group on Retirement Adequacy of Federal-Provincial-Territorial Ministers of Finance.

2 The requirement is being phased-in with full implementation by February 1, 2018.

3 In most cases employee contributions are eligible for tax relief equal to 20 per cent of the employee contribution rate.