Vol. 141, No. 31 — August 4, 2007

Calculation of Contribution Rates Regulations, 2007

Statutory authority

Canada Pension Plan

Sponsoring department

Department of Finance

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Description

1. Preamble

The Canada Pension Plan (CPP) requires the federal Minister of Finance and provincial Ministers of Finance to review the financial state of the Canada Pension Plan (CPP) every three years. At each review, they may make recommendations as to whether benefits or contribution rates or both should be changed. Changes require the agreement of the federal government, plus two-thirds of the provinces representing at least two-thirds of Canada's population.

In making their decision on a contribution rate, Ministers are required to consider two objectives outlined in paragraphs 113.1(4)(c) and (d) of the CPP, respectively:

Objective 1 in paragraph 113.1(4)(c): " . . . the financing objective of having a contribution rate that is no lower than the rate (i) that, beginning with the year 2003, is the lowest constant rate that can be maintained over the foreseeable future and (ii) that results in the ratio of the projected assets of the Canada Pension Plan at the end of any given year over the projected annual expenditures of the Canada Pension Plan in the following year being generally constant"; and

Objective 2 in paragraph 113.1(4)(d): "that changes to the Act that increase benefits or add new benefits must be accompanied by a permanent increase in the contribution rates to cover the extra costs of the new or increased benefits and by a temporary increase in the contribution rates for a number of years that is consistent with common actuarial practice to fully pay any unfunded liability resulting from the increased or new benefits."

The effect of these two objectives is that Ministers must consider setting a contribution rate that is at least as high as a so-called "default contribution rate," which is the sum of

1. the lowest constant contribution rate, as per paragraph 113.1(4)(c); and

2. the contribution rate required to fully cover the costs of any new or increased benefits, as per paragraph 113.1(4)(d).

The Chief Actuary publishes the default contribution rate in the first year of each Triennial Review period in an actuarial report. This rate is expressed, for convenience, as a rate for self-employed persons (also equal to the sum of the employer and employee rates) since self-employed persons pay both the employer's and employee's share of the contribution.

The existing Calculation of Default Contribution Rates Regulations set out the manner in which the contribution rate for benefits that are not new or increased benefits, i.e. those under paragraph 113.1(4)(c) of the CPP, is to be calculated. However, there is no description in either the CPP or any regulations describing the manner for calculating the contribution rate for new or increased benefits, i.e. those under paragraph 113.1(4)(d) of the CPP.

2. Proposed new Calculation of Contribution Rates Regulations, 2007

In the 2004–2006 Triennial Review, concluded in June 2006, Ministers recommended that the objective outlined in paragraph 113.1(4)(d) of the CPP be operationalized by having the manner in which it is calculated set out in regulation (www.fin.gc.ca/news06/06-026e.html). Bill C-36, An Act to amend the Canada Pension Plan and the Old Age Security Act (www.parl.gc.ca/ LEGISINFO/index.asp?Language=E8query=48838Session=148 List=toc), which received Royal Assent on May 3, 2007, provides the authority to prescribe by regulation the manner in which it is calculated.

Thus, the proposed new Calculation of Contribution Rates Regulations, 2007 (the "new Regulations") repeal the existing Calculation of Default Contribution Rates Regulations and include the calculation for the contribution rate for benefits referred to in paragraph 113.1(4)(c) of the CPP as well as the calculation for that component of the default contribution rate that is required to fully fund the costs of any new or increased benefits referred to in paragraph 113.1(4)(d) of the CPP.

The manner of calculating the contribution rate referred to in paragraph 113.1(4)(c) of the CPP will not change. However, the way it is described is simplified in the new Regulations.

The new Regulations will specify that the calculation for that component of the default contribution rate required to fully fund new or enhanced benefits is equal to the sum of

1. the permanent increase in the contribution rate, if any, required to pay for the costs of a new or increased benefit as the benefit is earned by CPP contributors through current and future contributions; and

2. the temporary increase in the contribution rate, if any, required to pay for the cost of a new or increased benefit that was not earned by CPP contributors through past contributions (past service liability).

The new Regulations also provide for a uniform rounding rule—to one cent per $100 of contributory earnings—for both elements of the calculation of the default contribution rate.

It also provides that new or increased benefits with a cost, without the application of the rounding rule, of less than 2 cents per $100 of contributory earnings be included in the calculation of the contribution rate for benefits under paragraph 113.1(4)(c) of the CPP.

The new Regulations will come into force in accordance with subsections 115(1.3) and 114(4) of the CPP. That is, it will come into force on a date to be fixed by order of the Governor in Council, which will not be made or come into force unless at least two-thirds of the provinces having two-thirds of the population of Canada consent to the new Regulations.

The new Regulations will also repeal the outdated Calculation of Contribution Rates Regulations. Since 2003, the calculation of the contribution rate has been done according to the Calculation of Default Contribution Rates Regulations, which were introduced following the 1997 reforms to the CPP. The outdated Calculation of Contribution Rates Regulations have not been in use since that time; however, they have not yet been repealed.

Alternatives

The calculation for the full funding contribution rate could have alternatively been specified in the CPP rather than in a new regulation. However, federal, provincial and territorial Ministers of Finance agreed, in June 2006, that regulation would be a more appropriate avenue, given the technical nature of the calculation. If a change in the calculation is required in the future, it will be easier to amend a regulation, while still following a transparent Parliamentary process, than it would be to amend the CPP.

The regulatory approach is consistent with the approach taken for the calculation of the contribution rate for benefits under paragraph 113.1(4)(c) of the CPP (that is, benefits that are not new or increased) which is currently set out in the existing Calculation of Default Contribution Rates Regulations. It also allows for the combination of both sets of calculations in one new regulation. Having the two financing objectives of the CPP together in one regulation is expected to facilitate the contribution rate-setting process for federal, provincial and territorial Ministers of Finance.

Benefits and costs

The new Regulations will help the Chief Actuary of the Office of the Superintendent of Financial Institutions, who will be responsible for the calculation, determine the manner in which the contribution rate for new or increased benefits will be calculated. It will also help federal, provincial and territorial Ministers of Finance determine if it is affordable to the CPP to introduce a new or increased benefit and whether they must consider increasing the contribution rate.

The new Regulations will also make the contribution rate-setting process more transparent for Canadians. If Ministers increase contribution rates when a new or increased benefit is introduced, Canadians will be able to determine what part of the increase is attributable to the cost of the new or increased benefit.

There are no dollar costs for the new Regulations, and the disadvantages of it are limited because the Regulations are technical in nature and limited to setting out a calculation, rather than introducing any new policies.

Consultation

Extensive consultations have taken place with the provinces and territories with respect to specifying the calculation for the contribution rate for new or increased benefits in regulation. Federal, provincial and territorial Ministers of Finance recommended, at the conclusion of the 2004–2006 Triennial Review, operationalizing the requirement to fully fund new or increased benefits as per paragraph 113.1(4)(d) of the CPP through regulation. Provinces and territories were consulted on drafts of the new Regulations.

The proposal to create the new Regulations was also discussed in Parliamentary Committees (both the House of Commons Committee on Human Resources, Social Development and the Status of Persons with Disabilities as well as the Senate Committee on Banking, Trade and Commerce) as part of the legislative passage of Bill C-36. The Committees consulted associations representing retired workers as well as experts in the pension field, including

•  the Federal Superannuates National Association;

•  the Association québécoise de défense des droits des personnes retraitées et préretraitées;

•  Richard Shillington; and

•  the Old Age Benefits Forum.

These groups and individuals did not raise concerns about setting out the calculation of the full funding contribution rate in the new Regulations.

Extensive consultations were held with the Office of the Chief Actuary of the Office of the Superintendent of Financial Institutions in specifying the calculation of the full funding contribution rate.

Compliance and enforcement

The Chief Actuary of the Office of the Superintendent of Financial Institutions will be responsible for the calculations in accordance with paragraph 115(1.1)(c) of the CPP.

Contact

Suzan Kalinowski
Chief, Income Security Section
Social Policy Division
Department of Finance
140 O'Connor Street
Ottawa, Ontario
K1A 0G5
Telephone: 613-943-1136

PROPOSED REGULATORY TEXT

Notice is hereby given that the Governor in Council, pursuant to paragraphs 101(1)(d.1) (see footnote a) and 115(1.1)(c) (see footnote b) of the Canada Pension Plan, proposes to make the annexed Calculation of Contribution Rates Regulations, 2007.

Interested persons may make representations concerning the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to Suzan Kalinowski, Chief, Income Security, Finance Canada, L'Esplanade Laurier, Floor 15EE, 140 O'Connor Street, Ottawa, Ontario K1A 0G5 (tel.: 613-943-1136; fax: 613-943-2919; e-mail: kalinowski.suzan@fin.gc.ca).

Ottawa, July 30, 2007

MARY O'NEILL

Assistant Clerk of the Privy Council

CALCULATION OF CONTRIBUTION RATES REGULATIONS, 2007

INTERPRETATION

1. The following definitions apply in these Regulations.

"Act" means the Canada Pension Plan. (Loi)

"contributory earnings" means the contributory salary and wages and the contributory self-employed earnings referred to in sections 12 and 13, respectively, of the Act. (gains cotisables)

"increased or new benefits" means the increased or new benefits referred to in paragraph 113.1(4)(d) of the Act. (accroissement des prestations)

"payments" means the payments charged to the Canada Pension Plan Account under subsection 108(3) of the Act excluding any payments in respect of any increased or new benefits that resulted in a non-zero contribution rate under section 3. (paiement)

"review period" means any three-year period for which the Chief Actuary prepares a report set out in subsection 115(1) of the Act. (période d'examen)

CALCULATION OF CONTRIBUTION RATE

2. For the purposes of subparagraph 115(1.1)(c)(i) of the Act, the contribution rate is the one that is the smallest multiple of 0.001 percentage points and that results in a projected ratio of assets to expenditures for the 60th year after the review period that is not lower than the projected ratio of assets to expenditures for the 10th year after the review period which ratios are determined in accordance with the formula:

(A + B – C) / D

where

A is the projected balance in the Canada Pension Plan Account on December 31 of that year;

B is the projected assets of the Investment Board on December 31 of that year;

C is the projected assets on December 31 of that year in respect of any increased or new benefits that resulted in a non-zero contribution rate calculated under section 3; and

D is the projected payments for the following year.

3. (1) For the purposes of subparagraph 115(1.1)(c)(ii) of the Act, the contribution rate with respect to any increased or new benefits is equal to the sum of the permanent increase in the contribution rate calculated in accordance with subsection (2) and the temporary increase in the contribution rate calculated in accordance with subsection (3).

(2) The permanent increase in the contribution rate is calculated, in respect of contributory earnings for the year that, and the years after, the increased or new benefits come into effect, as the ratio of the present value of the projected extra costs related to the increased or new benefits in respect of those contributory earnings to the present value of those contributory earnings.

(3) The temporary increase in the contribution rate for a period not exceeding 15 years is calculated, in respect of contributory earnings for the years before the increased or new benefits come into effect, as the ratio of the present value of the projected extra costs related to the increased or new benefits in respect of those contributory earnings to the present value of contributory earnings for the same period as the temporary increase in the contribution rate.

(4) The present values referred to in this section shall be calculated as of the day on which the increased or new benefits come into effect.

(5) If the contribution rate calculated in accordance with subsection (1) is less than 0.02 percentage points, the contribution rate shall be deemed to equal zero.

ROUNDING OF AMOUNTS

4. If a contribution rate determined under section 2 and subsection 3(1) is not a multiple of 0.01 percentage points, it shall be rounded to the nearest multiple of 0.01 or, if the amount is equidistant from the two multiples, to the higher multiple.

REPEALS

5. The Calculation of Contribution Rates Regulations (see footnote 1) are repealed.

6. The Calculation of Default Contribution Rates Regulations (see footnote 2) are repealed.

[31-1-o]

Footnote a

R.S., c. 30 (2nd Supp.), s. 52

Footnote b

S.C. 2007, c. 11, s. 14

Footnote 1

SOR/89-221

Footnote 2

SOR/98-593

NOTICE:
The format of the electronic version of this issue of the Canada Gazette was modified in order to be compatible with hypertext language (HTML). Its content is very similar except for the footnotes, the symbols and the tables.

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