Actuarial Report (26th) on the Canada Pension Plan

Document Properties

  • Type of Publication: Actuarial Report
  • Date: November 21, 2013

The Honourable James M. Flaherty, P.C., M.P.
Minister of Finance
House of Commons
Ottawa, Canada
K1A 0A6

Dear Minister:

In accordance with section 115 of the Canada Pension Plan, which provides that an actuarial report shall be prepared every three years for purposes of the financial state review by the Minister of Finance and the ministers of the Crown from the provinces, I am pleased to submit the Twenty-Sixth Actuarial Report on the Canada Pension Plan, prepared as at 31 December 2012.

Yours sincerely,

Jean-Claude Ménard Signature

Jean-Claude Ménard, F.S.A., F.C.I.A.
Chief Actuary

List of Tables

I. Executive Summary

This is the 26th Actuarial Report since the inception of the Canada Pension Plan (CPP or the “Plan”) in 1966.  It presents the financial status of the Plan as at 31 December 2012.  The previous triennial report was the 25th Actuarial Report on the Canada Pension Plan as at 31 December 2009, which was tabled in the House of Commons on 15 November 2010.  An independent panel of actuaries reviewed the 25th CPP Actuarial Report and released a report in March 2011.  The Office of the Chief Actuary gave due consideration to the review panel’s recommendations and action was taken accordingly. 

Since the 25th CPP Actuarial Report, the Canada Pension Plan has been amended, most recently as a result of technical amendments under Bill C-45 – Jobs and Growth Act, 2012, which received Royal Assent on 14 December 2012.  As required by the Canada Pension Plan, the amendments under Bill C-45 will come into force once formal approval of the provinces is received.  This is in process and should be completed in due course.  In addition, all amendments to the Canada Pension Plan, as set forth under the Economic Recovery Act (stimulus) have come into force as of 1 January 2012.  This 26th CPP Actuarial Report includes all the amendments made to the Canada Pension Plan under the Economic Recovery Act (stimulus) and the Jobs and Growth Act, 2012.

A. Purpose of the Report

This report has been prepared in compliance with the timing and information requirements of the Canada Pension Plan.  Section 113.1 of the Canada Pension Plan provides that the Minister of Finance and ministers of the Crown from the provinces shall review the financial state of the CPP once every three years and may consequently make recommendations to change the benefits or contribution rates, or both.  Section 113.1 identifies the factors the ministers consider in their review, including information to be provided by the Chief Actuary.

An important purpose of the report is to inform contributors and beneficiaries of the current and projected financial status of the Plan.  The report provides information to evaluate the Plan’s financial sustainability over a long period, assuming the legislation remains unchanged.  Such information should facilitate a better understanding of the financial status of the Plan and the factors that influence costs, and thus contribute to an informed public discussion of issues related to the finances of the Plan.

B. Scope of the Report

Section II presents a general overview of the methodology used in preparing the actuarial estimates included in this report, which are based on the best-estimate assumptions described in section III.  The results are presented in section IV and include the projections of the revenues, expenditures, and assets of the Plan over the next 75 years.  Section V presents the reconciliation of the results with those presented in the 25th CPP Actuarial Report.  Section VI concludes with the financial status of the Plan, while section VII provides the actuarial opinion.

The various appendices provide supplemental information on the long-term financial sustainability of the Plan, the uncertainty of the results, including the impact that asset allocation and financial market volatility have on the financial status of the Plan as well as a sensitivity analysis of the key best-estimate assumptions based on deterministic and stochastic approaches, the Plan provisions, a detailed reconciliation of the results with the previous triennial report and a description of the data, assumptions, and methodology employed.

C. Main Findings

The results of the actuarial projections of the financial status of the Canada Pension Plan presented in this report are generally consistent with the trends revealed in the previous triennial actuarial report.

  • With the legislated contribution rate of 9.9%, contributions are projected to be more than sufficient to cover the expenditures over the period 2013 to 2022.  Thereafter, a proportion of investment income is required to make up the difference between contributions and expenditures.  In 2050, 27% of investment income is required to pay for expenditures.
  • With the legislated contribution rate of 9.9%, total assets are expected to increase significantly over the next decade and then will continue increasing at a slower pace.  Total assets are expected to grow from $175 billion at the end of 2012 to $300 billion by the end of 2020.  The ratio of assets to the following year’s expenditures is projected to grow from 4.7 in 2013 to 5.4 by 2025 and 5.9 by 2075. 
  • The minimum contribution rate to sustain the Plan is 9.84% of contributory earnings for the year 2016 and thereafter.  The legislated rate of 9.9% applies to the first three years after the valuation year, that is, to the current review period of 2013 - 2015.
  • With the minimum contribution rate of 9.84% applicable for 2016 and thereafter, the assets are expected to increase significantly but to a lower level than under the legislated contribution rate.  The ratio of assets to the following year’s expenditures is projected to grow from 4.7 in 2013 to 5.3 by 2025 and to be the same fifty years later in 2075.
  • The number of contributors is expected to grow from 13.5 million in 2013 to 14.5 million by 2020.  Under the legislated contribution rate of 9.9%, contributions are expected to increase from $42 billion in 2013 to $56 billion in 2020.
  • The number of retirement beneficiaries is expected to increase from 4.6 million in 2013 to 10.2 million in 2050.

D. Uncertainty of Results

To measure the sensitivity of the long-term projected financial position of the Plan to future changes in the demographic and economic environments, a variety of sensitivity tests were performed.  The tests and results are presented in detail in Appendix B of this report.

One of the tests performed focuses on the impact of the Plan’s assets being invested in portfolios with different asset mixes than the best-estimate portfolio.  The tests show that the minimum contribution rate varies between 9.5% and 10.7% depending on the proportions of fixed income securities versus equity and real asset securities of the portfolios.  Those portfolios more heavily weighted toward fixed income securities place upward pressure on the minimum contribution rate, whereas portfolios more heavily invested in equities and real assets tend to lower the minimum contribution rate.

Sensitivity tests were also performed to measure the impact that market shocks could have on the financial sustainability of the Plan under the best-estimate portfolio and alternative investment portfolios.  Investment portfolio shocks, whether positive or negative, can have an immediate and significant impact on the financial status of the Plan.  The impact varies depending on the amount of risk present in the portfolio.  A portfolio more heavily weighted toward equity will tend to experience larger changes in the minimum contribution rate (either positive or negative) and is more likely to experience severe portfolio shocks in market upswings and downturns.  The upside of investing in a risky portfolio must be weighed against the downside risk and the probability of poor investment returns occurring.  These tests show that the minimum contribution rate could vary between 9.4% and 10.1% depending on the magnitude of the investment shock and the degree of risk present in a portfolio.

Following the economic slowdown experienced in 2008-09, sensitivity tests were created to analyze the capacity of the CPP to withstand another similar slowdown in the near future.  These sensitivity tests assume that an economic slowdown would occur in 2014 and 2015, followed by a period of recovery.  The impact on the minimum contribution rate would be relatively small, if it is assumed that only the unemployment rate and real wage increase are affected.  In this case, the minimum contribution rate would increase to 9.9%.  However, if a large investment loss occurs over the same period, then this could result in the minimum contribution rate reaching 10.1%.

Key best-estimate assumptions were varied individually in order to measure the potential impact that long-term changes in those assumptions could have on the financial status of the Plan.  The individual sensitivity tests show that the minimum contribution rate could deviate significantly, from 9.0% to 10.7%, compared to its best-estimate of 9.84%, if other than best-estimate assumptions were to be realized.

Mortality is the most sensitive demographic assumption as it produces the widest range of the minimum contribution rate.  If life expectancies continue to increase at the current rate, especially for ages 75 to 89, the long-term mortality assumptions will need to be adjusted accordingly.  This will put additional pressure on the minimum contribution rate that could cause the rate to increase above 9.9%. The last tests performed concern the aging of the population and how it may differ from the best-estimate projection.  Two demographically based scenarios were developed that portray generally younger and older populations.  These scenarios produced minimum contribution rates of 9.3% and 10.4%, respectively.

E. Conclusion

The results contained in this report confirm that the legislated contribution rate of 9.9% is sufficient to financially sustain the Plan over the long term.  The results also show that assets accumulate to $300 billion (i.e. 5.2 times the annual expenditures) by 2020.

The minimum contribution rate required to financially sustain the Plan under this report is 9.84% for the year 2016 and thereafter, compared to 9.86% for years 2013 to 2022 and 9.85% from 2023 onward, as determined for the 25th CPP Actuarial Report.  Experience over the period 2010 to 2012 was better than anticipated overall, especially regarding migration, benefits, and investment returns.  However, this is offset by higher projected life expectancies at age 65 and lower assumed real wage increases.  The net result of all changes since the 25th CPP Actuarial Report is an overall small decrease in the minimum contribution rate.

Under the 9.9% legislated contribution rate, the assets are projected to grow rapidly over the next decade as contribution revenue is expected to exceed expenditures over that period.  Assets will continue to grow thereafter until the end of the projection period, but at a slower pace, with the ratio of assets to the following year’s expenditures expected to reach a level of 6.0 by 2050.  Thus, despite the projected substantial increase in benefits paid as a result of an aging population, the Plan is expected to be able to meet its obligations throughout the projection period and to remain financially sustainable over the long term.

II. Methodology

The actuarial examination of the Canada Pension Plan (CPP or the “Plan”) involves projections of its revenues and expenditures over a long period of time, so that the future impact of historical and projected trends in demographic and economic factors can be properly assessed.  The actuarial estimates in this report are based on the provisions of the Canada Pension Plan as at 31 December 2012, data regarding the starting point for the projections, and “best-estimate” assumptions regarding future demographic and economic experience.

The revenues of the Plan include both contributions and investment income.  The projection of contributions begins with a projection of the working-age population.  This requires assumptions regarding demographic factors such as fertility, migration, and mortality.  Total contributory earnings are derived by applying labour force participation and job creation rates to the projected population and by projecting future employment earnings.  This requires assumptions about various factors such as wage increases, an earnings distribution, and unemployment rates.  Contributions to the Plan are obtained by applying the contribution rate to contributory earnings.  Investment income is projected on the basis of the existing portfolio of assets, projected net cash flows (contributions less expenditures), and the assumptions regarding the future asset mix and rates of return on investments net of investment expenses.

Expenditures consist of the benefits paid out and operating expenses.  Newly emerging benefits are projected by applying assumptions regarding retirement, disability, and death to the populations eligible to benefits, together with the benefit provisions and the earnings histories of the participants.  The projection of total benefits, which includes the continuation of benefits already in pay at the valuation date, requires further assumptions.  Operating expenses, excluding CPPIB operating expenses, are projected by considering the historical relationship between expenses and total employment earnings, while CPPIB operating expenses are considered in the determination of the rate of return.

The assumptions and results presented in the following sections make it possible to measure the financial status of the Plan in each projection year and to calculate the minimum contribution rate, which consists of two components.  The first component is applicable to the Plan excluding the full funding provision for increased or new benefits, and is referred to as the “steady-state” contribution rate.  The second component of the minimum contribution rate consists of the full funding rate for increased or new benefits.

A wide variety of factors influence both the current and projected financial position of the Plan.  Accordingly, the results shown in this report differ from those shown in previous reports.  Likewise, future actuarial examinations will reveal results that differ from the projections included in this report.

III. Best Estimate Assumptions

A. Introduction

The information required by statute, which is presented in section IV of this report, requires making several assumptions regarding future demographic and economic trends.  The projections included in this report cover a long period of time (75 years) and the assumptions are determined by putting more emphasis on historical long-term trends than on more recent short-term trends.  These assumptions reflect the Chief Actuary’s best judgment and are referred to in this report as the “best-estimate” assumptions.  The assumptions were chosen to be, independently and in aggregate, reasonable and appropriate, taking into account certain interrelationships between them.

An independent panel of actuaries reviewed the 25th Actuarial Report on the CPP (the previous triennial report on the Plan) and released a report in March 2011.  The findings of the review panel reflected the professionalism and expertise of the staff of the Office of the Chief Actuary (OCA) in their work of projecting the financial status of the Plan.  The review panel confirmed that the 25th CPP Actuarial Report was prepared in accordance with professional standards of practice and statutory requirements.  The review panel found that the 25th CPP Actuarial Report was prepared using reasonable actuarial methods, and that the assumptions were, individually and in the aggregate, within the reasonable range.  The review panel made a series of recommendations dealing with data, methodology, assumptions, communication of results, and other actuarial issues.  As well, the reviewers provided an opinion and recommendations on the 24th Actuarial Report on the CPP that provided cost estimates of recent amendments to the Canada Pension Plan pursuant to the Economic Recovery Act (stimulus).

The Government Actuary’s Department of the United Kingdom selected the reviewers who were suitably qualified to carry out the review and provided the opinion that the work carried out for the review and the review report adequately addressed the issues set out in the terms of reference.  For this 26th Actuarial Report on the CPP, the OCA gave due consideration to the review panel’s recommendations and acted on them accordingly.

Since the 25th CPP Actuarial Report, the Canada Pension Plan has been amended, most recently as a result of technical amendments under Bill C-45 – Jobs and Growth Act, 2012, which received Royal Assent on 14 December 2012.  As required by the Canada Pension Plan, the amendments under Bill C-45 will come into force once formal approval of the provinces is received.  This is in process and should be completed in due course.  In addition, all amendments to the Canada Pension Plan, as set forth under the Economic Recovery Act (stimulus) have come into force as of 1 January 2012.  This 26th CPP Actuarial Report includes all the amendments made to the Canada Pension Plan under the Economic Recovery Act (stimulus) and the Jobs and Growth Act, 2012.

The Chief Actuary held a seminar in September 2012 on the long-term demographic, economic, and investment outlook for Canada to obtain opinions from a wide range of individuals with relevant expertise.  Four experts in the fields of demography, economics, and investments were invited to present their views.  Among the participants at the seminar were representatives from the OCA, federal departments including Employment and Social Development Canada and the Department of Finance, as well as representatives from provincial and territorial governments and other organizations.  Representatives of the OCA also attended a seminar on the demographic, economic and financial outlook for 2012-2060 held by the Québec Pension Plan (QPP) on 29 November 2012.  The various presentation materials from both seminars are available on OSFI’s Web site.

Table 1 presents a summary of the most important assumptions used in this report compared with those used in the previous triennial report.  The assumptions are described in more detail in Appendix E of this report.

Table 1 Best-Estimate Demographic and Economic Assumptions
Canada 26th Report(as at 31 December 2012) 25th Report(as at 31 December 2009)
Total fertility rate 1.65 (2015+) 1.65 (2015+)
Mortality Canadian Human Mortality Database (CHMD 2009) with assumed future improvements Canadian Human Mortality Database (CHMD 2006) with assumed future improvements
Canadian life expectancy Males Females Males Females
at birth in 2013 86.1 years 89.1 years 85.7 years 88.5 years
at age 65 in 2013 20.9 years 23.3 years 20.5 years 22.8 years
Net migration rate 0.60% of population for 2017+ 0.58% of population for 2023+
Participation rate (age group 15-69) 76.8% (2030) 75.2% (2030)
Employment rate (age group 15-69) 72.1% (2030) 70.6% (2030)
Unemployment rate 6.0% (2023+) 6.1% (2022+)
Rate of increase in prices 2.2% (2021+) 2.3% (2019+)
Real wage increase 1.2% (2020+) 1.3% (2019+)
Real rate of return 4.0% (2019+) 4.0% (2017+)Table 1 Footnote (1)
Retirement rates for cohort at age 60 Males
Females
34% (2016+)
38% (2016+)
Males
Females
38% (2016+)
41% (2016+)
CPP disability incidence rates
(per 1,000 eligible)
Males
Females
3.30 (2017+)
3.75 (2017+)
Males
Females
3.40 (2015+)Table 1 Footnote (2)
3.79 (2015+)Table 1 Footnote (2)

B. Demographic Assumptions

The population projections start with the Canada and Québec populations on 1 July 2012, to which are applied fertility, migration and mortality assumptions.  The relevant population for the Canada Pension Plan is the population of Canada less that of Québec and is obtained by subtracting the projected results for Québec from those for Canada.  The population projections are essential in determining the future number of CPP contributors and beneficiaries.

  1. Fertility

    The first cause of the aging of the Canadian population is the large drop in the total fertility rate that occurred between the end of the baby boom period (mid 1940s to mid 1960s) and latter half of the 1980s. The total fertility rate in Canada has dropped rapidly from a level of about 4.0 children per woman in the late 1950s to 1.6 by the mid-1980s. The total fertility rate rose slightly in the early 1990s, but then generally declined to a level of 1.5 by the late 1990s. Canada is one of many industrialized countries that have seen an increase in their fertility rates since 2000. By 2008, the total fertility rate for Canada had reached 1.68. However, in some industrialized countries, including Canada, the total fertility rate has decreased since 2008, which could be attributed to the economic downturn experienced in recent years. As of 2010, the total fertility rate for Canada stood at 1.63.

    Similar to Canada, the total fertility rate in Québec fell from a high of about 4.0 per woman in the 1950s; however, the Québec rate fell to a greater degree, reaching 1.4 by the mid-1980s.  The Québec rate then recovered somewhat in the early 1990s to over 1.6 and subsequently declined to below 1.5 by the late 1990s.  There was a significant increase in the Québec rate since the year 2000, with the rate reaching 1.74 by 2008.  However, similar to Canada’s fertility rate, the fertility rate for Québec has been decreasing in recent years and was 1.69 in 2011.

    The overall decrease in the total fertility rate since the 1950s occurred as a result of changes in a variety of social, medical, and economic factors.  Although there have been periods of growth in the total fertility rates in recent decades, it is unlikely that the rates will return to historical levels in the absence of significant societal changes.

    It is assumed that the total fertility rate for Canada will increase slightly from its 2010 level of 1.63 children per woman to an ultimate level of 1.65 in 2015.  The total fertility rate for Québec is assumed to decrease from its 2011 level of 1.69 to the same ultimate level of 1.65 in 2015.

  2. Mortality

    Another element that has contributed to the aging of the population is the significant reduction in age-specific mortality rates. This can be best measured by the increase in life expectancy at age 65, which directly affects how long retirement benefits will be paid to beneficiaries. Male life expectancy (without future mortality improvements) at age 65 increased 37% between 1966 and 2009, rising from 13.6 to 18.6 years. For women, life expectancy at age 65 (without future improvements) increased 28%, from 16.9 to 21.7 years over the same period. Although the overall gains in life expectancy at age 65 since 1966 are similar for males and females (about 5 years), about 60% of the increase occurred after 1991 for males, while for females, about 60% of the increase occurred by 1991.

    Mortality improvements are expected to continue in the future, but at a slower pace than most recently observed over the 15-year period ending in 2009.  Further, it is assumed that ultimately, mortality improvement rates for males will decrease to the same level as females.  The ultimate rates of improvement in the year 2030 correspond to half the value of the average experience for females over the 15 to 20-year periods ending in 2009.  Rates of improvement in the year 2010 are assumed to vary by age and sex, and correspond to the average rates experienced over the 15-year period ending in 2009.  After 2010, the rates are assumed to gradually reduce to their ultimate levels in 2030 for Canada.  As a result, life expectancy at age 65 in 2013 is 20.9 years for males, and 23.3 years for females, assuming future mortality improvements.  This represents increases in life expectancies at age 65 in 2013 for males and females of 0.4 and 0.5 of a year, respectively, compared to the 25th CPP Actuarial Report.

    To project CPP benefits, the mortality rates for CPP retirement, survivor, and disability beneficiaries reflect actual experience for those segments of the population.  Specific mortality experience for CPP beneficiaries is discussed further in Appendix E of this report.

  3. Net Migration

    Net migration (i.e. the excess of immigration over emigration) is unlikely to materially reduce the continued aging of the population unless (1) the level of immigration rises significantly above what has been observed historically and (2) the average age at immigration falls dramatically.

    The net migration rate is assumed to gradually decline from its current (2012) level of 0.77% of the population to an ultimate level of 0.60% of the population for the year 2017 and thereafter.  This assumption reflects the fact that the annual net increase in the number of non-permanent residents has recently grown significantly, and that it is expected to remain at a positive but lower level in the future.  The ultimate rate of 0.60% corresponds to the average observed experience over the last 30 to 40 years.  For the Québec population, the net migration rate averages 0.50% over the projection period.

  4. Population Projections

    Table 2 shows the population for three age groups (0-19, 20-64 and 65 and over) throughout the projection period. The ratio of the number of people aged 20-64 to those aged 65 and over is a measure that approximates the ratio of the number of working-age people to retirees. Because of the aging population, this ratio drops from 4.2 in 2013 to less than half its value or 2.0 in 2075.

    Table 2 Population of Canada less Québec
    (thousands)
    Year Total Age
    0-19
    Age
    20-64
    Age
    65 and Over
    Ratio of 20-64 to
    65 and Over
    2013 27,151 6,111 16,998 4,041 4.2
    2014 27,475 6,133 17,151 4,192 4.1
    2015 27,795 6,156 17,293 4,346 4.0
    2016 28,110 6,186 17,420 4,504 3.9
    2017 28,418 6,230 17,523 4,665 3.8
    2018 28,727 6,286 17,603 4,837 3.6
    2019 29,036 6,350 17,665 5,021 3.5
    2020 29,345 6,417 17,714 5,214 3.4
    2025 30,860 6,776 17,864 6,220 2.9
    2030 32,256 7,009 18,001 7,246 2.5
    2040 34,615 7,157 19,116 8,342 2.3
    2050 36,679 7,415 20,136 9,127 2.2
    2075 41,892 8,413 22,498 10,981 2.0

C. Economic Assumptions

The main economic assumptions relating to the Canada Pension Plan are for the following indicators:  labour force participation rates, job creation rates, unemployment rates, and real increases in average employment earnings.  For benefit and asset projection purposes, assumptions regarding the rate of increase in prices and rates of return on invested assets are also required.

One of the key elements underlying the best‑estimate economic assumptions relates to the continued trend toward delayed retirement.  Older workers are expected to exit the workforce at a later age, which could alleviate the impact of the aging of the population on future labour force growth.  However, despite the expected later exit ages, labour force growth is projected to weaken as the working-age population expands at a slower pace and as the baby boomers retire and exit the labour force.  As a result, a labour shortage is anticipated.  Labour shortages together with projected improvements in productivity growth are assumed to create upward pressure on real wages.  These higher real wages may in turn help keep people in the labour force who might otherwise retire.

  1. Labour Force

    Employment levels are reflected in the projections through the assumption regarding the proportion of the population, by age and sex, with earnings in a given year.  These proportions vary not only with the rate of unemployment, but also reflect trends in increased workforce participation by women, longer periods of formal education among young adults, and changing retirement patterns of older workers.

    As the population ages, it becomes more heavily weighted in age groups where labour force participation is lower and, as a result, the labour force participation rate for Canadians aged 15 and over is expected to decline from 66.6% in 2013 to 64.0% by 2030.  A more useful measure of the working-age population is the participation rate of those aged 15 to 69, which is expected to increase from 74.6% in 2013 to 76.8% in 2030. 

    The increase in the participation rate for those aged 15 to 69 is mainly due to an assumed increase in participation rates for those aged 55 and over as a result of an expected continued trend toward delayed retirement.  Furthermore, anticipated labour shortages are expected to create attractive employment opportunities that will exert upward pressure on the participation rates for all age groups.  It is also expected that future participation rates will increase with the aging of cohorts that have a stronger labour force attachment compared to older cohorts due to higher education attainment.  The cohort effect of stronger labour force attachment of women is expected to continue but at a much slower pace than in the past, resulting in a gradual narrowing of the gap between the age-specific participation rates of men and women.

    As a result, the participation rates for females are projected to increase slightly more than for males, primarily for those aged 25 to 44.  Overall, the male participation rate of those aged 15 to 69 is expected to be 78.5% in 2013 and 80.2% in 2030, while the female participation rate for the same age group is expected to increase from 70.7% in 2013 to 73.4% in 2030.  Therefore, the current gap of 7.8% between males and females in this age group is expected to decrease to 6.8%.

    The job creation rate (i.e. the change in the number of persons employed) in Canada was on average 1.6% from 1976 to 2012 based on available employment data, and it is assumed that the number of jobs will increase by 1.4% in 2013.  The job creation rate assumption is determined on the basis of expected moderate economic growth and an unemployment rate that is expected to gradually decrease from its 2012 level of 7.2% to an ultimate rate of 6.0% by 2023.  The job creation rate is on average about 1.0% from 2013 to 2017 and 0.7% from 2018 to 2023, which is slightly higher than the labour force growth rate.  For the year 2024 and thereafter, the job creation rate follows the labour force growth rate, which is equal to 0.6% per year on average between 2024 and 2030, and 0.5% per year on average thereafter.  The aging of the population is the main reason behind the slower long-term growth in the labour force and job creation rate.

  2. Price Increases

    Price increases, as measured by changes in the Consumer Price Index (CPI), tend to fluctuate from year to year. In 2011, the Bank of Canada and the Government renewed their commitment to keep inflation between 1% and 3% until the end of 2016. It is expected that this policy will be maintained until the end of 2019. In Canada, inflation was moderate at 1.5% in 2012. To reflect recent experience and the short-term expectation that inflation will remain subdued in coming quarters, the price increase assumption was set at 1.5% in 2013. Thereafter, the price increase assumption is set at 2.0% for years 2014 to 2019, 2.1% in 2020, and 2.2% for 2021 and thereafter.

  3. Real Wage Increases

    Wage increases affect the financial balance of the Canada Pension Plan in two ways.  In the short term, an increase in the average wage translates into higher contribution income, with little immediate impact on benefits.  Over the longer term, higher average wages produce higher benefits.

    Increases in the nominal wage comprise increases in the real wage and increases in the level of prices (“inflation”).  Put another way, the difference between nominal wage increases and inflation represents increases in the real wage, which is referred to also in this report as the “real wage increase”.  This increase affects the long-term projected financial status of the Plan.

    There are five main factors which influence increases in the real wage, namely general productivity, the extent to which changes in productivity are shared between labour and capital, changes in the compensation structure offered to employees, changes in the average number of hours worked, and changes in labour’s terms of trade.  Labour’s terms of trade measure how shifts in the prices of goods produced by workers (measured by the Gross Domestic Product (GDP) deflator) compare to shifts in the prices of goods consumed by workers (CPI).

    Based on the average increase in the real average weekly earnings over the last 15 years, the real wage increase is assumed to be 0.5% in 2013.  It is then projected to gradually rise to an ultimate value of 1.2% by 2020.  The ultimate real wage increase assumption is developed taking into account the relationships described above, historical trends, and an assumed labour shortage.  The ultimate real wage increase assumption combined with the ultimate price increase assumption results in an assumed annual increase in average nominal wages of 3.4% in 2021 and thereafter.

    The assumptions regarding the increase in average real annual employment earningsand job creation rates result in projected average annual real increases in total Canadian employment earnings of about 1.8% for the period 2013 to 2030.  After 2030, this decreases to about 1.7% on average over the remainder of the projection period, reflecting the assumed 1.2% real increase in annual wages and projected average 0.5% annual growth in the working-age population.

    Given historical trends and the long-term relationship between increases in the average real annual employment earnings and the Year’s Maximum Pensionable Earnings (YMPE), it is assumed that the real wage increase assumption is also applicable to the increases in the YMPE from one year to the next.

  4. Rates of Return on Investments

    Real rates of return are the excess of the nominal rates of return over price increases and are required for the projection of revenue arising from investment income. A real rate of return is assumed for each year in the projection period and for each of the main asset categories in which CPP assets are invested. The assumed long-term real rate of return on CPP assets takes into account the assumed asset mix of investments as well as the assumed real rates of return for all categories of CPP assets. The real rates of return on investments are net of all investment expenses, including CPPIB operating expenses. The ultimate real rate of return is assumed to be 4.0% for the year 2019 and thereafter.

    For the period 2013 to 2018, the annual real rates of return are lower than the assumed ultimate real rate of return of 4.0% in 2019 due to lower expected bond returns during the period. Equity returns are assumed to be stable throughout the projection period, and an ultimate equity risk premium of 2.2% is assumed to be reached in 2019. The 4.0% long-term real rate of return on CPP assets is comparable to the average over the last 50 years of historical real rates of return for large pension plans.

    Table 3 summarizes the main economic assumptions over the projection period.

    Table 3 Economic Assumptions
    Year Real Increase Average Annual Earnings Real Increase Average Weekly Earnings (YMPE) Price Increase Labour Force (Canada) Real Rate of Return on Investments
    Participation Rate
    (Ages 15+)
    Job Creation Rate Unemployment Rate Labour Force Annual Increase
    (%) (%) (%) (%) (%) (%) (%) (%)
    2013 0.5 0.5 1.5 66.6 1.4 7.1 1.2 2.7
    2014 0.6 0.6 2.0 66.6 1.1 7.0 1.0 2.8
    2015 0.7 0.7 2.0 66.5 1.0 6.9 0.9 3.0
    2016 0.8 0.8 2.0 66.4 0.9 6.8 0.8 3.2
    2017 0.9 0.9 2.0 66.2 0.8 6.7 0.7 3.4
    2018 1.0 1.0 2.0 66.1 0.8 6.6 0.6 3.4
    2019 1.1 1.1 2.0 65.9 0.7 6.5 0.6 4.0
    2020 1.2 1.2 2.1 65.7 0.7 6.3 0.6 4.0
    2021 1.2 1.2 2.2 65.5 0.7 6.2 0.6 4.0
    2025 1.2 1.2 2.2 64.6 0.6 6.0 0.6 4.0
    2030 1.2 1.2 2.2 64.0 0.7 6.0 0.7 4.0
    2040 1.2 1.2 2.2 62.7 0.5 6.0 0.5 4.0
    2050 1.2 1.2 2.2 62.1 0.3 6.0 0.3 4.0
    2060 1.2 1.2 2.2 61.3 0.4 6.0 0.4 4.0

D. Other Assumptions

This report is based on several other key assumptions, such as retirement rates and disability incidence rates.

  1. Retirement Rates

    The retirement rates are determined on a cohort basis.  The sex-distinct retirement rate for any given age and year from age 60 and above corresponds to the number of emerging (new) retirement beneficiaries divided by the product of the population and the retirement benefit eligibility rate for the given sex, age, and year.  The unreduced pension age under the Canada Pension Plan is 65.  However, since 1987 a person can choose to receive a reduced retirement pension as early as age 60.  This provision has had the effect of lowering the average age at pension take-up.  In 1986, the average age at pension take-up was 65.2, compared to about 62.6 over the decade ending in 2012.

    In 2012, there was a significant increase observed in the retirement rates at age 60 for the cohort reaching age 60 that year.  The retirement rates at age 60 in 2012 were 41% and 44% for males and females, respectively, compared to the corresponding rates of 32% and 35% in 2011.  The observed increase in the retirement rates at age 60 in 2012 may have resulted from two provisions of the Economic Recovery Act (stimulus).  First, the work cessation test to receive the pension early (prior to age 65) was removed in 2012.  As such, starting in 2012, individuals may receive a CPP retirement pension without having to stop working or materially reduce their earnings.  The removal of the work cessation test may have thus led at least in part to the observed increase in retirement rates at age 60 in 2012.  Second, greater reductions in early retirement pensions are being phased in over a five-year period, starting in 2012.  The anticipation of greater adjustments may have also contributed toward the observed increase in retirement rates at age 60 in 2012.

    Starting from 2013, the age 60 retirement rates are assumed to gradually decrease to their pre-2012 levels as the higher actuarial adjustments are phased in and the effect of the removal of the work cessation test diminishes.  For cohorts reaching age 60 in 2016 and thereafter, the retirement rates are assumed to decrease to 34% and 38% and to increase to 41% and 39%, at age 65 in 2021 and thereafter, for males and females respectively.  These rates result in a projected average age at take-up of 62.9 in 2030.

  2. Disability Incidence Rates

    The sex-distinct disability incidence rate at any given age is the number of new disability beneficiaries divided by the total number of people eligible for the disability benefit.  Based on the average experience over the period 1998 to 2012, the ultimate overall incidence rates for the year 2017 and thereafter are assumed to be 3.30 per thousand eligible for males and 3.75 per thousand eligible for females.  Between 2012 and 2017, the rates are assumed to gradually increase from their 2012 levels (3.10 for males, 3.59 for females) to the ultimate assumptions.

    The assumptions recognize that although current disability incidence rates are significantly below the levels experienced from the mid-1970s (for males) and early-1980s (for females) to the early-1990s for both sexes, incidence rates for both sexes have been relatively stable since 1997 as a result of administrative changes made to the disability program.

IV. Results

A. Overview

The results of the actuarial projections of the financial status of the Canada Pension Plan presented in this report are generally consistent with the trends revealed in the previous triennial actuarial report.  The key observations and findings are described below.

  • With the legislated contribution rate of 9.9%, contributions are projected to be more than sufficient to cover the expenditures over the period 2013 to 2022.  Thereafter, a proportion of investment income is required to make up the difference between contributions and expenditures.  In 2050, 27% of investment income is required to pay for expenditures.
  • With the legislated contribution rate of 9.9%, total assets are expected to increase significantly over the next decade and then will continue increasing at a slower pace.  Total assets are expected to grow from $175 billion at the end of 2012 to $300 billion by the end of 2020.  The ratio of assets to the following year’s expenditures is projected to grow from 4.7 in 2013 to 5.4 by 2025 and 5.9 by 2075.
  • With the legislated contribution rate of 9.9%, investment income, which represents 15% of revenues (i.e. contributions and investment income) in 2013, will represent 24% of revenues in 2020.  In 2050, investment income represents 29% of revenues.  This clearly illustrates the importance of investment income as a source of revenues for the Plan.
  • The minimum contribution rate to sustain the Plan is 9.84% of contributory earnings for the year 2016 and thereafter.  The legislated rate of 9.9% applies to the first three years after the valuation year, that is, to the current review period of 2013 - 2015.
  • With the minimum contribution rate of 9.84% applicable for 2016 and thereafter, the assets are expected to increase significantly but at a lower level than under the legislated contribution rate.  The ratio of assets to the following year’s expenditures is projected to grow from 4.7 in 2013 to 5.3 by 2025 and to be the same fifty years later in 2075.
  • Although the pay-as-you-go rate is expected to increase steadily from 8.8% in 2013 to 11.8% by the end of the projection period due to the retirement of the baby boom generation and the continued aging of the population, the legislated contribution rate of 9.9% remains sufficient to sustain the Plan in the long term.  The pay-as-you-go rate is the rate that would need to be paid if there were no assets.
  • Demographic changes will have a major impact on the ratio of workers to retirees; the ratio of the number of individuals in Canada less Québec aged 20 to 64 to those aged 65 and over is expected to fall from about 4.2 in 2013 to 2.2 in 2050.
  • The number of contributors is expected to grow from 13.5 million in 2013 to 14.5 million by 2020.  Under the legislated contribution rate of 9.9%, contributions are expected to increase from $42 billion in 2013 to $56 billion in 2020.
  • The number of retirement beneficiaries is expected to increase from 4.6 million in 2013 to 10.2 million in 2050.
  • There continues to be more female than male retirement beneficiaries and by 2020, there is expected to be approximately 214,000 (or 7.4%) more female than male retirement beneficiaries.
  • The proportion of retirement benefits relative to total expenditures is expected to increase from 74% in 2013 to 83% in 2050.
  • Total expenditures are expected to grow rapidly from approximately $38 billion in 2013 to $54 billion in 2020.

B. Contributions

Projected contributions are the product of the contribution rate, the number of contributors and the average contributory earnings.  The contribution rate is set by law and is 9.9%.

The number of contributors by age and sex is directly linked to the assumed labour force participation rates applied to the projected working-age population and the job creation rates.  Hence, the demographic and economic assumptions have a great influence on the expected level of contributions.  In this report, the number of CPP contributors is expected to increase continuously throughout the projection period, but at a decreasing pace, from 13.5 million in 2013 to 14.5 million by 2020.  The future increase in the number of contributors is limited due to the projected lower growth in the working-age population and labour force. 

The growth in contributory earnings, which are derived by subtracting the Year’s Basic Exemption (YBE) from pensionable earnings, is linked to the growth in average employment earnings through the assumption regarding annual increases in wages and is affected by the freeze on the YBE since 1998.

Contributions are expected to be $42.3 billion in 2013 as shown in Table 4, which presents the projected components of contributions.  Since the legislated contribution rate is constant at 9.9% for the year 2013 and thereafter, contributions increase at the same rate as total contributory earnings over the projection period.  Table 4 presents the projected number of CPP contributors, including CPP retirement beneficiaries who are working (i.e. “working beneficiaries”), their contributory earnings and contributions.

Table 4 Contributions
Year Contribution Rate Number of Contributors Contributory Earnings Contributions
(%) (thousands) ($ million) ($ million)
2013 9.9 13,453 427,762 42,348
2014 9.9 13,630 444,048 43,961
2015 9.9 13,806 461,583 45,697
2016 9.9 13,978 481,371 47,656
2017 9.9 14,123 501,091 49,608
2018 9.9 14,261 521,723 51,651
2019 9.9 14,393 543,322 53,789
2020 9.9 14,512 566,009 56,035
2025 9.9 15,021 695,678 68,872
2030 9.9 15,549 854,642 84,610
2040 9.9 16,660 1,285,576 127,272
2050 9.9 17,604 1,904,295 188,525
2060 9.9 18,285 2,772,797 274,507

C. Expenditures

The projected number of beneficiaries by type of benefit is given in Table 5, while Table 6 presents information for male and female beneficiaries separately.

The number of retirement, disability, and survivor beneficiaries increases throughout the projection period.  In particular, the number of retirement beneficiaries is expected to double by the year 2040 due to the aging of the population.  Female retirement beneficiaries continue to outnumber their male counterparts, and by 2050 there is projected to be 720,000 or 15% more female than male beneficiaries.  Over the same period, the number of disability and survivor beneficiaries is projected to increase but at a much slower pace than for retirement beneficiaries.

Table 7 shows the amount of projected expenditures by type.  Projected expenditures in 2013 are $37.6 billion and reach $54.4 billion in 2020.  Table 8 shows the same information but in millions of 2013 constant dollars.  Table 9 shows the projected expenditures by type expressed as a percentage of contributory earnings.  These are referred to as the pay-as-you-go (or “paygo”) rates.  A pay-as-you-go rate corresponds to the contribution rate that would need to be paid if there were no assets.  Although the total pay-as-you-go rate is expected to increase significantly from its current level of 8.8% in 2013 to 11.8% by the end of the projection period, the legislated contribution rate of 9.9% is sufficient to financially sustain the Plan over the projection period.

Table 5 BeneficiariesTable 5 Footnote (1)
(thousands)
Year RetirementTable 5 Footnote (2) Disability SurvivorTable 5 Footnote (3) Children DeathTable 5 Footnote (4)
2013 4,594 390 1,203 234 137
2014 4,805 396 1,224 237 140
2015 5,010 402 1,244 240 144
2016 5,205 410 1,265 244 147
2017 5,383 417 1,286 249 151
2018 5,577 424 1,307 252 155
2019 5,784 430 1,329 255 159
2020 6,007 435 1,351 259 163
2025 7,154 449 1,472 282 188
2030 8,105 451 1,613 309 219
2040 9,199 509 1,919 343 287
2050 10,152 562 2,129 343 337
2060 11,149 561 2,202 349 353
Table 6 Beneficiaries by SexTable 6 Footnote (1)
(thousands)
Year Males Females
RetirementTable 6 Footnote (2) Disability SurvivorTable 6 Footnote (3) DeathTable 6 Footnote (4) RetirementTable 6 Footnote (2) Disability SurvivorTable 6 Footnote (3) DeathTable 6 Footnote (4)
2013 2,250 183 210 84 2,344 207 993 53
2014 2,347 185 217 85 2,458 210 1,006 55
2015 2,441 188 225 87 2,568 214 1,020 57
2016 2,531 192 232 88 2,674 218 1,033 59
2017 2,610 195 240 90 2,773 222 1,046 61
2018 2,698 198 248 92 2,879 226 1,060 63
2019 2,793 201 255 94 2,991 229 1,074 65
2020 2,896 203 263 96 3,110 232 1,088 67
2025 3,432 210 303 108 3,723 239 1,169 80
2030 3,865 209 342 124 4,239 242 1,271 95
2040 4,310 235 404 156 4,889 274 1,515 132
2050 4,716 260 431 175 5,436 302 1,698 161
2060 5,197 258 440 181 5,953 304 1,763 173
Table 7 Expenditures
($ million)
Year RetirementTable 7 Footnote (1) Disability Survivor Children Death Operating ExpensesTable 7 Footnote (2) Total
2013 27,946 3,852 4,307 510 312 648 37,575
2014 29,803 3,959 4,384 523 321 610 39,601
2015 31,796 4,100 4,486 541 331 634 41,888
2016 33,827 4,254 4,594 561 342 659 44,237
2017 35,828 4,412 4,705 583 353 683 46,564
2018 37,904 4,578 4,817 603 364 709 48,975
2019 40,184 4,737 4,933 624 376 736 51,590
2020 42,672 4,894 5,055 648 389 765 54,422
2021 45,385 5,054 5,187 672 401 796 57,495
2022 48,292 5,213 5,333 699 414 827 60,778
2023 51,347 5,375 5,490 728 428 860 64,229
2024 54,530 5,545 5,658 759 443 894 67,829
2025 57,818 5,712 5,841 790 458 928 71,547
2026 61,182 5,876 6,038 822 474 965 75,357
2027 64,591 6,040 6,251 856 491 1,003 79,232
2028 68,071 6,199 6,482 891 509 1,044 83,195
2029 71,624 6,374 6,733 928 527 1,086 87,273
2030 75,212 6,578 7,006 966 546 1,130 91,439
2031 78,806 6,822 7,298 1,004 563 1,173 95,667
2032 82,390 7,097 7,613 1,041 580 1,219 99,940
2033 85,997 7,390 7,949 1,077 597 1,268 104,277
2034 89,671 7,699 8,306 1,114 615 1,319 108,724
2035 93,440 8,022 8,687 1,151 632 1,371 113,304
2036 97,326 8,357 9,089 1,188 650 1,427 118,036
2037 101,304 8,721 9,510 1,224 667 1,485 122,910
2038 105,374 9,111 9,951 1,259 684 1,546 127,925
2039 109,570 9,530 10,411 1,294 701 1,608 133,116
2040 113,952 9,960 10,890 1,328 717 1,673 138,521
2041 118,556 10,406 11,384 1,361 733 1,740 144,180
2042 123,383 10,869 11,893 1,393 748 1,809 150,095
2043 128,459 11,346 12,416 1,424 762 1,881 156,288
2044 133,822 11,834 12,952 1,456 776 1,954 162,793
2045 139,516 12,324 13,500 1,487 789 2,030 169,646
2050 173,561 14,725 16,376 1,644 841 2,441 209,587
2055 217,506 17,066 19,442 1,835 870 2,924 259,643
2060 269,874 19,677 22,809 2,090 882 3,520 318,852
2065 329,756 23,494 26,856 2,403 897 4,271 387,678
2070 401,344 28,626 32,095 2,748 927 5,198 470,939
2075 489,886 34,652 38,797 3,107 971 6,312 573,725
2080 600,302 41,559 46,830 3,491 1,009 7,634 700,825
2085 737,636 49,134 55,925 3,928 1,029 9,211 856,862
2090 905,580 57,935 66,089 4,450 1,033 11,119 1,046,206
Table 8 Expenditures (millions of 2013 constant dollars)Table 8 Footnote (1)
Year RetirementTable 8 Footnote (2) Disability Survivor Children Death Operating
ExpensesTable 8 Footnote (3)
Total
2013 27,946 3,852 4,307 510 312 648 37,575
2014 29,387 3,904 4,322 516 317 601 39,048
2015 30,762 3,967 4,340 524 320 613 40,526
2016 32,085 4,035 4,357 532 324 625 41,959
2017 33,317 4,103 4,375 542 328 635 43,300
2018 34,556 4,175 4,392 550 332 646 44,649
2019 35,916 4,233 4,409 559 336 658 46,111
2020 37,392 4,288 4,429 568 341 670 47,689
2021 38,958 4,338 4,453 577 344 683 49,353
2022 40,567 4,379 4,480 587 348 695 51,056
2023 42,205 4,418 4,513 598 352 707 52,794
2024 43,857 4,460 4,551 610 356 719 54,553
2025 45,500 4,495 4,597 622 360 730 56,304
2026 47,111 4,524 4,649 634 365 743 58,026
2027 48,665 4,550 4,710 645 370 756 59,697
2028 50,183 4,570 4,779 658 375 770 61,333
2029 51,666 4,598 4,857 669 380 783 62,954
2030 53,086 4,643 4,944 682 385 798 64,540
2031 54,426 4,711 5,041 693 389 810 66,070
2032 55,676 4,796 5,145 703 392 824 67,536
2033 56,863 4,886 5,256 712 395 838 68,950
2034 58,016 4,981 5,374 720 398 853 70,342
2035 59,153 5,078 5,500 729 400 868 71,728
2036 60,286 5,177 5,630 736 403 884 73,115
2037 61,400 5,286 5,764 742 404 900 74,495
2038 62,492 5,403 5,901 747 406 917 75,865
2039 63,581 5,530 6,041 751 407 933 77,245
2040 64,701 5,655 6,183 754 407 950 78,651
2041 65,866 5,781 6,325 757 407 967 80,102
2042 67,072 5,908 6,465 757 407 983 81,593
2043 68,328 6,035 6,604 758 405 1,001 83,130
2044 69,648 6,159 6,741 757 404 1,017 84,726
2045 71,049 6,276 6,874 757 402 1,034 86,392
2050 79,274 6,726 7,480 750 384 1,115 95,729
2055 89,103 6,991 7,965 752 356 1,198 106,365
2060 99,158 7,230 8,381 768 324 1,293 117,154
2065 108,669 7,742 8,851 792 296 1,407 127,757
2070 118,625 8,461 9,486 812 274 1,536 139,195
2075 129,867 9,186 10,285 824 257 1,673 152,093
2080 142,732 9,881 11,135 830 240 1,815 166,633
2085 157,304 10,478 11,926 838 219 1,964 182,729
2090 173,208 11,081 12,641 851 198 2,127 200,106
Table 9 Expenditures as Percentage of Contributory Earnings
(pay-as-you-go rates)
Year RetirementTable 9 Footnote (1) Disability Survivor Children Death Operating ExpensesTable 9 Footnote (2) Total
  (%) (%) (%) (%) (%) (%) (%)
2013 6.53 0.90 1.01 0.12 0.07 0.15 8.78
2014 6.71 0.89 0.99 0.12 0.07 0.14 8.92
2015 6.89 0.89 0.97 0.12 0.07 0.14 9.07
2016 7.03 0.88 0.95 0.12 0.07 0.14 9.19
2017 7.15 0.88 0.94 0.12 0.07 0.14 9.29
2018 7.27 0.88 0.92 0.12 0.07 0.14 9.39
2019 7.40 0.87 0.91 0.12 0.07 0.14 9.50
2020 7.54 0.86 0.89 0.11 0.07 0.14 9.62
2021 7.69 0.86 0.88 0.11 0.07 0.13 9.74
2022 7.85 0.85 0.87 0.11 0.07 0.13 9.88
2023 8.01 0.84 0.86 0.11 0.07 0.13 10.01
2024 8.16 0.83 0.85 0.11 0.07 0.13 10.16
2025 8.31 0.82 0.84 0.11 0.07 0.13 10.28
2026 8.44 0.81 0.83 0.11 0.07 0.13 10.40
2027 8.55 0.80 0.83 0.11 0.07 0.13 10.49
2028 8.65 0.79 0.82 0.11 0.06 0.13 10.57
2029 8.73 0.78 0.82 0.11 0.06 0.13 10.64
2030 8.80 0.77 0.82 0.11 0.06 0.13 10.70
2031 8.86 0.77 0.82 0.11 0.06 0.13 10.76
2032 8.90 0.77 0.82 0.11 0.06 0.13 10.80
2033 8.92 0.77 0.82 0.11 0.06 0.13 10.82
2034 8.93 0.77 0.83 0.11 0.06 0.13 10.83
2035 8.94 0.77 0.83 0.11 0.06 0.13 10.84
2036 8.93 0.77 0.83 0.11 0.06 0.13 10.83
2037 8.92 0.77 0.84 0.11 0.06 0.13 10.82
2038 8.90 0.77 0.84 0.11 0.06 0.13 10.81
2039 8.88 0.77 0.84 0.10 0.06 0.13 10.79
2040 8.86 0.77 0.85 0.10 0.06 0.13 10.78
2041 8.85 0.78 0.85 0.10 0.05 0.13 10.77
2042 8.85 0.78 0.85 0.10 0.05 0.13 10.76
2043 8.85 0.78 0.86 0.10 0.05 0.13 10.77
2044 8.86 0.78 0.86 0.10 0.05 0.13 10.78
2045 8.88 0.78 0.86 0.09 0.05 0.13 10.79
2050 9.11 0.77 0.86 0.09 0.04 0.13 11.01
2055 9.48 0.74 0.85 0.08 0.04 0.13 11.32
2060 9.73 0.71 0.82 0.08 0.03 0.13 11.50
2065 9.78 0.70 0.80 0.07 0.03 0.13 11.49
2070 9.75 0.70 0.78 0.07 0.02 0.13 11.44
2075 9.77 0.69 0.77 0.06 0.02 0.13 11.45
2080 9.88 0.68 0.77 0.06 0.02 0.13 11.53
2085 10.04 0.67 0.76 0.05 0.01 0.13 11.66
2090 10.19 0.65 0.74 0.05 0.01 0.13 11.77

D. Financial Projections with Legislated Contribution Rate

  1. Asset Projections at Market Value

    Prior to 2001, CPP assets were presented at cost value because they were traditionally limited to short-term investments and 20-year non marketable bonds in the form of loans to provinces. Since the creation of the CPPIB in 1997, excess cash flows are invested in the capital markets. Those assets, as is usually the case for private pension plans, are valued at market. The market value of assets is $175,095 million as at 31 December 2012.

  2. Projected Financial Status

    Table 10 presents historical results while Tables 11 and 12 present the projected financial status of the CPP using the legislated contribution rate of 9.9% in current dollars and in 2013 constant dollars, respectively. The projected financial status of the CPP using the minimum contribution rate of 9.84% for the year 2016 and thereafter is discussed in section E.

Table 10 Historical Results
Year PayGo
RateTable 10 Footnote (1)
Contribution
Rate
Contributions Expenditures Net Cash Flow Investment
IncomeTable 10 Footnote (2)
Assets at
31 Dec.Table 10 Footnote (3)
Yield/
ReturnTable 10 Footnote (3)
Asset/
Expenditure
Ratio
  (%) (%) ($ million) ($ million) ($ million) ($ million) ($ million) (%)  
1966 0.05 3.60 531 8 523 2 525 0.7 52.50
1970 0.45 3.60 773 97 676 193 3,596 6.2 24.13
1975 1.42 3.60 1,426 561 865 607 9,359 7.2 11.47
1980 2.72 3.60 2,604 1,965 639 1,466 18,433 8.7 7.64
1981 2.89 3.60 3,008 2,413 595 1,784 20,812 9.4 7.04
1982 2.91 3.60 3,665 2,958 707 2,160 23,679 10.0 6.58
1983 3.73 3.60 3,474 3,598 (124) 2,494 26,049 10.4 6.22
1984 3.66 3.60 4,118 4,185 (67) 2,829 28,811 10.7 5.97
1985 4.31 3.60 4,032 4,826 (794) 3,113 31,130 10.8 5.66
1986 4.20 3.60 4,721 5,503 (782) 3,395 33,743 10.9 4.73
1987 5.02 3.80 5,393 7,130 (1,737) 3,654 35,660 10.9 4.31
1988 5.41 4.00 6,113 8,272 (2,159) 3,886 37,387 11.0 3.98
1989 5.89 4.20 6,694 9,391 (2,697) 4,162 38,852 11.3 3.72
1990 5.82 4.40 7,889 10,438 (2,549) 4,386 40,689 11.4 3.53
1991 6.31 4.60 8,396 11,518 (3,122) 4,476 42,043 11.2 3.22
1992 7.07 4.80 8,883 13,076 (4,193) 4,497 42,347 11.0 2.97
1993 7.79 5.00 9,166 14,273 (5,107) 4,480 41,720 10.9 2.72
1994 8.33 5.20 9,585 15,362 (5,777) 4,403 40,346 11.0 2.52
1995 7.91 5.40 10,911 15,986 (5,075) 4,412 39,683 11.3 2.37
1996 8.71 5.60 10,757 16,723 (5,966) 4,177 37,894 11.0 2.16
1997 8.67 6.00 12,165 17,570 (5,405) 3,971 36,460 10.8 1.99
1998 8.11 6.40 14,473 18,338 (3,865) 3,938 36,535 10.9 1.94
1999 8.23 7.00 16,052 18,877 (2,825) 764 42,783 1.7 2.17
2000 7.69 7.80 19,977 19,683 294 4,446 47,523 9.9 2.32
2001 7.85 8.60 22,469 20,515 1,954 3,154 52,631 6.2 2.43
2002 8.16 9.40 24,955 21,666 3,289 187 56,107 0.3 2.47
2003 8.19 9.90 27,454 22,716 4,738 6,769 67,614 11.1 2.84
2004 8.29 9.90 28,459 23,833 4,626 6,475 78,715 8.9 3.15
2005 8.37 9.90 29,539 24,976 4,563 11,083 94,361 13.2 3.59
2006Table 10 Footnote (4) 8.22 9.90 31,000 26,080 4,920 14,300 113,581 14.4 4.10
2007Table 10 Footnote (4) 8.15 9.90 33,621 27,691 5,930 3,269 122,780 2.7 4.20
2008Table 10 Footnote (4) 8.03 9.90 36,053 29,259 6,794 (18,350) 111,224 (14.2) 3.60
2009Table 10 Footnote (4) 8.16 9.90 37,492 30,901 6,591 9,021 126,836 7.6 3.96
2010 8.83 9.90 35,885 32,023 3,862 11,804 142,502 8.9 4.23
2011 8.73 9.90 38,202 33,691 4,511 8,057 155,070 5.4 4.27
2012 8.84 9.90 40,682 36,321 4,361 15,664 175,095 9.7 4.66
Table 11 Financial Status

Table 11 Financial Status (Text Version)

Table 12 Financial Status (millions of 2013 constant dollars)Table 12 Footnote (1)
Year PayGo Rate Contribution Rate Contributory Earnings Contributions Expenditures Net Cash Flow Investment IncomeTable 12 Footnote (2) Assets at 31 Dec.
  (%) (%)            
2013 8.78 9.90 427,762 42,348 37,575 4,773 7,547 187,415
2014 8.92 9.90 437,845 43,347 39,048 4,299 9,104 198,200
2015 9.07 9.90 446,571 44,211 40,526 3,685 10,093 208,249
2016 9.19 9.90 456,584 45,202 41,959 3,243 10,941 218,349
2017 9.29 9.90 465,969 46,131 43,300 2,831 11,769 228,667
2018 9.39 9.90 475,642 47,089 44,649 2,439 12,313 238,936
2019 9.50 9.90 485,621 48,077 46,111 1,965 14,470 250,686
2020 9.62 9.90 495,979 49,102 47,689 1,413 15,275 262,459
2021 9.74 9.90 506,674 50,161 49,353 808 16,233 274,142
2022 9.88 9.90 516,912 51,174 51,056 118 17,028 285,430
2023 10.01 9.90 527,203 52,193 52,794 (601) 17,700 296,385
2024 10.16 9.90 537,198 53,183 54,553 (1,370) 18,347 306,982
2025 10.28 9.90 547,468 54,199 56,304 (2,105) 18,983 317,252
2026 10.40 9.90 558,169 55,259 58,026 (2,767) 19,604 327,259
2027 10.49 9.90 568,941 56,325 59,697 (3,371) 20,204 337,047
2028 10.57 9.90 580,409 57,460 61,333 (3,873) 20,788 346,707
2029 10.64 9.90 591,679 58,576 62,954 (4,378) 21,364 356,229
2030 10.70 9.90 603,226 59,719 64,540 (4,820) 21,935 365,676
2031 10.76 9.90 614,217 60,808 66,070 (5,263) 22,499 375,040
2032 10.80 9.90 625,504 61,925 67,536 (5,611) 23,061 384,417
2033 10.82 9.90 637,336 63,096 68,950 (5,853) 23,625 393,914
2034 10.83 9.90 649,577 64,308 70,342 (6,034) 24,188 403,588
2035 10.84 9.90 661,989 65,537 71,728 (6,191) 24,765 413,475
2036 10.83 9.90 675,077 66,833 73,115 (6,282) 25,363 423,655
2037 10.82 9.90 688,612 68,173 74,495 (6,322) 25,980 434,193
2038 10.81 9.90 702,008 69,499 75,865 (6,367) 26,620 445,099
2039 10.79 9.90 716,220 70,906 77,245 (6,339) 27,294 456,473
2040 10.78 9.90 729,936 72,264 78,651 (6,387) 27,991 468,251
2041 10.77 9.90 743,999 73,656 80,102 (6,446) 28,715 480,441
2042 10.76 9.90 758,100 75,052 81,593 (6,541) 29,472 493,029
2043 10.77 9.90 772,079 76,436 83,130 (6,695) 30,252 505,974
2044 10.78 9.90 786,218 77,836 84,726 (6,891) 31,045 519,236
2045 10.79 9.90 800,388 79,238 86,392 (7,154) 31,852 532,756
2050 11.01 9.90 869,785 86,109 95,729 (9,620) 36,007 601,754
2055 11.32 9.90 939,927 93,053 106,365 (13,313) 39,995 667,233
2060 11.50 9.90 1,018,795 100,861 117,154 (16,294) 43,674 727,714
2065 11.49 9.90 1,111,490 110,038 127,757 (17,720) 47,413 789,954
2070 11.44 9.90 1,216,486 120,432 139,195 (18,763) 51,596 859,864
2075 11.45 9.90 1,328,626 131,534 152,093 (20,559) 56,238 937,139
2080 11.53 9.90 1,445,303 143,085 166,633 (23,548) 61,088 1,017,265
2085 11.66 9.90 1,567,375 155,170 182,729 (27,559) 65,809 1,094,588
2090 11.77 9.90 1,699,883 168,288 200,106 (31,817) 70,160 1,165,330

Assets are projected to increase significantly over the next decade, from $175 billion at the end of 2012 to $300 billion by the end of 2020. Contributions and investment income are projected to be higher than expenditures over that period. Thereafter, revenues (i.e. contributions and investment income) continue to be higher than expenditures but to a lesser extent generally over the long term. This causes the assets to grow at a slower pace. The assets reach a level of $1,317 billion by 2050. Table 13 shows in more detail the sources of the revenues required to cover the expenditures.

From Table 13, several conclusions can be drawn.

  • The assets grow continuously over the projection period.  During the period 2013 to 2022, contributions are more than sufficient to cover expenditures.
  • From 2023 onward, a proportion of investment income is required to fund net cash outflows.  In 2050, 27% of investment income is required to pay for expenditures.
  • Investment income, which represents 15% of revenues in 2013, will represent 24% in 2020.  In 2050, investment income represents 29% of revenues.  This clearly illustrates the importance of investment income as a source of revenues for the Plan.
Table 13 Sources of Revenues and Funding of Expenditures
($ billion)
Year Contributions Expenditures Shortfall Investment IncomeTable 13 Footnote (1) Total Revenues Shortfall
as % of Investment Income
Investment
Income
as % of
Revenues
            (%) (%)
2013 42.3 37.6 0.0 7.5 49.9 0.0 15.1
2014 44.0 39.6 0.0 9.2 53.2 0.0 17.4
2015 45.7 41.9 0.0 10.4 56.1 0.0 18.6
2016 47.7 44.2 0.0 11.5 59.2 0.0 19.5
2017 49.6 46.6 0.0 12.7 62.3 0.0 20.3
2018 51.7 49.0 0.0 13.5 65.2 0.0 20.7
2019 53.8 51.6 0.0 16.2 70.0 0.0 23.1
2020 56.0 54.4 0.0 17.4 73.5 0.0 23.7
2021 58.4 57.5 0.0 18.9 77.3 0.0 24.4
2022 60.9 60.8 0.0 20.3 81.2 0.0 25.0
2023 63.5 64.2 0.7 21.5 85.0 3.4 25.3
2024 66.1 67.8 1.7 22.8 88.9 7.5 25.7
2025 68.9 71.5 2.7 24.1 93.0 11.1 25.9
2026 71.8 75.4 3.6 25.5 97.2 14.1 26.2
2027 74.8 79.2 4.5 26.8 101.6 16.7 26.4
2028 77.9 83.2 5.3 28.2 106.1 18.6 26.6
2029 81.2 87.3 6.1 29.6 110.8 20.5 26.7
2030 84.6 91.4 6.8 31.1 115.7 22.0 26.9
2031 88.0 95.7 7.6 32.6 120.6 23.4 27.0
2032 91.6 99.9 8.3 34.1 125.8 24.3 27.1
2033 95.4 104.3 8.9 35.7 131.2 24.8 27.2
2034 99.4 108.7 9.3 37.4 136.8 24.9 27.3
2035 103.5 113.3 9.8 39.1 142.6 25.0 27.4
2036 107.9 118.0 10.1 40.9 148.8 24.8 27.5
2037 112.5 122.9 10.4 42.9 155.3 24.3 27.6
2038 117.2 127.9 10.7 44.9 162.1 23.9 27.7
2039 122.2 133.1 10.9 47.0 169.2 23.2 27.8
2040 127.3 138.5 11.2 49.3 176.6 22.8 27.9
2041 132.6 144.2 11.6 51.7 184.3 22.4 28.1
2042 138.1 150.1 12.0 54.2 192.3 22.2 28.2
2043 143.7 156.3 12.6 56.9 200.6 22.1 28.4
2044 149.6 162.8 13.2 59.6 209.2 22.2 28.5
2045 155.6 169.6 14.0 62.5 218.1 22.5 28.7
2050 188.5 209.6 21.1 78.8 267.4 26.7 29.5
2055 227.1 259.6 32.5 97.6 324.8 33.3 30.1
2060 274.5 318.9 44.3 118.9 393.4 37.3 30.2
2065 333.9 387.7 53.8 143.9 477.8 37.4 30.1
2070 407.5 470.9 63.5 174.6 582.0 36.4 30.0
2075 496.2 573.7 77.6 212.1 708.3 36.6 30.0
2080 601.8 700.8 99.0 256.9 858.7 38.5 29.9
2085 727.6 856.9 129.2 308.6 1,036.2 41.9 29.8
2090 879.9 1,046.2 166.3 366.8 1,246.7 45.4 29.4

Chart 1 shows historical and projected revenues and expenditures for the period 1995 to 2025.

Chart 1 Revenues and Expenditures
(billions of 2013 constant dollars)

Chart 1	Revenues and Expenditures

An important measure of the Plan’s financial status is the ratio of assets at the end of one year to the expenditures of the next year. As can be seen in Chart 2, under the legislated contribution rate of 9.9%, this ratio is projected to increase over the next decade, reaching 5.4 by 2025. After 2025, it rises slowly to a value of 6.0 by 2050.

The slowdown in the growth of the ratio from 2020 to the early 2030s is caused by the retirement of the baby boom generation, which increases the cash outflows of the Plan.  The existence of a large pool of assets enables the Plan to absorb the increased outflow and maintain the contribution rate at 9.9% without impairing the financial sustainability of the Plan.

Chart 2 Asset/Expenditure Ratio
(9.9% contribution rate)

Chart 2	Asset/Expenditure Ratio (9.9% contribution rate)

E. Financial Projections with Minimum Contribution Rate

The major reform package of the CPP agreed to by the federal, provincial, and territorial governments in 1997 included significant changes to the Plan’s financing provisions.

  • The introduction of steady-state funding to replace pay-as-you-go financing in order to build a reserve of assets and stabilize the ratio of assets to expenditures over time.  Under steady-state funding, the ratio of assets to expenditures is currently projected to stabilize at a level of about 5.3.  Investment income on the pool of assets would help pay benefits as the large cohort of baby boomers retires.  This refers to paragraph 113.1(4)(c) of the Canada Pension Plan.
  • The introduction of full funding which requires that changes to the CPP that increase or add new benefits be fully funded, i.e. that their costs be paid as the benefit is earned and that any costs associated with benefits that have been earned but not paid be amortized and paid for over a defined period of time consistent with common actuarial practice.  This refers to paragraph 113.1(4)(d) of the Canada Pension Plan.
    • 113.1(4) In conducting any review required by this section and in making any recommendations, ministers shall consider…
    • (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 increased or new 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.

Both of these funding principles were introduced to improve fairness across generations.  The move to steady-state funding eases some of the contribution burden on future generations, while under full funding each generation that receives benefit enrichments is more likely to pay for such enrichments in full so that the associated costs are not passed on to future generations.

Paragraphs 113.1(4)(c) and (d) have been part of the Plan since 1997, but prior to 2008 there were only regulations describing how to calculate the rate under the financing objective of paragraph 113.1(4)(c) (i.e. the steady-state contribution rate).  However, as a result of the 2008 amendments to the Plan, the regulations regarding the calculation of contribution rates were also amended to set out the calculation of the contribution rate that the Ministers must consider under paragraph 113.1(4)(d) (i.e. the full funding rate).

  1. Steady-State Contribution Rate

    Subparagraph 115(1.1)(c)(i), as amended in 2008, requires the Chief Actuary to specify in the report a contribution rate for the first year after the review period and thereafter that is no lower than the lowest rate that will result in the ratio of the assets to the following year’s expenditures of the Plan remaining generally constant over the foreseeable future. The lowest contribution rate that will meet this requirement is referred to as the steady state contribution rate.

    The steady-state contribution rate calculation is specifically defined in the regulations as the lowest level contribution rate applicable after the end of the review period, to the nearest 0.001%, that results in the projected asset/expenditure ratio of the Plan being the same in the 10th and 60th years following the end of the review period.  For this report, the end of the review period is 2015.  Therefore, the steady-state contribution rate is applicable for 2016 and thereafter and the relevant years for the determination of the steady-state contribution rate are 2025 and 2075.  The resulting steady-state contribution rate is rounded to the nearest 0.01% and is 9.84% for the year 2016 and thereafter for this report.

    The steady-state contribution rate is calculated separately from the full funding rate, which provides for the funding of increased or new benefits in accordance with the full funding requirements of paragraph 113.1(4)(d) of the Canada Pension Plan.  However, where the full funding rate is deemed to be nil in accordance with the Calculation of Contribution Rates Regulations, 2007 for the Plan, as it is determined for this report, the improvement in benefits is financed entirely by the steady-state approach.

  2. Full Funding Rate of New or Increased Benefits

    Subparagraph 115(1.1)(c)(ii), as added through Plan amendments in 2008, requires the Chief Actuary to specify in the report a contribution rate in respect of any increased or new benefits in accordance with the requirements of paragraph 113.1(4)(d). The 2008 amendments include the first amendment to the Plan since 1 January 1998 that required the application of paragraph 113.1(4)(d) of the Canada Pension Plan. The temporary and permanent full funding contribution rate calculations are also defined in the regulations.

Temporary Full Funding Rate

Since disability benefits that came into pay on or after the effective date of the 2008 amendments to the Plan are based on disabled contributors’ Plan participation both before and after the effective date of the amendment, there is a portion of the projected increase in liabilities that relates to Plan participation prior to the effective date.  For this report, the increase in past liabilities is calculated as the present value as at 1 January 2013 of the projected increase in expenditures relating to Plan participation prior to the effective date and is estimated at $54 million.

The increase in past liabilities was originally amortized over fifteen years (2008-2022) with the fifteen-year amortization period beginning at the effective date of the amendment in 2008.  Thus, ten years remain in the original amortization period.  The increase in past liabilities is therefore to be amortized over the remaining ten years (2013-2022).  The temporary full funding contribution rate in respect of this period was determined to be 0.001%.  This amortization period is consistent with common actuarial practice, as provided in the legislation, and is appropriate in this circumstance since the change does not put the financial sustainability of the Plan at risk.  The temporary full funding rate is equal to the ratio of the increase in past liabilities to the present value as at 1 January 2013 of contributory earnings over the remaining period 2013 through 2022.

Permanent Full Funding Rate or “Current Service Cost”

The increased liability due to the 2008 amendments to the Plan regarding the disabled contributors’ Plan participation on or after 1 January 2013 is estimated to be $2.3 billion and is fully funded with a permanent contribution rate of 0.011%.  This rate is referred to as the “current service cost” of the amendment.  The current service cost is equal to the ratio of the increase in liabilities due to future participation to the present value of future contributory earnings as at 1 January 2013. 

The sum of the temporary and permanent full funding rates for the first ten years (2013-2022) is 0.012% (0.001% plus 0.011%) and 0.011% for 2023 and thereafter.  The rounded full funding rate is 0.01% for the year 2013 and thereafter.

Application of the Regulations – Deeming the Full Funding Rate to be 0%

According to Calculation of Contribution Rates Regulations, 2007 for the CPP, if the initial full funding rate (sum of temporary and permanent components) after rounding is less than 0.02%, then the full funding rate is deemed to be zero.  In previous CPP Actuarial Reports (22nd to 25th), the initial full funding rate in respect of the 2008 amendments was determined to be 0.02%.  For these past reports, assumptions were required regarding the number of contributors who would qualify for the improvement, as actual experience data were not yet available. For this 26th CPP Actuarial Report, preliminary experience data regarding long-term contributors eligible for the disability benefit were assessed.  Based on analysis of the experience data and resulting projections, the initial full funding rate has been determined to be 0.01%.  As a result, the full funding rate in respect of the 2008 amendments for this 26th CPP Actuarial Report is deemed to be zero, and the financing of the improvement in benefits is financed entirely by the steady-state approach.

The total actuarial liability as at 1 January 2013 resulting from the 2008 amendments to the Plan is estimated to be $2,320 million.  Table 14 summarizes the results.

Table 14 Full Funding Rates in Respect of the 2008 Amendments to the Plan
Present Value of
Contributory
Earnings
(2013 - 2022)
Increase
in Liability
due to Participation Prior to Effective Date
Temporary Full Funding Rate 
(2013 - 2022)
Present Value of
Contributory
Earnings
(2013+)
Increase
in Liability
due to Participation
on or After the Effective Date
Permanent
 Full Funding Rate or
“Current Service Cost”
(2013+)
Permanent and Temporary Rate
(2013 - 2022)
Permanent and Temporary Rate, after Application of Regulations
(2013 - 2022)
(A)Table 14 Footnote (1) (B)Table 14 Footnote (2) (C) = (B)/(A) (D)Table 14 Footnote (1) (E)Table 14 Footnote (2) (F) = (E)/(D) (G) = (C) + (F) (G) after  Regulations applied
($ billion) ($ million)   ($ billion) ($ million)      
3,999 54 0.0013% 20,842 2,266 0.0109% 0.0122% 0.0%
  1. Minimum Contribution Rate

    The minimum contribution rate is the sum of the Plan’s rounded steady state contribution rate and the rounded full funding rate. For this report, the minimum contribution rate has been determined to be 9.84% for the year 2016 and thereafter. The minimum contribution rate equals the Plan’s steady-state contribution rate of 9.84%, since the rate to fully fund the 2008 amendments to the Plan, equal to 0.01%, is less than 0.02% and thus deemed to be zero. As a result, the corresponding funding for the 2008 amendments of 0.01% is included within the steady-state rate of 9.84%. The minimum contribution rate will be recalculated in the next triennial actuarial report to be prepared as at 31 December 2015. It may also be recalculated at any other date to reflect the cost impact of any other proposed amendments to the Plan.

    The insufficient rates provisions in subsections 113.1(11.05) to 113.1(11.15) may result in adjustments to the legislated contribution rate and, perhaps, benefits in pay if the federal and provincial governments make no recommendation to either increase the legislated rate or maintain it in the case that the minimum contribution rate exceeds the legislated rate.  In respect of the current triennial review, the minimum contribution rate is less than the legislated rate of 9.9%, and thus the insufficient rates provisions do not apply.  Therefore, in the absence of specific action by the federal and provincial governments, the legislated contribution rate will remain at 9.9% for the year 2016 and thereafter.

    The results presented in Table 15 are based on the best-estimate assumptions but use the minimum contribution rate of 9.84% for 2016 and thereafter as opposed to the currently scheduled contribution rate of 9.9% for those years.  The financial projections under the legislated rate of 9.9% were previously presented in Table 11.

    Table 15 Financial Results

    Table 15 Financial Results (Text Version)

    Table 16 shows the progression of the minimum contribution rate over time under the best estimate assumptions of this report.

    Table 16 Progression of Minimum Contribution Rate over Time
    Valuation YearTable 16 Footnote (1) Target YearsTable 16 Footnote (2) Steady State Target A/E ratioTable 16 Footnote (3) Minimum Contribution Rate Years Minimum Contribution Rate ApplicableTable 16 Footnote (4) Average PayGo Rate Over Target Years Period
    2012 2025 & 2075 5.29 9.84% 2016+ 11.07%
    2015 2028 & 2078 5.33 9.85% 2019+ 11.14%
    2018 2031 & 2081 5.39 9.86% 2022+ 11.19%
    2021 2034 & 2084 5.48 9.87% 2025+ 11.24%
    2024 2037 & 2087 5.59 9.89% 2028+ 11.29%

As shown in Table 16, the minimum contribution rate is relatively stable over the periods considered. If the best-estimate assumptions of this report are realized, the minimum contribution rate will increase between 0.01% and 0.02% for each of the next four reports and will remain below the legislated contribution rate of 9.9%. Thus, the current legislated contribution rate is projected to be sustainable over subsequent reports as long as the best-estimate assumptions remain the same and Plan experience does not deviate materially from the assumptions.

V. Reconciliation with Previous Report

A. Introduction

The results presented in this report differ from those previously projected for a variety of reasons.  Differences between the actual experience for 2010 through 2012 and that projected in the 25th CPP Actuarial Report are addressed in section B below.  Since historical results provide the starting point for the projections shown in this report, these historical differences between actual and projected experience have an effect on the projections.  The impact of experience since the last triennial valuation of the Plan (that is, the experience update from the period 2010-2012) and changes in the assumptions and methodology on the minimum contribution rate are addressed in section C.  Detailed reconciliations of the projected pay-as-you-go rates and the minimum contribution rate are presented in Appendix D.

B. Experience Update – 2010 to 2012

The major components of the change in the CPP assets from 31 December 2009 to 31 December 2012 are summarized in Table 17.

Contributions during the period 2010 to 2012 were about $553 million less than projected, mainly as a result of lower than anticipated growth in total employment earnings.  This represents a deviation from the expected results of about -0.5%.

Expenditures during the period were $167 million less than projected slightly offsetting the impact of lower contributions.  This represents a deviation from the expected results of about -0.2%.  The difference between actual and expected expenditures is mainly due to an over-projection of retirement, death, and children’s benefits that outweighs an under-projection of other expenditures.  The details by type of expenditure are given in Table 18.

Investment income was 96% higher than anticipated due to the strong performance of financial markets over the period.  As a result, the change in assets was $17 billion or 55% higher than expected over the period.  The resulting assets as at 31 December 2012 are 11% higher than projected.

Table 17 Financial Status - 2010 to 2012Table 17 Footnote (1)
(cost accrual basis, $ million)
Difference % Change
  Actual Expected Actual – Expected Difference/
Expected
Assets at 31 December 2009 126,836 126,836 0 0.0%
+ Contributions 114,770 115,323 (553) (0.5%)
- Expenditures 102,035 102,202 (167) (0.2%)
+ Investment Income 35,523 18,097 17,426 96.3%
Change in Assets 48,259 31,218 17,041 54.6%
Assets at 31 December 2012 175,095 158,054 17,041 10.8%
Table 18 Summary of Expenditures - 2010 to 2012
($ million)
      Difference % Change
  Actual Expected Actual –
Expected
Difference/
Expected
Retirement 72,952 73,897 (945) (1.3%)
Disability 11,390 11,166 224 2.0%
Survivors 12,204 12,078 126 1.0%
Children 1,567 1,598 (31) (2.0%)
Death 897 909 (12) (1.3%)
Operating Expenses 3,025 2,554 471 18.4%
Total Expenditures 102,035 102,202 (167) (0.2%)

C. Changes in the Minimum Contribution Rate

Table 19 presents the main elements of change in the minimum contribution rate since the 25th CPP Actuarial Report and shows an overall small decrease in the rate. Experience over the period 2010 to 2012 was better than anticipated overall, especially regarding migration, benefits, and investment returns, which lowered the minimum contribution rate. In addition, in response to a recommendation made by the independent peer reviewers of the 25th CPP Actuarial Report, the valuation methodology was improved by including CPPIB operating expenses the investment expenses assumption, instead of as a componenet of CPP operating expenses, which lowered the minimum contribution rate. Changes made to the assumptions regarding benefits also act to lower the minimum contribution rate.  However, these reductions in the rate are mostly offset by higher projected life expectancies at age 65, lower assumed real wage increases, lower inflation expectations, and changes in investments assumptions.  A more detailed reconciliation of changes in the minimum contribution rate is provided in Table 34 in Appendix D of this report.

Table 19 Reconciliation of Changes in Minimum Contribution Rate(Table 19 Footnote 1,Table 19 Footnote 2)
(% of contributory earnings)
  Steady-State
Rate
Full Funding Rate Minimum Rate
2013-2022 2023+ 2013-2022 2023+
25th CPP Actuarial Report - After Rounding 9.84 0.02 0.01 9.86 9.85
25th CPP Actuarial Report - Before Rounding 9.836 0.017 0.014 9.853 9.850
Improvements in Methodology (0.067) (0.001) (0.000) (0.068) (0.067)
Experience (2010 to 2012) (0.114) (0.004) (0.004) (0.119) (0.118)
Changes in Demographic Assumptions 0.044 0.000 0.000 0.044 0.044
Changes in Benefit Assumptions (0.037) 0.000 0.001 (0.037) (0.036)
Changes in Economic Assumptions 0.124 (0.000) (0.000) 0.124 0.124
Changes in Investment Assumptions 0.040 (0.000) (0.000) 0.041 0.040
Rates before Rounding
and Adjustment
9.826 0.012 0.011 9.838 9.837
           
Rounded Rates, in accordance with CPP RegulationsTable 19 Footnote (3) 9.83 0.01 0.01 9.84 9.84
Adjustment to Rates, in accordance with CPP RegulationsTable 19 Footnote (3) 0.01 (0.01) (0.01) 0.00 0.00
26th CPP Actuarial Report 9.84 0.00 0.00 9.84 9.84

VI. Conclusion

The results contained in this report confirm that the legislated contribution rate of 9.9% is sufficient to financially sustain the Plan over the long term.  The results also show that assets accumulate to $300 billion (i.e. 5.2 times the annual expenditures) by 2020.

The minimum contribution rate required to financially sustain the Plan under this report is 9.84% for the year 2016 and thereafter, compared to 9.86% for years 2013 to 2022 and 9.85% from 2023 onward, as determined for the 25th CPP Actuarial Report.  Experience over the period 2010 to 2012 was better than anticipated overall, especially regarding migration, benefits, and investment returns.  However, this is offset by higher projected life expectancies at age 65 and lower assumed real wage increases.  The net result of all changes since the 25th CPP Actuarial Report is an overall small decrease in the minimum contribution rate.

To measure the sensitivity of the long-term projected financial position of the Plan to changes in the future demographic and economic outlook, a number of sensitivity tests were performed.  Sensitivity tests on key assumptions and an analysis of the impact of financial market volatility and choice of asset allocation show that the minimum rate could deviate significantly from its best-estimate value of 9.84% if other than best-estimate assumptions were to be realized.  If life expectancies continue to increase at the current rate, especially for ages 75 to 89, the long-term mortality assumptions will need to be adjusted accordingly.  This will put additional pressure on the minimum contribution rate that could cause the rate to increase above 9.9%.

Under the 9.9% legislated contribution rate, the assets are projected to grow rapidly over the next decade as contribution revenue is expected to exceed expenditures over that period.  Assets will continue to grow thereafter until the end of the projection period, but at a slower pace, with the ratio of assets to the following year’s expenditures expected to reach a level of 6.0 by 2050.  Thus, despite the projected substantial increase in benefits paid as a result of an aging population, the Plan is expected to be able to meet its obligations throughout the projection period and to remain financially sustainable over the long term.

The projected financial status of the Canada Pension Plan presented in this report is based on the assumed demographic and economic outlook over the long term.  Therefore, it remains important to review the Plan’s long-term financial status on a regular basis by producing periodic actuarial reports.  For this purpose, as required by the Canada Pension Plan, the next such review will be as at 31 December 2015.

VII. Actuarial Opinion

In our opinion, considering that this 26th Actuarial Report was prepared pursuant to the Canada Pension Plan:

  • the data on which this report is based are sufficient and reliable;
  • the assumptions used are, individually and in aggregate, reasonable and appropriate; and
  • the methodology employed is appropriate and consistent with sound actuarial principles.

Based on the results of this valuation, we hereby certify that the minimum contribution rate to finance the Canada Pension Plan without further increase is 9.84% for the year 2016 and thereafter.

This report has been prepared, and our opinions given, in accordance with both accepted actuarial practice in Canada, in particular, the General Standards of Practice of the Canadian Institute of Actuaries, and internationally accepted actuarial practice as provided by the International Standard of Actuarial Practice 1 – General Actuarial Practice of the International Actuarial Association.

Jean-Claude Ménard Signature
Jean-Claude Ménard, F.S.A., F.C.I.A.
Chief Actuary

Michel Montambeault Signature
Michel Montambeault, F.S.A., F.C.I.A.
Senior Actuary

Michel Millette Signature
Michel Millette, F.S.A., F.C.I.A.
Senior Actuary

Ottawa, Canada
21 November 2013

Appendix A – Financing the Canada Pension Plan

I. Historical Background

The retirement system in Canada has been designed as a three-tier system.  First, the Old Age Security (OAS) Program provides for a minimum floor benefit based on residence in Canada.  Second, the CPP and QPP cover most individuals with employment earnings.  Finally, individuals may be covered by registered pension plans (RPPs) as well as pooled registered pension plans (PRPPs), and can invest in individual registered retirement savings plans (RRSPs) and tax-free saving accounts (TFSAs) to supplement their retirement income.

Each tier is financed using a different approach:  the OAS Program is financed through general tax revenues on a pay-as-you-go basis, the CPP/QPP are partially funded based on contributions on employment earnings, and RPPs, PRPPs, RRSPs, and TFSAs are intended to be fully funded.  The variety in both the sources and methods of financing enables the Canadian retirement income system to be less vulnerable, and thus more resilient, to changes in economic and demographic conditions compared to systems that are less varied in their provision of retirement income.

The CPP was initially established as a pay-as-you-go plan with a small reserve fund worth about two years of benefits.  At the time of the Plan’s inception, demographic and economic conditions were characterized by a younger population (higher fertility rates and lower life expectancies), rapid growth in wages and labour force participation, and low rates of return on investments.  These conditions made prefunding the scheme unattractive and pay-as-you-go financing more appropriate.  Growth in total earnings of the workforce and thus contributions were sufficient to cover growing expenditures without requiring large increases in the contribution rate.  Plan assets were invested primarily in long-term non-marketable securities of provincial governments at lower than market rates, thus providing the provinces with a relatively inexpensive source of capital to develop needed infrastructure.

However, changing conditions over time, including lower birth rates, increased life expectancies, and lower real wage growth led to increasing Plan costs.  These factors, in combination with higher market returns, made fuller funding more attractive and appropriate.  By the mid-1980s, the net cash flow (contributions less expenditures) had turned negative and part of the Plan’s investment income was required to meet the shortfall.  The shortfall continued to grow, which eventually caused the assets of the reserve fund to start to fall by the mid-1990s.

In the December 1993 (15th) Actuarial Report on the CPP, the Chief Actuary projected that the pay-as-you-go contribution rate (expenditures as a percentage of contributory earnings) would increase to 14.2% by 2030.  It was further projected that if changes were not made to the Plan, the reserve fund would be exhausted by 2015.  The Chief Actuary identified five factors responsible for the increasing costs of the Plan, namely: lower birth rates, higher life expectancies than expected, lower productivity than expected, benefit enrichments, and increased numbers of Canadians claiming disability benefits for longer periods.

In response to these developments, amendments were made in 1998 to gradually increase the level of CPP funding by increasing contribution rates over the short term, reducing the growth of benefits over the long term, and investing net cash flows in the private markets through the CPPIB to achieve higher rates of return.  It was also decided that any future increases to or additions of new benefits under the Plan should be fully funded.  The reform package agreed to by the federal and provincial governments in 1997 thus included significant changes to the Plan’s financing provisions:

  • The introduction of steady-state funding to replace pay-as-you-go financing in order to build a reserve of assets and stabilize the ratio of assets to expenditures over time.  Under steady-state funding, the ratio of assets to expenditures is currently projected to stabilize at a level of about 5.3.  Investment income on this pool of assets is projected to help pay benefits when the large cohort of baby boomers retires.  This refers to section 113.1(4)(c) of the Canada Pension Plan.
  • The introduction of full funding that requires that changes to the CPP that increase or add new benefits be fully funded, i.e. that their costs be paid as the benefit is earned and that any costs associated with benefits that have already been earned must be amortized and paid for over a defined period of time consistent with common actuarial practice.  This refers to section 113.1(4)(d) of the Canada Pension Plan.

Both of these funding objectives were introduced to improve fairness across generations.  The move to steady-state funding eases some of the contribution burden on future generations, and under full funding each generation that will receive benefit enrichments is more likely to pay for such enrichments in full so that the associated costs are not passed on to future generations.

The combination of steady-state funding and full funding supports the objective of the 1997 reform package to improve the financial long-term sustainability of the Plan so that the CPP will be affordable and sustainable for future generations.

II. Balance Sheet

The CPP balance sheet presented in this section is prepared using an open group approach.  An open group is defined as one that includes all current and future participants of a plan, where the plan is considered to be ongoing into the future, that is, over an extended time horizon.  This means that future contributions of current and new participants and their associated benefits are included in order to determine whether current assets and future contributions will be sufficient to pay for all future expenditures.  This is compared to a closed group that includes only current participants of the Plan, with no new entrants permitted and no new benefits accrued.

The choice of the methodology used to produce a social security system’s balance sheet is mainly determined by the system’s financial approach.  Partially funded plans like the CPP represent a social contract where, in any given year, current contributors allow the use of their contributions to pay current beneficiaries’ benefits.  This social contract creates claims for current and past contributors to contributions of future contributors.  As such, the proper assessment of the financial sustainability of partially funded plans by means of their balance sheets should reflect these claims. The open group approach does account explicitly for these claims by considering the benefits and contributions of both the current and future plan participants.  In comparison, the closed group methodology does not reflect these claims since only current participants are considered.

To determine the actuarial liability of the Plan under the open group approach, future expenditures with respect to current and future Plan participants are first projected over a 150-year period using the best-estimate assumptions described in Appendix E.  Next, these total projected expenditures are discounted using the projected rate of return on CPP assets to determine their present value.  This is the actuarial liability under the open group approach.

To determine the assets of the Plan under the open group approach, future contributions of current and future contributors are first projected over a 150-year period using the best-estimate assumptions described in Appendix E and the legislated rate of 9.9%.  These total projected contributions are then discounted using the projected rate of return on current CPP assets to determine their present value.  This present value is added to the Plan’s current assets to obtain the total assets of the Plan under the open group approach.

The actuarial position of the Plan as at 31 December 2012 and 31 December 2022 under the open group approach is presented in Table 20.  To obtain the asset excess (shortfall) of the Plan, the Plan’s actuarial liability is deducted from the assets at the valuation date.

Table 20 CPP Balance Sheet (Open Group Approach)
  As at 31 December 2012 As at 31 December 2022
  ($ billion) ($ billion)
Assets 2,245.8 3,181.3
Actuarial Liability 2,254.7 3,196.3
Asset Excess (Shortfall) (8.9) (15.0)
Assets as Percentage of Liability 99.6% 99.5%

The Plan is intended to be long-term and enduring in nature, a fact that is reinforced by the federal, provincial, and territorial governments’ joint stewardship through the established strong governance and accountability framework of the Plan. Therefore, if the Plan’s financial sustainability is to be measured based on its asset excess or shortfall, it should be done so on an open group basis that reflects the partially funded nature of the Plan, that is, its reliance on both future contributions and invested assets as means of financing its future expenditures. The inclusion of future contributions and benefits with respect to both current and future participants in the assessment of the Plan’s financial status confirms that the Plan is able to meet its financial obligations and is sustainable over the long termFootnote 1,Footnote 2.

III. Internal Rates of Return

The internal rate of return is, with respect to a group of CPP participants born in a given year (i.e. a cohort), the unique interest rate resulting from the equality of:

  • the present value of past and future contributions (both employer and employee portions) paid or expected to be paid by and in respect of that cohort, and
  • the present value of past and future benefits earned or expected to be earned by that cohort.

Accordingly, actual internal rates of return cannot be determined until the last member of the cohort has died.  However, they can be estimated based on the historical and projected experience of the cohort.  Internal rates of return are dependent on many assumptions as to future experience, such as those regarding the age at pension take-up, life expectancy, the actuarial adjustment factor applied to the pension, and the working beneficiaries provision.  The internal rates of return are calculated on the basis of the best-estimate assumptions of this report and using the legislated contribution rate of 9.9%.

The results presented in Table 21 are rates based solely on contributions paid and benefits received; that is, operating expenses associated with each cohort are excluded.  Results are shown on two bases, as both nominal and real internal rates of return.  To determine the real internal rates of return, both contributions and benefits were first adjusted to remove the impact of price increases.

Table 21 Internal Rates of Return by Cohort
(annual percentages)
Birth Year Nominal Real
1950 7.1 4.2
1960 5.3 3.0
1970 4.6 2.4
1980 4.5 2.3
1990 4.5 2.2
2000 4.5 2.3
2010 4.5 2.3

The higher internal rates of return of the cohorts currently reaching age 65 mean that they are expected to receive better value from the CPP than those who will follow. The differences provide an indication of the degree of intergenerational transfer present in the Plan. However, the rates stabilize for cohorts born after 1970. The positive and stable internal rates of return for younger cohorts confirm that the Plan in its current form is a sustainable and fair retirement savings vehicle.

Appendix B – Uncertainty of Results

I. Introduction

The future income and outgo of the Canada Pension Plan depend on many demographic and economic factors, including fertility, mortality, migration, the labour force, average earnings, inflation, retirement patterns, disability rates, and investment returns.  The income will depend on how these factors affect the size and composition of the working-age population and the level and distribution of earnings.  Similarly, the outgo will depend on how these factors affect the size and composition of the beneficiary population and the general level of benefits.

The projected long-term financial status of the Plan is based on best-estimate assumptions; the objective of this section is to illustrate the sensitivity of the long-term projected financial position of the Plan to changes in the future demographic and economic outlook.

Section II examines the sensitivity of the Plan to different asset allocations.  Six alternative investment portfolios are described, along with the volatility of each portfolio and the resulting impact on the Plan’s minimum contribution rate.  The impact of financial market volatility on the financial status of the Plan is explored in section III.  Severe one-time financial shocks are applied to three investment portfolios with the purpose of quantifying the long-term impact on the minimum contribution rate.

An economic slowdown followed by a partial economic recovery and the resulting impact on the financial status of the Plan is discussed in section IV.  The slowdown is assumed to occur in 2014-15 and attempts to replicate the economic slowdown of 2008-09.  Section V presents sensitivity tests on individual long-term assumptions based on a combination of judgment and stochastic modeling techniques.

Finally, section VI builds on the individual sensitivity tests performed in section V by combining the demographic and labour force assumptions of the individual sensitivity tests to create younger and older populations.  The combination of these assumptions is not meant to necessarily create probable scenarios, but rather to show the possible impact of changing the overall composition of the population.

II. Sensitivity of Investment Policy

The CPPIB was created in 1997 with the object “to invest its assets with a view to achieving a maximum rate of return, without undue risk of loss, having regard to the factors that may affect the funding of the Canada Pension Plan and the ability of the Canada Pension Plan to meet its financial obligations on any given business day”, as stated in the Canada Pension Plan Investment Board Act.  The purpose of the CPPIB is to meet this mandate while mitigating risk through diversification of investments in equities and other asset classes with the aim of achieving higher returns.  Over time, the role of the CPPIB will continue to become increasingly important as assets are expected to grow rapidly over the next decade with contributions to the Plan projected to exceed expenditures over this period.  After 2022, it is projected that an increasing proportion of investment income will be required to meet expenditures.  Although net cash flows (contributions less expenditures) are projected to be negative after 2022, asset growth is still expected to continue.

Historically, equities have shown greater volatility than fixed income instruments (such as bonds), volatility being a measure of the magnitude of fluctuation in returns.  Similarly, long-term bonds have historically shown greater volatility than shorter fixed income instruments.  For instance, in the fifty, twenty-five, and ten years ending in 2012, the volatility (standard deviation) of Canadian equity returns (indicated by the S&P/TSX Total Return Index) was 16.4%, 17.0%, and 19.5%, respectively, as given in the Canadian Institute of Actuaries’ Report on Canadian Economic Statistics 1924 – 2012.  This compares with the volatility of returns of long-term federal bonds (10+ years) of 10.2%, 9.2%, and 6.8% and with the volatility of returns of medium-term federal bonds (5-10 years) of 7.4%, 6.7%, and 4.8% over the same periods.  Higher volatility of a security’s returns implies a greater risk since the range of possible outcomes of returns widens.  Hence, equities are viewed as being more risky than bonds and long-term bonds are viewed as more risky than medium- or short-term bonds.

Historically, the higher volatility of equities compared to bonds has also been rewarded with higher returns.  This describes the key risk-reward relationship, whereby investors seek a higher level of return over the long term, or an equity risk premium, in exchange for assuming a higher level of risk.  Nevertheless, over the short term, the potential for lower returns exists along with that for higher returns due to the higher level of volatility.

Investing in a greater proportion of equities requires assuming a higher level of risk and hence the possibility of realizing a wider range of returns.  Conversely, investing in lower risk fixed income instruments will tend to produce lower returns.  Further, by accepting lower returns with lower risk, investment objectives may not be achieved.

Table 22 shows the impact that various investment portfolios would have on the Plan’s real rate of return and minimum contribution rate, as well as the volatility present in each portfolio.

Table 22 Investment Policy Impact on Minimum Contribution Rate
Portfolio Fixed Income Equity Real Assets Ultimate Real Rate of Return One-Year Standard Deviation Average Term to Maturity of Fixed Income Portfolio Minimum Contribution RateTable 22 Footnote (1)
  (%) (%) (%) (%) (%) (Years) (%)
1Table 22 Footnote (2) 100 0 0 2.8 8.9 21.5 10.65
2Table 22 Footnote (3) 100 0 0 3.3 7.5 19.7 10.36
3 80 15 5 3.6 7.3 18.5 10.17
4 50 40 10 3.8 8.4 7.7 10.02
BE 30 50 20 4.0 10.6 7.7 9.84
5 15 65 20 4.3 12.9 7.7 9.67
6 0 80 20 4.5 15.2 n/a 9.54

Portfolio 1 is assumed to consist solely of long-term federal bonds and as such, a low return is expected.  This portfolio’s volatility (one-year standard deviation) is relatively low for an undiversified portfolio.  Under this scenario, the low risk investments would cause the minimum contribution rate to increase to 10.65%.  Portfolio 2 is assumed to be a marketable bond portfolio consisting of federal, provincial, corporate, and real return bonds.  This portfolio produces a higher real rate of return and lower volatility compared to Portfolio 1 because of the diversification through different bond classes.  However, the expected return of Portfolio 2 is still not sufficient to maintain the current 9.9% contribution rate.  As for Portfolio 1, Portfolio 2 is a low risk, low return portfolio.  These two portfolios demonstrate the necessity of higher investment returns and thus, the incurrence of higher risk, in order to maintain the minimum contribution rate at a level below the legislated rate of 9.9%.  This could be achieved by including equities in the investment portfolio.

The remaining portfolios are diversified portfolios that consist of fixed income, equity (Canadian, foreign and emerging markets) and real assets.  Portfolio 3 is more diversified than the first two portfolios with 20% in variable income securities (equity and real assets).  This diversification increases the expected real rate of return earned on the portfolio while reducing the volatility compared to the first two portfolios, since the three broad asset classes are not perfectly correlated.  Portfolio 4 is even more diversified with 50% of the portfolio invested in equities and real assets.  However, it is only slightly riskier than portfolios 2 and 3 due to the fact that the higher volatility from increased investment in variable income securities is partially compensated by a reduction in the fixed income’s average term to maturity.  The lower average term to maturity of bonds of Portfolio 4 more closely reflects actual investments by the CPPIB and is better positioned for an expected increase in bond yields.  However, despite increased real returns and similar risks compared to the first two portfolios, portfolios 3 and 4 are still not sufficient to maintain the minimum contribution rate at a level below the legislated rate of 9.9%.

Portfolios 5 and 6 are considered to be more risky than the best-estimate portfolio, because they consist of substantial investments in variable income securities (85% and 100%, respectively) and consequently, have higher volatility.  While both portfolios may produce returns that result in the minimum contribution rate being at or below the legislated contribution rate of 9.9%, such portfolios have a greater likelihood of earning poor investment returns when market downturns occur (as demonstrated in the next section).  By investing in a less risky portfolio with a lower degree of volatility, the minimum contribution rate can still be maintained at or below 9.9%.

The best-estimate portfolio (BE) is invested 30% in fixed income, 50% in equity and 20% in real assets in the long term.  Such a portfolio produces an expected average annual real return of 4.0% with a one-year standard deviation of 10.6%.  By observing the volatility of each of the portfolios in Table 22, it can be concluded that a certain degree of risk must be undertaken in order to earn a sufficient return.  An asset allocation such as the best-estimate portfolio demonstrates that an average real return of 4.0% can be achieved with a moderate degree of risk.  The benefit of an increased return produced by the more risky portfolios (5 and 6) does not seem to outweigh the accompanying increase in risk.  This aligns with the investment objective of the CPPIB which is to invest its assets with a view to achieving a maximum rate of return, without undue risk of loss, having regard to the factors that may affect the funding of the CPP and the ability of the Plan to meet its financial obligations on any given business day.

III. Financial Market Tail Events

This section analyzes the impacts that tail events in portfolio returns could have on the minimum contribution rate.  To illustrate this, portfolio returns other than the best estimate are assumed to occur in 2015 for various investment portfolios.  Two alternative portfolios were selected from section II to show the potential impacts of a less risky (Portfolio 4: 40% equity, 10% real assets, 50% fixed income) and a more risky (Portfolio 5: 65% equity, 20% real assets, 15% fixed income) portfolio in relation to the best-estimate portfolio.

In this illustration, it is assumed that the returns of the three portfolios follow a normal distribution.  The standard deviation for each portfolio is given in Table 22 in section II.  The expected nominal returns for the year 2015 are given in Table 23.  Two probability levels were selected to analyze: 1/10 and 1/50.  These levels can be thought of as the probabilities of earning more or less than a given return once every 10 and 50 years, respectively.  Since the normal distribution has two tails, a left tail and a right tail, both were examined.  The left tail event is the occurrence of a nominal return such that the probability of earning that return or less is equal to 1/10 (or 1/50).  The right tail event is the occurrence of a nominal return such that the probability of earning that return or more is equal to 1/10 (or 1/50).

For each portfolio a nominal return is calculated for 2015 at the two probability levels.  Following the various portfolio returns in 2015, it is assumed that the returns revert back to their best-estimate values from 2016 onward.  The nominal returns and the resulting impact on the minimum contribution rates are given in Table 23.

Table 23 Impact of Various Portfolio Returns and Portfolios (2015)
Probability of ReturnTable 23 Footnote (2) Tail Portfolio 4 Best-Estimate Portfolio Portfolio 5
Expected Nominal Return in 2015 MCRTable 23 Footnote (1) Expected Nominal Return in 2015 MCRTable 23 Footnote (1) Expected Nominal Return in 2015 MCRTable 23 Footnote (1)
3.8% 10.02% 5.0% 9.84% 5.7% 9.67%
(%) Impact on MCR (%) (%) Impact on MCR (%) (%) Impact on MCR (%)
1/10  Left (7.0) 0.08 (8.5) 0.11 (10.8) 0.16
 Right 14.6 (0.07) 18.5 (0.11) 22.2 (0.16)
1/50  Left (13.5) 0.12 (16.7) 0.18 (20.8) 0.25
 Right 21.1 (0.12) 26.7 (0.18) 32.2 (0.25)

Once every ten years, the best-estimate portfolio is expected to experience a nominal return of -8.5% or less as well as a nominal return of +18.5% or more. As a result, the minimum contribution rate could increase or decrease by at least 0.11 percentage points.

If a smaller probability is considered, then one can expect the results to be more extreme and the impact on the minimum contribution rate to be larger.  For a once every fifty years event, the left tail event for the best-estimate portfolio is a nominal return of -16.7% or less while the right tail event is a nominal return of +26.7% or more.  As a result of these two tail events, the minimum contribution rate could increase or decrease by at least 0.18 percentage points.

Portfolio 4, the lower-risk portfolio, has the lowest proportion of variable income securities and thus, the lowest volatility.  As such, the tail events for this portfolio are less extreme than for a riskier portfolio when considering the same probability levels.  It then follows that the impact on the minimum contribution rate is less when compared to a riskier portfolio.

Portfolio 5 has a greater proportion of variable income securities compared to the other two portfolios and thus, the highest volatility.  As such, the left and right tail events for Portfolio 5 are more extreme.  As a result, the impact on the minimum contribution rate is larger when the portfolio shocks occur.  Once every fifty years, a nominal return of -20.8% or less may occur resulting in an absolute increase of at least 0.25 percentage points to the minimum contribution rate.  Although such an event is not common, the immediate impact on the financial status of the Plan would be significant.

Investment portfolio shocks, whether positive or negative, can have an immediate and significant impact on the financial status of the Plan.  The impact varies depending on the amount of risk present in the portfolio.  A portfolio more heavily weighted toward variable income securities will likely experience greater changes in market upswings and downturns, and the minimum contribution rate under such a portfolio will likewise change to a significant degree.  The upside of investing in a risky portfolio must be weighed against the downside risk and the associated probability of poor investment returns occurring.

IV. Economic Slowdown

Following the economic slowdown experienced in 2008-09, sensitivity tests were created to analyze the capacity of the CPP to withstand another similar slowdown in the near future.  During the 2008-09 economic slowdown, the Canadian unemployment rate increased by over two percentage points.  In addition, CPP assets declined from $123 billion to $106 billion. The Canadian economy is still recovering following the recent slowdown. As the short-term economic outlook for major foreign economies and for Canada remains uncertain, there are a number of risk factors which could adversely affect the Canadian economy in the short term.

Under the best-estimate scenario, moderate and sustainable economic growth is assumed.  The sensitivity tests assume that another economic slowdown occurs in 2014 and 2015, followed by a period of recovery as economic assumptions return to their best-estimate values. The first scenario focuses on the impact of changes to the economic assumptions, while the second scenario builds on the first one and adds negative shocks to the investment portfolio.

Under the best-estimate scenario, the unemployment rate in Canada is assumed to be 7.0% and 6.9% for 2014 and 2015, respectively, and reaches an ultimate rate of 6.0% by 2023.  In addition, average real annual earnings are assumed to increase by 0.6% and 0.7% in 2014 and 2015, respectively, with an ultimate rate of 1.2% reached in 2020.

Under the first scenario, the 2015 unemployment rate is two percentage points higher than under the best-estimate scenario, with the increase occurring over a two-year period. This results in an assumed unemployment rate of 8.0% in 2014 and 8.9% in 2015.  It then gradually reverts to its best-estimate value over the following ten years.  The real increases in average weekly earnings and average annual earnings are reduced to 0.3% and 0.0% in 2014 and 2015, respectively, and then return to their best-estimate values for 2016 and thereafter.  As a result, total contributory earnings are 2.4% lower than under the best-estimate scenario by 2015 and continue to lag the best estimate in all subsequent projection years.  Under this scenario, the minimum contribution rate increases slightly to 9.86%.

The second scenario builds on the first with the additional assumption that the CPP investment portfolio experiences a nominal rate of return of -10% in both 2014 and 2015, and reverts back to its best-estimate value in the following year.  As a result, the minimum contribution rate increases to 10.09%.

The results of these tests are summarized in Table 24.

Table 24 Economic Slowdown (2014-2015)
Canada Slowdown Best Estimate
  (%) (%) (%) (%)
  2014 2015 2014 2015
Scenario #1        
Unemployment Rate 8.0 8.9 7.0 6.9
Real wage Increase 0.3 0.0 0.6 0.7
Minimum Contribution RateTable 24 Footnote (1) 9.86 9.84
Scenario #2        
Unemployment Rate 8.0 8.9 7.0 6.9
Real wage Increase 0.3 0.0 0.6 0.7
Nominal investment return (10.0) (10.0) 4.8 5.0
Minimum Contribution Rate(1) 10.09 9.84

V. Invidividual Sensitivity Tests

This actuarial report on the Canada Pension Plan is based on the projection of its revenues and expenditures over a long period of time.  The information required by statute, which is presented in the Results section of this report, has been derived using best-estimate assumptions regarding future demographic and economic trends.  The key best-estimate assumptions, i.e. those for which changes within a reasonable range have the most significant impact on the long-term financial results, are described in Appendix E.  Both the length of the projection period and the number of assumptions required ensure that actual future experience will not develop precisely in accordance with the best-estimate assumptions.  Individual sensitivity tests have been performed that consist of projecting the financial status of the Plan using alternative assumptions.

With the exception of the labour market test, which uses a purely deterministic model based on judgment, the individual assumption sensitivity tests are developed using a combination of judgment and stochastic modeling techniques.  All of the tests are described in the sections below.

Stochastic modeling techniques estimate the probability distribution of an outcome for each selected assumption, and these distributions are used to quantify a range of possible outcomes. The fluctuation in each variable other than the rate of return on investments is projected by using standard time-series modeling, a method designed to make inferences based on historical data.  The fluctuation in the rate of return on investments is based on a normal distribution of returns and is projected using historical correlations between asset classes, historical standard deviations, and expected returns for each asset class.

With the time series approach, a variable is modeled by an equation that captures a relationship between current and prior years' values of the variable.  A year-by-year random variation consistent with the variation observed in the historical period is then introduced.  Parameters for the equations are estimated using historical data for periods that range between 30 years and 84 years.  Each time-series equation is designed such that, in the absence of random variation, the value of the variable is equal to the value assumed under the best-estimate assumption.

Future mortality rates are stochastically projected using the time series approach and assuming that, for each year, rates by age and gender are correlated.  For each projection year and based on 1,000 outcomes, the life expectancies with future improvements are calculated and an 80% confidence is determined.  In addition to the scenario based on the best-estimate mortality rates, two other scenarios based on mortality rates derived using deterministically defined low and high assumed future mortality improvement rates are considered.  Alternative assumptions are then derived using the results of these scenarios.

For the remaining stochastically analyzed assumptions, a minimum of 10,000 outcomes are generated for each year in the projection period.  Although the yearly outcome of each variable will fluctuate, it is the average outcome over the projection period that will determine the financial sustainability of the Plan. Therefore, an 80% confidence interval is calculated for the cumulative average of each assumption to determine, with 80% probability, the range of possible outcomes over the entire 75-year projection period.  If a shorter projection period were to be considered, such as ten or fifteen years, one could expect the average 80% confidence interval to be wider since the outcomes will not have had enough time to stabilize.  The upper and lower values of the 80% confidence interval are used as the low-cost and high-cost assumptions, or vice versa depending on the assumption, for these individual sensitivity tests.

The results should be interpreted with caution and a full understanding of the inherent limitations of stochastic modeling.  Results are very sensitive to model specifications, degrees of interdependence among variables, and the historical periods used for the parameters estimates.  For some variables, using the variations exhibited in relatively recent or, conversely, earlier historical periods may not provide a realistic representation of the potential variation for the future.  Furthermore, additional variability could result from incorporating statistical approaches that would more fully model change in the long-range central tendencies of the variables.  The historical periods chosen for most variables are relatively homogeneous and do not reflect substantial shifts.  The time-series modeling reflects what occurred in these historical periods.  As a result, the variation indicated in this section should be viewed as the minimum plausible variation for the future.  Structural shifts, as predicted by many experts and as seen in prior centuries, are not reflected in the current models.  Rather, the projection models or time series are adjusted to reflect the best judgment over a long period.

The sensitivity tests were performed by varying most of the key assumptions individually in a manner consistent with the results of the stochastic analysis and by keeping the remaining assumptions at their best-estimate levels.  Each sensitivity test was categorized as either a low-cost scenario or a high-cost scenario.  In the low-cost scenarios, the alternative assumptions have the effect of reducing the minimum contribution rate.  Conversely, assumptions for the high-cost scenarios increase the minimum contribution rate.

The alternative assumptions selected are intended to represent a wide range of potential long-term experience.  However, each individual result cannot simply be combined because a change in any one particular assumption may have an impact on other assumptions to various degrees.

Table 25 summarizes the alternative assumptions used in the individual sensitivity tests.  It is followed by a brief discussion of each assumption and the impact that the variation in each assumption has on the results.

Table 25 Individual Sensitivity Test Assumptions
Canada Low-Cost Best-Estimate High-Cost
1 Total fertility rate 1.90 1.65 1.40
2 Mortality:
Canadian life expectancy at age 65 in 2050 with future improvements Males 20.7 Males 23.0 Males 25.6
Females 22.9 Females 25.3 Females 27.7
3 Net migration rate 0.65% 0.60% 0.55%
4 Labour Market :      
Participation rate (aged 15-69)Footnote 1 82% (2030) 77% (2030) 73% (2030)
Unemployment rateFootnote 1 4.0% 6.0% 8.0%
Average CPP retirement benefit take-up ageFootnote 1 63.8 62.9 62.0
5 Rate of increase in prices 2.7% 2.2% 1.6%
6 Real wage increase 1.9% 1.2% 0.4%
7 Real rates of return 5.5% 4.0% 2.5%
8 CPP disability incidence rates (per 1,000 eligible) Males 2.50 Males 3.30 Males 4.10
Females 2.85 Females 3.75 Females 4.65

A. Fertility Rate

The best-estimate assumption is that the total fertility rate for Canada will increase slightly from its 2010 level of 1.63 to an ultimate level of 1.65 in 2015.  Based on fertility experience of the last 40 years (1971 to 2010), a stochastic approach was used to generate the low- and high-cost scenarios over the 75-year projection period.  Factors such as higher labour force participation of women, later entry into marriages or common-law relationships, higher and longer periods of education, as well as others, make it unlikely that high fertility rates such as those experienced during the post-WWII baby boom period will be seen again in the future.  Therefore, the experience period selected for the stochastic analysis excludes periods of high fertility rates.

It was projected that the average total fertility rate throughout the 75-year projection period will be in the range 1.4 to 1.9 with 80% probability.  Instead, if a 15-year projection period is considered, then the average total fertility rate will be in the range 1.3 to 2.0.

The low-cost assumption has the total fertility rate increasing to an ultimate level of 1.9 in 2015, which is lower than the national population replacement rate.  The total Canadian fertility rate has not been above 1.9 since 1973.  Under this scenario, the population grows to a level in 2050 that is about 7% higher than under the best-estimate assumption.  In addition, a higher ultimate total fertility rate leads to a younger population.  Thus, the dependency ratio, defined as the ratio of those aged 65 and over to the working-age population (20-64), is 0.44 (or approximately 2.3 workers per retiree) in 2050 compared to a dependency ratio of 0.46 (or approximately 2.2 workers per retiree) under the best-estimate assumption.

The high-cost assumption has the total fertility rate decreasing to an ultimate level of 1.4 in 2015.  This is similar to the recent total fertility rates of Italy and Japan.  Under this scenario, the population grows much more slowly, to a level in 2050 that is 6.5% lower than under the best-estimate assumption.  A lower ultimate total fertility rate leads to an older population.  In this scenario, the dependency ratio increases from the best-estimate value of 0.46 (or 2.2 workers per retiree) in 2050 to 0.48 (or 2.1 workers per retiree).

B. Mortality Rates

In addition to the stochastic projections of the mortality rates, a deterministic element has been introduced to the test to capture the impact of greater uncertainty regarding the long-term mortality improvement rates assumption.

A deterministic model was first used to generate two alternatives for the mortality improvement rate assumption.  Under the first alternative, the best-estimate ultimate values of the mortality improvement rates have been reduced by 0.2% whereas for the second alternative, the best-estimate ultimate values of the mortality improvement rates have been increased by 0.2%.  Under the alternative of reducing the ultimate improvement rates, the life expectancies of males and females at age 65 in 2050 are 0.5 of a year lower than under the best-estimate assumption.  Under the alternative of increasing the ultimate improvement rates, the life expectancies of males and females at age 65 in 2050 are 0.6 of a year higher than under the best estimate.

Based on the mortality experience by age and sex of the last 84 years (1926 to 2009), a stochastic approach was used to generate scenarios over the 75-year projection period under the best-estimate assumption and each of the two alternatives described above.  The following table presents the life expectancies at the 10th and 90th percentiles determined by the stochastic analysis as well as the expected life expectancies determined with the deterministic approach.  For example, under the best-estimate assumption, it was projected that, on average, the life expectancy of a male aged 65 in 2050 will be in the range of 21.0 to 24.9 years with 80% probability.  For a female aged 65 in 2050, life expectancy is projected to be in the range of 23.4 to 27.1 years with 80% probability.

Table 26 Stochastic and Deterministic Projections of Life Expectancy at age 65 in 2050Table 26 Footnote (1)
(Canada)
Mortality
Improvement
Rates Scenario
Life Expectancy
Stochastic
10th Percentile
Deterministic
Expected
Stochastic
90th Percentile
Best Estimate Males 21.0 23.0 24.9
Females 23.4 25.3 27.1
Reducing Alternative Males 20.7 22.5 24.4
Females 22.9 24.8 26.7
Increasing Alternative Males 21.8 23.6 25.6
Females 24.0 25.9 27.7

The low-cost scenario corresponds to the lower end of the 80% probability range under the alternative of reducing the improvement rate assumption. Under this scenario, mortality is assumed to improve at a slower rate than under the best-estimate scenario, reflecting that current improvements above age 65 might not be sustainable. Under this scenario, the population grows to a level in 2050 that is 1.4% lower than under the best-estimate assumption. In addition, the dependency ratio decreases to 0.43 (or 2.3 workers per retiree) compared to a best-estimate of 0.46 (or 2.2 workers per retiree) since life expectancy is lower and there would be fewer retirees compared to the working-age population.

The high-cost scenario corresponds to the higher end of the 80% probability range under the alternative of increasing the improvement rate assumption.  Under this scenario, mortality is assumed to improve at a faster pace than under the best-estimate scenario. Under this scenario, the population grows to a level in 2050 that is 1.5% higher than under the best-estimate assumption.  The dependency ratio also increases to 0.48 (or 2.1 workers per retiree) compared to a best-estimate of 0.46 (or 2.2 workers per retiree) since life expectancy is higher and there would be more retirees compared to the working-age population.

Table 27 presents the life expectancies that would result in 2050 from the different rates of improvement.

Table 27 Life Expectancy in 2050 under Alternative AssumptionsTable 27 Footnote (1)
(Canada)
  Low Cost Best Estimate High Cost
At Birth Males 85.1 88.6 92.3
Females 87.5 91.3 94.6
At Age 65 Males 20.7 23.0 25.6
Females 22.9 25.3 27.7

C. Net Migration Rate

Under the best-estimate assumption, the net migration rate is assumed to gradually reduce from its current (2012) level of 0.77% of the population to an ultimate rate of 0.60% of the population for the year 2017 and thereafter.

Based on the net migration experience of the last 54 years (1959 to 2012) and taking into account the recent increase in the number of net-permanent residents, a stochastic approach was used to generate the low- and high-cost scenarios over the 75-year projection period.  It is projected that average net migration throughout the entire projection period will be in the range 0.55% to 0.65% of the population with 80% probability.  Instead, if a 15-year projection period is considered, then average net migration will be in the range 0.51% to 0.72% of the population.

The low-cost assumption has net migration reaching a level of 0.65% of the population in 2017 and remaining constant thereafter.  This is very close to the average net migration rate over the twenty-five-year period ending in 2012.  Under this scenario, the population grows to a level in 2050 that is 2.3% higher than under the best-estimate assumption.  As well, the dependency ratio of those aged 65 and over to the working-age population (20-64) changes very little from the best estimate of 0.46 (or 2.2 workers per retiree) in 2050.

The high-cost assumption has net migration reaching a level of 0.55% of the population in 2017 and remaining constant thereafter.  This is very close to the average net migration rate experienced during the 1990s.  Under this scenario, the population grows more slowly, to a level in 2050 that is 2.2% lower than under the best-estimate assumption.  As well, the dependency ratio is 0.47 (or approximately 2.1 workers per retiree), which is slightly higher than the best estimate.  The dependency ratio only changes slightly under both the low- and high-cost assumptions compared to the best-estimate, since the impact in each case depends on the age distribution of the immigrants and emigrants.  If both groups, those aged 65 and above and those aged 20 to 64, are affected similarly by net migration, then one would expect very little change in the dependency ratio.

D. Labour Market

Employment levels are reflected in the actuarial projection model through the assumptions made regarding the level of labour force participation and job creation rates by year, age and sex.  These rates vary not only with the rate of unemployment, but also reflect trends in increased workforce participation by women, longer periods of formal education among young adults, and trends in the retirement patterns of older workers.

This sensitivity test analyzes the impact of stronger and weaker labour demand on the cost of the Plan.

Under the best-estimate scenario, the job creation rate assumption is determined on the basis of expected moderate economic growth and an unemployment rate that is expected to gradually decrease from its 2012 level of 7.2% to an ultimate rate of 6.0% by 2023.  Furthermore, the participation rates for all age groups are expected to increase due to the attractive employment opportunities resulting from anticipated labour shortages and the aging of cohorts with stronger labour attachments, especially for women and individuals with higher education attainment. The assumed increase in participation rates of those aged 55 and over is even more significant, given that it is also affected by the expected continued trend toward delayed retirement. Under the best-estimate scenario, the participation rate of those aged 15 to 69 is expected to increase from 74.6% in 2013 to 76.8% in 2030.

Retirement rates are used to determine the distribution of retirement ages of new retirement beneficiaries.  The ultimate rates for the best-estimate scenario are based on recent experience.  For cohorts reaching age 60 in 2016 and thereafter, the retirement rates at age 60 are assumed to decrease from their 2012 levels to 34% and 38% in 2016 and thereafter, and the retirement rates at age 65 are assumed to increase from their 2012 levels to 41% and 39% in 2021 and thereafter for males and females, respectively.  These rates result in a projected average age at take-up of 62.9 in 2030.

A deterministic model (instead of a stochastic model) was used to generate the low-cost and high-cost scenarios for these assumptions, since a stochastic model would not accurately reflect the assumed future trends in labour force participation and unemployment.  The anticipated future labour shortage and the trend toward delayed retirement are unlike any labour situation experienced in the past, and thus the historical data do not reflect any substantial shifts like the one being projected.  Therefore, it was decided to use judgment in determining the low and high cost assumptions for participation rates, unemployment and retirement rates.

Under the strong labour demand scenario, the job creation rate is robust resulting in a lower unemployment level, higher labour force participation rates, and later retirement due to the availability of employment and unwillingness to incur early retirement penalties.  Such an environment has the effect of lowering the minimum contribution rate. For this low-cost scenario, the job creation rates are assumed to increase at a faster pace than under the best-estimate scenario, resulting in an unemployment rate of 4.0% in 2023 and thereafter.  In addition, ultimate male participation rates in 2030 are assumed to increase more than expected as a result of a higher than anticipated impact of the labour shortage and the delayed retirement trend on future labour market participation.  Furthermore, the ultimate gap in 2030 between male and female participation rates is equal to 3.4% as opposed to 6.8% under the best-estimate scenario.  This results in an overall participation rate of 81.8% for those aged 15 to 69 in 2030.  The lower unemployment rate and higher participation rate are assumed to encourage CPP participants to ask for their CPP retirement benefits at a later age. Therefore, by 2030, retirement rates at age 60 are assumed to gradually decrease to levels that are 20 percentage points lower than the best estimates, i.e. 14% and 18% for males and females, respectively.  This results in an increase in a projected average age at take-up from 62.9 to 63.8 in 2030.

Under the weaker labour demand scenario, the job creation rate is lower resulting in a higher unemployment level and lower labour force participation rates. Insufficient employment opportunities are likely to force Plan contributors to ask for their CPP retirement benefit at an earlier age regardless of the early retirement reduction.  Such an environment results in a higher minimum contribution rate.  For this high-cost scenario, the job creation rates are assumed to increase at a slower pace than under the best-estimate scenario, resulting in an unemployment rate of 8.0% in 2023 and thereafter. In addition, male and female participation rates are assumed to remain constant at their 2012 levels.  This results in an overall participation rate of 72.9% for those aged 15 to 69 in 2030.  The higher unemployment rate and lower participation rate are assumed to encourage CPP participants to ask for their CPP retirement benefits at an earlier age. Therefore, by 2030, retirement rates at age 60 are assumed to gradually increase to levels that are 20 percentage points higher than the best estimate, i.e. 54% and 58% for males and females, respectively.  This results in a decrease in a projected average age at take-up from 62.9 to 62.0 in 2030.

For both low- and high-cost scenarios, the proportions of working beneficiaries were adjusted compared to the best-estimate scenario in order to reflect the change in retirement behavior.

E. Price Increases

Higher price increases result in a lower minimum contribution rate for the CPP.  Indeed, although a higher rate of increase in prices produces higher CPP expenditures, this increase in cost is outweighed by higher nominal contributory earnings and thus, higher contributions.

For the best-estimate projections, the annual rate of price increase is assumed to be 1.5% in 2013, 2.0% from 2014 to 2019, 2.1% in 2020 and then to remain at an ultimate level of 2.2% from 2021 onward.

Based on the overall inflation rate experience over the last 30 years (1983 to 2012), a stochastic approach was used to generate the low- and high-cost scenarios over the 75-year projection period.  Over the last two decades, the Bank of Canada was successful in its inflation targeting policies resulting in price increases being mostly contained in the 1% to 3% target range with little volatility.  Although central banks might not always be able to control inflation, recent monetary policies in Canada and around the world make it unlikely that very high price increase periods such as the ones after the Second World War and in the 1970s will reoccur.  Therefore, the chosen experience period covers periods of both moderately high and low inflation but excludes periods of extremely high inflation seen in earlier years.  It was projected that the average annual rate of price increase during the 75-year projection period will be in the range 1.6% to 2.7% with 80% probability.  Instead, if a 15-year projection period is considered, then the average annual rate of price increase will be in the range 1.1% to 3.2%.

For the low-cost scenario, the annual rate of price increase is assumed to rise to 2.4% in 2020 and to an ultimate level of 2.7% in 2021.  This level of inflation is comparable to the average of the 1960s and over the last three decades.

For the high-cost scenario, the annual rate of price increase is assumed to be 1.8% in 2020 and 1.6% for 2021 and thereafter.  This level of inflation is comparable to that of the mid-to-late 1990s.

F. Real Wage Increase

Wage increases affect the financial balance of the CPP in two ways.  In the short-term, an increase in the average wage translates into higher contribution income with little immediate impact on benefits.  Over the longer term, higher average wages produce higher benefits.

An ultimate real wage increase of 1.2% has been assumed in the year 2020 and thereafter for the best-estimate projections.  The ultimate real wage increase assumption, combined with the ultimate price increase assumption of 2.2% yields the assumption for ultimate nominal annual increases in wages of 3.4% in 2021 and thereafter.  During the initial years of the projection period, the real wage increase is assumed to rise gradually to its ultimate level.

Based on the overall real wage experience of the last 50 years (1962 to 2011), a stochastic approach was used to generate the low- and high-cost scenarios over the 75-year projection period.  It was projected that the average real wage increase throughout the 75-year projection period will be in the range 0.4% to 1.9% with 80% probability.  Instead, if a 15-year projection period is considered, then the average real wage increase will be in the range -0.2% to 2.6%.

For the low-cost scenario, the assumed real wage increase rises to an ultimate level of 1.9% in 2020.  For the high-cost scenario, the assumed real wage increase is held constant at the level of 0.4% for 2014 and thereafter.

G. Rate of Return on Investments

In accordance with the policy of investing CPP assets in a diversified portfolio, the ultimate real rate of return on investments is projected to be 4.0% under the best-estimate assumptions.  Using the assumed asset mix of this report and based on historical correlations and standard deviations of returns by asset classes, a stochastic approach was used to generate the low- and high-cost scenarios over the 75-year projection period.  It was projected that the average annual real rate of return during the 75-year projection period will be in the range 2.5% to 5.5% with 80% probability.  Instead, if a 15-year projection period is considered, then the average annual real rate of return will be in the range 0.6% to 7.4%.

For the low-cost scenario, the real rate of return on investments is assumed to be 5.5% in 2019 and thereafter.  For the high-cost scenario, the real rate of return on investments is assumed to be 2.5% in 2019 and thereafter.

The real rates of return do not affect either expenditures or contributory earnings.  However, beginning in 2023 when net cash flows of the Plan are projected to turn negative, a proportion of investment income will be required to pay Plan benefits.  Thus, sufficient real rates of return are required to produce investment income large enough to cover the necessary portion of Plan expenditures while still increasing the assets of the Plan.

H. Disability Rates

The best-estimate projections assume that disability incidence rates will remain at levels comparable to what has been experienced in recent years.  The aggregate ultimate rate of incidence for the year 2017 and later is 3.30 new disability beneficiaries per year among 1,000 eligible workers for males and 3.75 per thousand for females, on average.

Based on the overall disability incidence rate experience of the last 43 years (1970 to 2012), a stochastic approach was used to generate the low- and high-cost scenarios over the 75-year projection period.  It was projected that the average annual disability incidence rate for males over the 75-year projection period will be in the range 2.50 to 4.10 per 1,000 eligible workers with 80% probability.  For females, the range of disability incidence rates is 2.85 to 4.65 per 1,000 eligible workers.

For the low-cost scenario, disability incidence rates are assumed to reach ultimate levels in 2017 of 2.50 per thousand for males and 2.85 per thousand for females.  Neither male nor female incidence rates have been below 3.0 since the early 1970s (on a year 2012 eligible population-adjusted basis for comparison purposes).

For the high-cost scenario, disability incidence rates are assumed to reach ultimate levels in 2017 of 4.10 per thousand for males and 4.65 per thousand for females.  These rates are lower than the high levels experienced in the 1980s and early 1990s.

I. Results

Under each scenario, the contribution rate was projected to follow the current schedule through 2015, and a new minimum contribution rate was determined for 2016 and thereafter. Table 28 summarizes the minimum contribution rate and pay-as-you-go rates under each of the scenarios. In addition, the table presents the first year that expenditures exceed contributions.

Table 28 Sensitivity of Minimum Contribution Rate
(percentages)
Assumption Scenario Minimum Contribution
RateTable 28 Footnote (1)
First Year
Expenditures
Exceed
ContributionsTable 28 Footnote (2)
Pay-As-You-Go Rates
2025 2050 2087
  Best Estimate 9.84 2022 10.28 11.01 11.71
1 Total Fertility Rate Low Cost 9.53 2020 10.28 10.49 10.50
High Cost 10.17 2025 10.29 11.58 13.23
2 Mortality Rates Low Cost 9.46 2020 10.13 10.54 10.97
High Cost 10.22 2024 10.45 11.49 12.41
3 Net Migration Rate Low Cost 9.75 2022 10.22 10.83 11.51
High Cost 9.93 2023 10.35 11.19 11.92
4 Labour Market Low Cost 9.59 2027 9.50 10.73 12.30
High Cost 10.12 2020 11.02 11.30 11.43
5 Price Increases Low Cost 9.74 2022 10.24 10.86 11.59
High Cost 9.97 2023 10.34 11.20 11.88
6 Real Wage Increases Low Cost 9.26 2018 9.77 9.87 10.46
High Cost 10.51 2023 10.94 12.55 13.46
7 Real Rate of Return on Investments Low Cost 8.97 2016 10.28 11.01 11.71
High Cost 10.73 2031 10.28 11.01 11.71
8 Disability Rates Low Cost 9.65 2022 10.12 10.79 11.50
High Cost 10.03 2023 10.45 11.22 11.91

As shown in the Table 28, some assumptions are more sensitive than others to changes in long term expectations. Mortality is the most sensitive demographic assumption as shown by the wide range of the minimum contribution rate. If male and female life expectancies at age 65 were to increase by approximately 2.5 years by 2050, the minimum contribution rate in 2016 and thereafter would increase to 10.22%, well above the legislated rate of 9.9%. On the other hand, if male and female life expectancies at age 65 were to decrease by about 2.5 years, the minimum contribution rate would decrease significantly to 9.46%.

The most sensitive economic assumptions are the real wage increase and the real rate of return on investments.  If an ultimate real wage increase of 1.9% is assumed for 2020 and thereafter, the minimum contribution rate would decrease to 9.26%.  However, if an ultimate real wage increase of 0.4% is assumed for 2014 and thereafter, the minimum contribution rate would increase to 10.51%.

Real rates of return can fluctuate greatly from year to year and can have a significant impact on the minimum contribution rate.  If a real rate of return of 5.5% is assumed for 2019 and thereafter, the minimum contribution rate will decrease to 8.97%.  However, if the real rate of return is assumed to be 2.5% for 2019 and thereafter, the minimum contribution rate increases to 10.73%.

Under some of the sensitivity tests, the ultimate pay-as-you-go rates do not stabilize.  In such cases, while the minimum contribution rates shown in Table 28 would be adequate through 2087, they could still result in significant increases or decreases in the ratio of assets to expenditures in later years.

It should be noted that once the low- and high-cost assumptions reach their ultimate values, they are held constant for the rest of the 75-year projection period and the Plan is assumed to remain in its current form.  This may not be realistic.  As new demographic and economic trends in society emerge, it may be necessary to update the Plan in order to reflect a new demographic or economic reality with the objective of maintaining affordability and intergenerational equity.

Table 29 summarizes the first year that expenditures exceed contributions and the projected impact on the ratio of the assets to the following year’s expenditures under each of the alternative sets of assumptions if the currently scheduled contribution rate of 9.9% continues to apply in years 2013 and thereafter.

Table 29 Sensitivity of Funding Levels
(9.9% contribution rate)
Assumption Scenario First Year
Expenditures Exceed Contributions
Asset/Expenditure Ratio
2025 2050 2087
  Best Estimate 2023 5.35 6.02 5.70
1 Total Fertility Rate Low Cost 2023 5.35 6.49 10.30
High Cost 2023 5.35 5.55 0.60
2 Mortality Rates Low Cost 2024 5.54 7.45 11.64
High Cost 2022 5.15 4.67 0.50
3 Net Migration Rate Low Cost 2023 5.38 6.36 6.94
High Cost 2022 5.32 5.68 4.39
4 Labour Market Low Cost 2033 6.00 8.37 8.61
High Cost 2019 4.74 3.88 1.73
5 Price Increases Low Cost 2023 5.37 6.39 7.06
High Cost 2022 5.33 5.56 3.96
6 Real Wage Increases Low Cost 2028 5.56 8.07 12.09
High Cost 2021 5.09 3.40 Table 29 Footnote (1)
7 Real Rate of Return on Investments Low Cost 2023 6.31 11.23 30.49
High Cost 2023 4.54 2.98 Table 29 Footnote (2)
8 Disability Rates Low Cost 2024 5.56 6.92 8.44
High Cost 2022 5.15 5.16 3.05

VI. Younger and Older Populations

Demographic and labour force assumptions are modified in this section with the purpose of projecting younger and older populations compared to the best estimate.  However, these alternative populations do not necessarily reflect probable scenarios.  Using the demographic assumptions of the individual sensitivity tests, two alternative scenarios were examined.  The first scenario is classified as the younger population scenario, since the ratio of retirees to workers is lower than under the best-estimate assumptions.  The second scenario has a ratio of retirees to workers that is higher than the best-estimate and is referred to as the older population scenario.  Once the two populations were created, the labour force participation rates were modified to align with the new populations.

The demographic assumptions anticipated in these scenarios were determined using the low- and high-cost assumptions regarding fertility, mortality, and migration rates, as well as the labour force participation rates pertaining to the low- and high-cost labour market tests described in section V.

The choice of assumptions will always remain subjective to a certain extent and one could always argue that the range of possible projected outcomes presented herein is not realistic.  However, one must keep in mind that these alternative scenarios are only presented to provide a reasonable range of possible future outcomes for the cost of the Plan.

A. Younger Population

Under the younger population scenario, it is assumed that the ultimate total fertility rate is 1.9 per woman for both Canada and Québec.  Mortality improvement rates are assumed to increase at a much slower pace than under the bes-estimate scenario.  The result is that life expectancies at age 65 decrease from their projected best-estimate by approximately 2.5 years for both males and females by 2050.  Finally, net migration to Canada is assumed to reach a level of 0.65% of the population by the year 2017.

The combination of these younger population assumptions results in a dependency ratio of those aged 65 and over to the working-age population (20-64) of about 0.40 (or 2.5 workers per retiree) in 2050.  This is 13% lower than under the best-estimate scenario where the ratio reaches a level of 0.46 (or 2.2 workers per retiree) in 2050.  Under this younger population scenario, the population grows more rapidly, to a level in 2050 that is 7.3% higher compared to the best-estimate scenario.

It is assumed that under a better demographic outlook a possible labour shortage would be less severe.  As a result, it is assumed that the labour force participation rates would be lower, especially at the younger and older ages.

B. Older Population

Under the older population scenario, it is assumed that the ultimate total fertility rate is 1.4 per woman for both Canada and Québec.  Mortality improvement rates are assumed to increase at a faster pace than under the best-estimate scenario.  The result is that life expectancies at age 65 increase from their projected best-estimate levels by approximately 2.5 years for both males and females by 2050.  Finally, net migration to Canada is assumed to fall to a level of 0.55% of the population by the year 2017.

The combination of these older population assumptions results in a dependency ratio of those aged 65 and over to the working-age population (20-64) of about 0.53 (or 1.9 workers per retiree) in 2050.  This is 15% higher than under the best-estimate scenario where the dependency ratio reaches a level of 0.46 (or 2.2 workers per retiree) in 2050.  Under this older population scenario, the population grows more slowly, to a level in 2050 that is 6.6% lower compared to the best-estimate scenario.

It is assumed that with a poorer demographic outlook a possible labour shortage would be more severe.  For this purpose, it is assumed that the labour force participation rates would be higher, especially at the older ages.

C. Results

Table 30 presents a summary of the assumptions used in this sensitivity analysis and the resulting minimum contribution rates.  The minimum contribution rates are 9.29% and 10.43% for the younger and older population scenarios, respectively.

Table 30 Younger and Older Populations Sensitivity Test Assumptions
Canada Younger Population Best-Estimate Older Population
Total fertility rate 1.90 1.65 1.40
Mortality:
Canadian life expectancy at age 65 in 2050 with future improvements Males 20.7 Males 23.0 Males 25.6
Females 22.9 Females 25.3 Females 27.7
Net migration rate 0.65% 0.60% 0.55%
Participation rate (age group 15-69) 73% (2030) 77% (2030) 82% (2030)
Minimum Contribution RateTable 30 Footnote (1) 9.29% 9.84% 10.43%

Appendix C – Summary of Plan Provisions

I. Introduction

The Canada Pension Plan came into force on 1 January 1966.  Since its inception, the CPP has been amended several times, the most recent occasion as a result of technical amendments under Bill C-45 – Jobs and Growth Act, 2012, which received Royal Assent on 14 December 2012.  As required by the Canada Pension Plan, the amendments under Bill C-45 will come into force once formal approval of the provinces is received.  This is in process and should be completed in due course.  In addition, all amendments to the Canada Pension Plan, as set forth under the Economic Recovery Act (stimulus) have come into force as of 1 January 2012.  This Appendix presents a summary of the provisions of the Plan inclusive of all amendments.  The legislation shall prevail if there is a discrepancy between it and this summary.

II. Participation

The CPP includes virtually all members of the labour force in Canada, including both employees and self-employed persons between the ages of 18 and 70 with employment earnings, other than those covered by the Québec Pension Plan (QPP).  The main exceptions are persons with annual earnings lower than $3,500 (the Year’s Basic Exemption, defined below), members of certain religious groups, and other persons who qualify under excepted employment.  It should be noted that the CPP covers all members of the Canadian Forces and the Royal Canadian Mounted Police, including those residing in the province of Québec.  The persons to whom a CPP disability pension is payable are not required to contribute.

Effective 1 January 2012, those persons in receipt of a CPP retirement pension who are aged less than 65 and who continue to work will be required to contribute to the Plan and will earn post-retirement benefits.  Beneficiaries aged 65 or older who continue to work will not be required to contribute but may choose to do so.  In any case, contributions are not permitted upon attaining age 70. This working beneficiaries provision is described further below.

III. Definitions

A. Year’s Maximum Pensionable Earnings (YMPE)

The YMPE for a calendar year is the limit to which employment earnings are subject to contributions for purposes of the Plan.  The YMPE increases each year to the extent warranted by the percentage increase, as at 30 June of the preceding year, in the 12-month average of the average weekly earnings of the Industrial Aggregate (as published by Statistics Canada).  If the amount so calculated is not a multiple of $100, the next lower multiple of $100 is used.  The YMPE is set at $51,100 in 2013.

B. Year’s Basic Exemption (YBE)

The YBE for a calendar year is the minimum employment earnings required to participate in the Plan.  As well, contributions are waived on earnings up to the YBE inclusive.  The YBE is $3,500 in 2013.

C. Contributory Period

The contributory period is the number of months from attainment of age 18 or from 1 January 1966, if later, to the earliest of the month in which the contributor dies, the month before the one in which the retirement pension commences and the month before the one in which the contributor reaches 70 years of age, less the number of months during which the contributor received a CPP or QPP disability benefit (including the three-month waiting period), or during which the contributor had at least one eligible child under seven years of age and had earnings for that year lower than the YBE.  The contributory period excludes periods on or after 1 January 2012 during which beneficiaries contribute while in receipt of a retirement pension.

D. Pension Index

The Pension Index for a given calendar year is equal to the Consumer Price Index averaged over the 12-month period ending with October of the preceding year; however, the Pension Index of a given year may not be less than the previous year’s Pension Index.

IV. Contribution Rates

From 1966 to 1986, the annual rate of contribution applicable to contributory earnings was 1.8% for employees (and the same amount for their employers) and 3.6% in respect of self-employed earnings.  This combined employer-employee contribution rate of 3.6% was subject to an annual increase of 0.2 percentage points from 1987 to 1996, attaining 5.6% in the last year of that period.

Table 31 shows that the combined employer-employee contribution rates from 1997 to 2003 increased in steps to reach a rate of 9.9% by 2003, with no subsequent increases scheduled thereafter.

Table 31 Contribution Rates
Year Contribution Rate (%)
1997 6.0
1998 6.4
1999 7.0
2000 7.8
2001 8.6
2002 9.4
2003+ 9.9

The legislation gives the federal and provincial ministers of finance the authority to make changes to the contribution rates through regulation, in connection with a triennial review.  However, year-over-year contribution rate increases cannot exceed 0.2 percentage points; beyond that, legislation is required.

If a triennial actuarial report projects a minimum contribution rate in excess of the scheduled (legislated) rate and the finance ministers do not make a recommendation to either increase the legislated rate or maintain it, the insufficient rates provisions of the Canada Pension Plan would apply.  The contribution rate would then be increased in stages and a possible temporary freeze on inflation adjustments to benefits in pay would apply.

V. Retirement Pension

A. Eligibility Requirements

A person aged 60 or over becomes eligible for a retirement pension upon application, provided contributions have been made during at least one calendar year.  Prior to 2012, the work cessation test applied in order for a retirement pension to become payable before age 65.  This test required individuals who applied to take their CPP retirement benefit early (i.e. before age 65) to either stop working or materially reduce their earnings both in the month immediately preceding and the month of benefit take-up.  The month following the start of pension payment, an individual could return to work and/or earn more without affecting the eligibility for or amount of the benefit.  However, no further contributions to the CPP were allowed once benefits started being paid.  There was no work cessation test for those aged 65 or older.

As of 1 January 2012, the work cessation test has been removed and no longer applies.  Also commencing 1 January 2012, individuals aged less than 65 who choose to work in Canada outside of Québec while receiving a CPP or QPP retirement pension are required, along with their employers, to contribute to the CPP.  Working beneficiaries aged 65 or older are given the option of continuing to contribute to the Plan; however, employers of those opting to do so are also required to contribute.  The contributions from working beneficiaries are applied toward providing a post-retirement benefit only and do not affect eligibility for other CPP benefits.  Upon attaining age 70, contributions are no longer permitted under the Plan.

B. Amount of Pension

The initial amount of the monthly retirement pension payable to a contributor under the Plan is based on his or her entire history of pensionable earnings during the contributory period.  The retirement pension is equal to 25% of the average of the YMPE for the year of his or her retirement and the four previous years, referred to as the Maximum Pensionable Earnings Average (MPEA), adjusted to take into account the contributor’s pensionable earnings.  For this purpose, the contributor’s pensionable earnings for any given month are indexed by the ratio of the MPEA for the year of retirement to the YMPE for the year to which the given month belongs.

Some periods with low pensionable earnings may be excluded from the calculation of benefits by reason of pensions commencing after age 65, disability, child-rearing for a child less than seven years of age, and the general drop-out provision.

The general drop-out provision allows for a number of years with low or zero earnings to be dropped from the calculation of the retirement benefit.  For example, for someone who took his/her retirement benefit at age 65 and before 2012, the provision allows for 15% of the number of months with the lowest earnings (up to a maximum of about seven years) to be dropped from the calculation of the benefit.  The general drop-out provision has increased to 16% as of 1 January 2012 and will further increase to 17% on 1 January 2014.  As a result, by 2014 about eight years of low or nil earnings (one more year than under the previous 15% general drop-out provision) may be dropped from the calculation of the retirement benefit for those contributors who take their benefit at age 65.  The actual drop-out percentage that applies is based on the year of benefit take-up.  The increase in the general drop-out provision will increase the basic retirement pension, as well as the CPP disability and survivor pensions, since the determination of these benefits depend on the retirement pension. 

The maximum monthly retirement pension at age 65 in 2013 is $1,012.50.

C. Adjustment for Early or Postponed Retirement Benefit

The retirement pension is subject to an actuarial adjustment that depends on the year and contributor’s age at commencement of the retirement pension.  The retirement pension is permanently adjusted downwards or upwards by a factor for each month between age 65 and the age when the pension commences or, if earlier, age 70.  Prior to 2011, the adjustment factor for both pre-65 and post-65 pension take-up was 0.5% per month.  The adjustment factors have since been scheduled to be restored to their actuarially fair values.  For contributors who take their retirement benefit early (before age 65), the adjustment factor will gradually increase to 0.6% per month over the five-year period 2012 to 2016.  For those who take their benefit after age 65, the factor will gradually increase to 0.7% per month over the three-year period 2011 to 2013.  The pension adjustment factors will come into effect according to the following schedule:

Table 32 New Pension Adjustment Factors
Effective date Pre-65 Downward
Monthly Adjustment Factor
Post-65 Upward
Monthly Adjustment Factor
1 January 2011 0.50% 0.57%
1 January 2012 0.52% 0.64%
1 January 2013 0.54% 0.70%
1 January 2014 0.56% 0.70%
1 January 2015 0.58% 0.70%
1 January 2016 0.60% 0.70%

The downward pension adjustment factor of 0.6% per month, applicable for the year 2016 and thereafter, will result in a pension that is reduced by 36% for pension take-up at age 60 (compared to a reduction of 30% based on the factor of 0.5%).  The upward factor of 0.7% per month, applicable for 2013 and thereafter, will result in a pension increased by 42% for pension take-up at age 70 (compared to an increase of 30% based on the factor of 0.5%).

In accordance with subsection 115(1.11) of the Canada Pension Plan, the Chief Actuary shall calculate the pension adjustment factors and specify them in every third triennial CPP Actuarial Report, commencing with the CPP Actuarial Report as at 31 December 2015.

D. Working Beneficiaries

Prior to 2012, those who received a CPP retirement pension and then returned to work (i.e. working beneficiaries) did not pay contributions and therefore did not continue to build their CPP pension.  Commencing 1 January 2012, individuals under the age of 65 who receive either a CPP or QPP retirement pension and continue to work in Canada outside of Québec are required, along with their employers, to contribute to the Plan.  Working beneficiaries aged 65 to 69 are not required to contribute, but are given the option to do so.  Employers of those working beneficiaries opting to contribute are also required to contribute. 

The contributions paid by working beneficiaries provide for a post-retirement benefit that is earned at a rate of 1/40 of the maximum retirement pension under the CPP per year of additional contributions and is adjusted for the earnings level and age of the contributor.  Contributions paid by working beneficiaries toward accruing the post-retirement benefit do not affect eligibility for other CPP benefits.  In addition, pensionable earnings of working beneficiaries do not qualify for credit splitting.

A post-retirement benefit becomes payable the year following the year in which contributions are made, and multiple post-retirement benefits may accumulate over time.  The total pension payable resulting from the combination of the retirement pension and post-retirement benefit may be greater than the maximum CPP or QPP pension payable.  As for the CPP retirement pension, the post-retirement benefit is payable for a beneficiary’s lifetime and is increased in accordance with inflation each January 1st.

The maximum monthly post-retirement benefit at age 65 in 2013 is $25.31.

VI. Disability Benefit

A. Eligibility Requirements

A person is considered disabled if he or she is determined to be suffering from a severe and prolonged mental or physical disability.  A disability is considered severe if by reason of it the person is regularly incapable of pursuing any substantially gainful occupation; a disability is considered prolonged if it is likely to be long-continuing and of indefinite duration or likely to result in death.

A person who becomes disabled prior to age 65 and is not receiving a CPP retirement pension is eligible for a disability benefit provided that contributions have been made, at the time of disablement, for at least four of the previous six calendar years, counting only years included wholly or partly in the contributory period.  Since 2008, contributors with 25 or more years of contributions to the Plan can meet the eligibility requirement with contributions in three of the last six years.  Contributions must be on earnings that are not less than 10% of the YMPE rounded, if necessary, to the next lower multiple of $100.

B. Amount of Pension

The amount of monthly benefit payable is the sum of a flat-rate portion ($453.52 in 2013) depending only on the year in which the benefit is payable and an earnings-related portion equal, when it commences, to 75% of the retirement pension under the Plan that would be payable at the onset of disability if the contributory period ended on that date and no actuarial adjustment applied.  The automatic conversion of a disability benefit into a retirement pension at age 65 is based on the pensionable earnings at the time of disablement, price-indexed to age 65.  In other words, the indexing from the time of disablement to age 65, which determines the initial rate of the retirement pension, is in line with increases in prices rather than wages.

In the case that both a disability and survivor benefit are payable, the monthly amount of the disability benefit is reduced.  The maximum monthly disability benefit in 2013 is $1,212.90.

VII. Survivor Benefit

A. Eligibility Requirements

A legal spouse, a separated legal spouse not cohabiting with a common-law partner, or a common-law partner of a deceased contributor, is eligible for a survivor benefit if the following conditions are met as at the date of the contributor’s death:

  • The deceased contributor must have made contributions during the lesser of ten calendar years, or one-third of the number of years included wholly or partly in his or her contributory period, but not for less than three years.
  • If the surviving spouse is the separated legal spouse of the deceased contributor, there must be no cohabiting common-law partner at the time of death.  If the survivor is the common-law partner of the deceased contributor, the couple must have cohabited for not less than one year immediately before the death of the contributor.  If the common-law partner is of the same-sex as the deceased contributor, the death must have occurred on or after 17 April 1985.
  • The surviving spouse or common-law partner must have dependent children, be disabled, or be at least 35 years of age.  A surviving spouse or common-law partner with dependent children means a surviving spouse who wholly or substantially supports a child of the deceased contributor where the child is under age 18, aged 18 or over but under age 25 and attending school full-time, or aged 18 or over and disabled, having been disabled without interruption since attaining age 18 or the time of the contributor’s death, whichever occurred later.

B. Amount of Pension

The amount of the monthly survivor benefit depends on the age of the survivor at the date of the contributor’s death, the survivor’s disability status, and the presence of dependent children.  In the case that both a survivor and retirement benefit are payable, the monthly amount of the survivor’s benefit is reduced.  The following five cases are relevant:

  1. New Survivor Age 45 to 65

    The amount of monthly benefit payable until the surviving spouse or common-law partner attains age 65 is composed of two portions:  a flat-rate benefit depending only on the year in which the survivor benefit is payable ($176.95 in 2013), and an earnings-related benefit depending initially only on the contributor’s record of pensionable earnings under the Plan as at the date of death.  The initial earnings-related portion (maximum of $379.69 in 2013) is equal to 37.5% of either the retirement pension of the deceased contributor if he or she had been receiving a pension, or the retirement pension that would have been payable to the deceased contributor if the contributory period had ended at the time of death, with no actuarial adjustment in either case.

  2. New Survivor under Age 45

    An eligible spouse or common-law partner, without dependent children and not disabled, who becomes widowed before age 35 is not entitled to a survivor’s benefit but may be entitled at a later date if she or he becomes disabled (see 4) or attains age 65 (see 5).  If such a survivor is between 35 and 45 years of age, she or he is entitled to a benefit amount calculated as described in 1 above but reduced (until the earlier of disablement or attainment of age 65) by 1/120 of such an amount for each month that the new survivor’s age is less than 45.

  3. New Survivor under Age 45 with Dependent Child(ren)

    An eligible spouse or common-law partner who becomes widowed prior to age 45 and with dependent children is entitled to a survivor benefit calculated as in 1 above.  Under certain circumstances, the survivor benefit is reduced or even discontinued when the survivor no longer has any dependent children.  If the survivor is then under age 45 and not disabled, she or he is considered to be a new survivor entitled only to the benefit in accordance with 2 above.

  4. Disabled Survivor under Age 65

    An eligible surviving spouse or common-law partner under age 65 is entitled to a survivor benefit calculated as in 1 above whenever she or he is disabled.  If the disabled surviving spouse or common-law partner recovers from disability before age 45, the survivor benefit is discontinued or reduced to what it would be for a new survivor in accordance with 2 above.

  5. Survivor Age 65 or Over

    At age 65, or upon becoming widowed at a later age, an eligible surviving spouse or common-law partner is entitled to a monthly benefit equal to 60% of either the retirement pension (maximum of $607.50 in 2013) of the deceased contributor if he or she had been receiving a pension, or the retirement pension that would have been payable to the deceased contributor if the contributory period had ended at the time of death, with no actuarial adjustment in either case.

VIII. Death Benefit

A lump sum benefit is payable to the estate of a deceased contributor if the eligibility rules for survivor benefits are met.  The amount of the death benefit is equal to the lesser of six times the monthly amount of retirement pension under the Plan accrued or payable in the year of death, adjusted to exclude any actuarial adjustments, and ten percent of the YMPE for the year of death, subject to a maximum of $2,500.

IX. Child Benefits

Each child under age 18 and each full-time student aged 18 to 25 who is dependent on a contributor eligible for a CPP disability benefit or was dependent on a deceased contributor who satisfied the contribution requirement for a survivor benefit is entitled to a flat-rate monthly benefit ($228.66 in 2013).  Furthermore, a child may receive more than one child benefit simultaneously.

X. Inflation Adjustments

All monthly CPP benefits are increased in accordance with inflation each year.  Benefits are multiplied on 1 January of each calendar year by the ratio of the Pension Index applicable for that calendar year to the Pension Index for the preceding year.

XI. Credit Splitting

Pensionable earnings may be split between divorced or separated couples (legal spouses or common-law partners) for each month the couple lived together.  Pensionable earnings are used to establish eligibility for CPP benefits and to calculate the amounts of benefits.  Contributors may obtain a credit split even if they have remarried.  However, pensionable earnings cannot be split for any year in which the total earnings of the former couple do not exceed twice the YBE.  Credit splitting also does not apply for any period of cohabitation during which a former spouse or common-law partner received a CPP retirement pension.

XII. Pension Sharing

Couples (legal spouses or common-law partners) in an ongoing relationship may voluntarily (at the request of one of them) share their CPP retirement pensions corresponding to the number of years during which they cohabited.  This applies provided both spouses have reached the minimum age requirement to receive a retirement pension.  Sharing is possible even if only one of the spouses has participated in the Plan.  Pension sharing ceases upon separation, divorce, or death.

Appendix D – Detailed Reconciliations with Previous Report

The results presented in this report differ from those previously projected for a variety of reasons.  Differences between the actual experience from 2010 through 2012 and that projected in the 25th CPP Actuarial Report for the same period were addressed in the Reconciliation with Previous Report section of this report.  Since historical results provide the starting point for the projections shown in this report, these historical differences between actual and projected experience have an effect on the projections.  The impact of the experience update and changes in the assumptions and methodology that have significantly changed the projected results are addressed in this section.

The pay-as-you-go rate, which is the ratio of expenditures to contributory earnings in a given year, is an important measure of the cost of the CPP and corresponds to the contribution rate that would need to be paid if there were no assets.  One way of understanding the differences between the best-estimate projections in this report and those presented in the 25th CPP Actuarial Report is to look at the effects of various factors on the pay-as-you-go rates.  The most significant effects are identified in the reconciliation presented in Table 33 and the discussion below.

The experience update had the effect of reducing the pay-as-you-go rates in the short and medium term mainly due to better than anticipated demographic and benefits experience compared to the 25th CPP Actuarial Report.  The impacts on the pay-as-you-go rates from the experience over the period 2010 to 2012 are shown in Table 33.  In particular:

  • The level of net migration including an increase in the number of non-permanent residents was higher than expected, which decreases the pay-as-you-go rates over the near and medium term of the projection.
  • Overall lower than expected benefit expenditures that resulted from an over-projection of retirement, death, and children’s benefits outweighing an under-projection of other expenditures leads to a substantial decrease in the pay-as-you-go rates over the near to medium term.
  • Lower than anticipated growth in total employment earnings increases the pay-as-you-go rates.  However, this increase due to economic experience is more than offset by the decrease for demographic and benefits experience over the near to medium term.

In previous CPP actuarial reports, CPPIB operating expenses were included in Plan expenditures along with other operating and benefit expenditures.  In response to a recommendation made by the independent peer reviewers of the 25th CPP Actuarial Report, the valuation methodology was improved by including CPPIB operating expenses in the investment expenses assumption, instead of as a component of CPP operating expenses. This change in the methodology results in a reduction in the projected pay-as-you-go rates.

Changes made to the key assumptions since the previous triennial report were outlined in Table 1.  The effects of these changes on the pay-as-you-rates are also shown in Table 33 and are summarized below. 

  • The assumed total fertility rates are similar to those assumed in the previous triennial report, and as such, have little impact on the pay-as-you-go rates.
  • The assumed level of net migration is higher than in the previous triennial report, and this decreases the pay-as-you-go rates, because the higher growth in total contributory earnings outweighs the ultimate increase in expenditures.
  • The higher mortality improvement rates at ages 65 and older assumed for this report increase the pay-as-you-go rates, because beneficiaries are expected to receive their benefits over longer periods of time.
  • Changes in retirement benefit-related assumptions decrease the pay-as-you-go rate in the medium term while increasing it in the long term.
  • Changes in disability benefit-related assumptions reduce the pay-as-you-go rates over the projection period.
  • The higher assumed labour force participation and employment rates decrease the pay-as-you-go rates, although the effect diminishes with time as the higher employment translates into higher benefit entitlements.
  • The change in the real wage increase assumption causes the pay-as-you-go rates to rise due to the lower increase in contributory earnings compared to the previous triennial report.
  • The lower assumed inflation rate has the effect of increasing the pay-as-you-go rates.  Although a lower rate of increase in prices produces lower CPP expenditures, this decrease in cost is outweighed by the lower nominal contributory earnings.

Some other assumptions, which are described in Appendix E, were also changed.  For example, the proportion of contributors married or in a common-law relationship at time of death and the experience adjustment factors used in the projection of benefits were revised to reflect more recent experience.  Overall, the changes in these other assumptions had the effect of slightly increasing the projected pay-as-you-go rates over the long term. 

Factors that lead to changes in the pay-as-you-go rates do not always have comparable effects on the minimum contribution rate.  Furthermore, while the investment experience and assumptions have no effect on the pay-as-you-go rates, they may have a significant impact on the minimum contribution rate.  Investment income was 96% higher than anticipated over the period 2010 to 2012 due to the strong performance of financial markets over that period.  This results in a substantial decrease of 0.057% in the minimum contribution rate, as shown in Table 34.  Regarding the real rates of return assumptions, changes compared to the previous triennial report include lower portfolio real rates of return over the short term due to an assumed increase in bond yields.  In addition, real rates of return for bonds and real assets are lower over the projection period.  However, these changes are partially offset by modifications to the asset mix that increase the proportion of assets invested in equities and real assets.  A reconciliation of the change in the minimum contribution rate of 9.86% for years 2010 to 2022 and 9.85% for 2023 and thereafter as presented in the 25th CPP Actuarial Report to the minimum contribution rate of 9.84% for this report is provided in Table 34.

A progression of the minimum contribution rate over time based on target years of future triennial valuation reports and using the best-estimate assumptions of this report is shown in Table 16 of the Results section of this report.  As shown in that table, the minimum contribution rate is projected to remain relatively stable over time.

Table 33 Reconciliation of Changes in Pay-As-You-Go RatesTable 33 Footnote (1)
(% of contributory earnings)
  2013 2025 2050 2075
25th CPP Actuarial Report 9.06 10.43 10.94 11.17
I. Improvements in Methodology (0.06) (0.07) (0.08) (0.09)
II. Experience Update (2010-2012)        
Demographic (0.02) (0.07) (0.06) 0.02
Economic 0.03 0.02 0.04 0.01
Benefits (0.16) (0.08) (0.01) (0.01)
Subtotal: (0.15) (0.12) (0.03) 0.02
III. Changes in Assumptions        
Fertility 0.00 0.00 (0.01) (0.05)
Net migration (0.01) (0.09) (0.10) (0.01)
Mortality 0.00 0.07 0.13 0.14
Retirement (0.05) (0.09) (0.03) 0.07
Disability (0.00) (0.03) (0.03) (0.03)
Labour Market (0.05) (0.02) (0.03) 0.01
Real wage increases 0.03 0.17 0.20 0.20
Price increases 0.02 0.03 0.03 0.02
Other assumptions 0.00 0.00 0.01 0.01
Subtotal: (0.06) 0.05 0.17 0.35
Total of I to III (0.28) (0.15) 0.07 0.28
26th CPP Actuarial Report 8.78 10.28 11.01 11.45
Table 34 Reconciliation of Changes in Minimum Contribution Rate(Footnote 1, Footnote 2)
(% of contributory earnings)
  Steady-State Rate Full Funding Rate Minimum Rate
2013-2022 2023+ 2013-2022 2023+
25th CPP Actuarial Report - After Rounding 9.84 0.02 0.01 9.86 9.85
25th CPP Actuarial Report - Before Rounding 9.836 0.017 0.014 9.853 9.850
I. Improvements in Methodology (0.067) (0.001) (0.000) (0.068) (0.067)
II. Experience Update (2010-2012)
Demographic (0.037) (0.000) (0.000) (0.037) (0.037)
Economic 0.034 (0.001) (0.000) 0.032 0.034
Benefits (0.054) (0.003) (0.003) (0.056) (0.057)
Investments (0.057) 0.000 0.000 (0.057) (0.057)
Subtotal: (0.114) (0.004) (0.004) (0.119) (0.118)
III.  Changes in Assumptions
Fertility (0.004) 0.000 0.000 (0.004) (0.004)
Net Migration (0.049) 0.000 0.000 (0.049) (0.049)
Mortality 0.097 (0.000) 0.000 0.097 0.097
Retirement (0.022) 0.000 0.001 (0.022) (0.022)
Disability (0.025) (0.000) (0.000) (0.026) (0.026)
Labour Market (0.024) 0.000 0.000 (0.024) (0.024)
Real wage increases 0.120 0.000 0.000 0.121 0.121
Price increases 0.028 (0.000) (0.001) 0.027 0.027
Real Rates of Return 0.040 0.000 0.000 0.041 0.040
Other assumptions 0.011 0.000 0.001 0.011 0.011
Subtotal: 0.172 0.000 0.001 0.172 0.173
IV.  Others (Change in funding target from 2022-2072 to 2025-2075) (0.001) (0.000) (0.000) (0.001) (0.001)
Total of I to IV (0.010) (0.005) (0.003) (0.016) (0.014)
Rates before Rounding and Adjustment 9.826 0.012 0.011 9.838 9.837
Rounded Rates, in accordance with CPP RegulationsFootnote 3 9.83 0.01 0.01 9.84 9.84
Adjustment to Rates, in accordance with CPP RegulationsFootnote 3 0.01 (0.01) (0.01) 0.00 0.00
26th CPP Actuarial Report 9.84 0.00 0.00 9.84 9.84

Appendix E – Assumptions and Methodology

I. Introduction

This section describes the assumptions and methodology that underlie the financial projections in the Results section of this report.

Future cash flows are projected over a long period of time, i.e. 75 years, and depend on assumptions such as those regarding fertility, mortality, migration, labour force participation, job creation, unemployment, inflation, employment earnings, and investment returns.  These assumptions form the basis for the projections of future income and expenditures of the Plan.  Over the years, the cumulative difference between the revenues from contributions and investment income and the expenditures of the Plan generates the accumulated assets.  The ratio of the end-of-year assets to the following year’s expenditures is then calculated and used to determine the steady-state contribution rate, which is the lowest contribution rate that, in the long term, would generally stabilize the ratio of assets to expenditures.  The steady-state contribution rate is determined in this way before the consideration of any full funding requirement for increased or new benefits.  The full funding rate is determined independently of the steady-state rate.  It is added to the steady-state rate to produce the minimum contribution rate.

Although the demographic and economic assumptions have been developed using the available information, the resulting estimates should be interpreted with caution.  These estimates are not intended to be predictions, but rather projections of the future financial status of the CPP.

II. Demographic Projections

Both the historical and projected populations of Canada less Québec are required for the calculation of future CPP contributions and benefits of the relevant cohorts of contributors and beneficiaries.

The populations of Canada and Québec as at 1 July 2012 are used as a starting point.  The populations are then projected by age and sex from one year to the next by adding births and net migrants and subtracting deaths.  Applying the fertility, migration, and mortality assumptions to the starting population develops the annual numbers of births, net migrants, and deaths.  The relevant population for the CPP, which is the population of Canada less Québec, is obtained by subtracting the projected population of Québec from the projected population of Canada.

The population covered by the CPP pertains to Canada less Québec, but includes all members of the Canadian Forces (CF) and the Royal Canadian Mounted Police (RCMP).  Consequently, the approach used above to determine the CPP population does not make an explicit allowance for the members of the CF or RCMP residing in Québec or outside Canada.  However, provision for this group was made implicitly through the development of the number of people with earnings and the proportion of contributors as described in section III of this Appendix.

A. Initial Population as at 1 July 2012

The starting point for the demographic projections is based on the most recent Statistics Canada population estimates as at 1 July 2012 for Canada and Québec, by age and sex.  The estimates are based on the 2006 Census.  The estimates are adjusted by ungrouping ages 100 and older into individual ages using the observed distribution of Old Age Security Program beneficiaries by age for ages 100 and older.

B. Fertility Rates

The fertility rate for a given age and year is the average number of live births per female of that age during that year.  The total fertility rate for a year is the average number of children that would be born to a woman in her lifetime if she experienced the age-specific fertility rates observed in, or assumed for, that year.

The total fertility rate in Canada has declined significantly since the baby boom period, when the rate peaked at nearly 4.0 per woman in the late 1950s.  The baby bust period that followed in the mid-1960s pulled down the total fertility rates by the mid-1980s to a record low of 1.6 children per woman.  The total fertility rate rose slightly in the early 1990s, but then generally declined to a level of 1.5 by the late 1990s.  Canada is one of many industrialized countries that have seen an increase in their total fertility rates since 2000.  By 2008, the total fertility rate for Canada reached 1.68.  However, in some industrialized countries, including Canada, the total fertility rate has decreased since 2008, which could be attributed to the economic downturn experienced in recent years.  In 2010, the total fertility rate for Canada was 1.63.

Similar to Canada, the total fertility rate in Québec fell from a high of 4.0 per woman in the 1950s; however, the Québec rate fell to a greater degree, reaching 1.4 by the mid-1980s.  The Québec rate then recovered somewhat in the early 1990s to over 1.6 and subsequently declined to below 1.5 by the late 1990s.  There was a significant increase in the Québec rate since the year 2000, with the rate reaching 1.74 by 2008.  In 2006, the Québec rate exceeded Canada’s level for the first time since 1958.  However, similar to Canada’s fertility rate, the fertility rate for Québec has been decreasing in recent years.  In 2011, the total fertility rate for Québec was 1.69.

Fertility rates are affected by many factors, including social attitudes, reproductive technologies, and economic conditions.  It is assumed for this report that the recent economic downturn has caused a temporary downward effect on total fertility rates, with couples choosing to postpone having any or more children until economic conditions improve.  This effect was taken into consideration along with historical trends in fertility rates by age group over the last 20 years.  The short periods of growth in the fertility rates that have occurred in recent decades are assumed to be temporary in nature, rather than having any long-term effects.  Lastly, it is assumed that the difference between Canada’s and Québec’s fertility rates will disappear over time.  In this report, it is thus assumed that the total fertility rate from 2015 onward for both Canada and Québec will be 1.65 children per woman.  This ultimate rate is the same as was assumed for the 25th CPP Actuarial Report.

Finally, in accordance with the average experience over the last 10, 20, and 30 years, the assumed ratio of male to female newborns is 1.054, which is the same as for the 25th CPP Actuarial Report.  Table 35 shows the projected age-specific and total fertility rates by calendar year for Canada.  In comparison, total cohort fertility rates per woman together with each cohort’s age-specific rates, all based on the year of birth of a woman, are shown in Table 36.  Cohort fertility rates provide a more reliable measure of the level of fertility, since they reflect the experience of real cohorts of women as opposed to the experience of synthetic cohorts, which is based on calendar years and used to derive the total fertility rates.  Chart 3 shows the historical and projected total and cohort fertility rates for Canada.

Table 35 Fertility Rates for Canada
Year Annual Fertility Rates by Age Group
(per 1,000 women)
Total Fertility Rate per Woman
15-19 20-24 25-29 30-34 35-39 40-44 45-49
2013 11.4 44.3 93.2 111.1 56.9 10.9 0.5 1.64
2014 10.7 43.0 92.1 112.9 58.6 11.3 0.5 1.65
2015+ 10.0 41.8 91.0 114.7 60.4 11.6 0.6 1.65
Table 36 Cohort Fertility Rates by Age and Year of Birth
(Canada)
Year of Birth of WomanFootnote 1 Annual Fertility Rates by Age GroupFootnote 2 (per 1,000 women) Cohort Fertility Rate per WomanFootnote 2
15 - 19 20 - 24 25 - 29 30 - 34 35 - 39 40 - 44 45 - 49
1956 – 1960 34.8 95.2 120.7 83.5 31.3 5.9 0.3 1.86
1961 – 1965 27.0 81.5 122.6 86.8 33.9 7.1 0.4 1.80
1966 – 1970 23.3 79.2 109.7 85.1 42.1 9.9 0.6 1.75
1971 – 1975 25.5 70.6 96.8 97.4 51.6 11.6 0.6 1.77
1976 – 1980 24.5 58.3 97.3 105.7 60.4 11.6 0.6 1.79
1981 – 1985 17.3 50.4 96.4 114.7 60.4 11.6 0.6 1.76
1986 – 1990 13.4 48.0 91.0 114.7 60.4 11.6 0.6 1.70
1991 – 1995 13.5 41.8 91.0 114.7 60.4 11.6 0.6 1.67
1994 – 1998 11.4 41.8 91.0 114.7 60.4 11.6 0.6 1.66
1996 – 2000+ 10.0 41.8 91.0 114.7 60.4 11.6 0.6 1.65

Chart 3 Historical and Assumed Total and Cohort Fertility Rates for CanadaChart 3 Footnote (1)

Chart 3	Historical and Assumed Total and Cohort Fertility Rates for Canada

C. Mortality

For this report, the mortality rate projections start from the 2009 mortality rates of the Canadian Human Mortality Database (CHMD).  According to the CHMD, life expectancies at birth in 2009 for males and females in Canada were 79.0 and 83.4 years, respectively, without any assumed future improvements in mortality.

For 2010, the annual rates of mortality improvement, varying by age and sex, were set equal to the average annual improvement rates experienced in Canada and Québec over the 15-year period 1994 to 2009.

The analysis of trends in Canadian mortality over the period 1921 to 2009 shows that Canadian males born between the mid-1930s and the late 1940s experienced historically higher improvement rates at most ages compared to males born at earlier or later periods.  This observed phenomenon of people born in a certain period experiencing more rapid improvements in mortality than generations born outside of this period is referred to as a ‘cohort effect’.

Mortality improvement rates for any given age, sex, and year may be regarded as a combination of age, year and cohort components or effects.  Improvement rates for years 2011 to 2029 were determined by cubical interpolation between:

  • the improvement rates of year 2010 after removing the cohort component value, where applicable, and
  • the ultimate improvement rates described below in respect of the period 2030 and thereafter for Canada, and 2025 and thereafter for Québec.

It was then assumed that the cohort effect will impact improvement rates for males aged 60 to 74 in 2010.  This effect is assumed to gradually disappear by 2020.

For the year 2030 and thereafter for Canada, the ultimate annual rates of mortality improvement vary by age only and not by sex or calendar year.  The ultimate mortality improvement rates are derived by analyzing Canadian experience over the period 1921 to 2009.  Male improvement rates at most ages are currently higher than female improvement rates but are assumed to decrease to the same level as female rates from 2030 onward.  The ultimate mortality improvement rates for Québec are assumed to be the same as for Canada but are expected to be reached five years earlier in 2025 to reflect the expected convergence of mortality levels between Québec and the rest of Canada.

The historical downward trend in mortality improvement rates is clear for both sexes in the age group 0-59.  For age groups 60 and older, recent experience has shown a stabilization of improvement rates for both sexes.  The ultimate rate for both sexes for ages 0 to 84 is set at 0.8% per year from 2030 onward for Canada (2025 onward for Québec), where 0.8% represents about one-half of the average rates observed for females over the 15 and 20-year periods ending in 2009.  The ultimate improvement rate is then set to reduce from 0.6% for the age group 85-89 to 0.2% for those aged 95 and older, consistent with observed experience that shows decreasing improvement rates with age.

Table 37 shows the initial (2010), intermediate (2011-2029) and ultimate (2030+) assumed annual mortality improvement rates for Canada.

Table 37 Annual Mortality Improvement Rates for Canada
Age Males Females
2010 2011-2029 2030+ 2010 2011-2029 2030+
(%) (%) (%) (%) (%) (%)
0 1.3 1.0 0.8 0.8 0.8 0.8
1-14 3.1 1.9 0.8 3.5 2.2 0.8
15-44 2.6 1.6 0.8 1.3 1.1 0.8
45-64 2.0 1.4 0.8 1.5 1.1 0.8
65-74 3.0 1.8 0.8 1.8 1.3 0.8
75-84 2.6 1.7 0.8 1.7 1.3 0.8
85-89 2.0 1.3 0.6 1.5 1.1 0.6
90-94 1.3 0.8 0.4 1.2 0.8 0.4
95+ 0.4 0.3 0.2 0.4 0.3 0.2

The projected mortality rates in Table 38 indicate a continuous decrease in mortality rates over the long term. For example, the mortality rate at age 65 for males is expected to decrease from about 12 deaths per thousand people in 2013 to 6 deaths per thousand people by 2075. The gap in mortality rates between males and females at each age is also expected to decrease over the projection period.

Table 38 Mortality Rates for Canada
(annual deaths per 1,000 people)
Age Males Females
2013 2025 2050 2075 2013 2025 2050 2075
0 4.85 4.28 3.50 2.86 4.58 4.17 3.41 2.79
10 0.11 0.09 0.07 0.06 0.10 0.07 0.06 0.05
20 0.62 0.51 0.42 0.34 0.27 0.24 0.19 0.16
30 0.73 0.59 0.48 0.39 0.38 0.34 0.28 0.23
40 1.17 0.99 0.81 0.66 0.79 0.69 0.56 0.46
50 3.20 2.78 2.27 1.86 2.08 1.85 1.51 1.24
60 7.32 6.03 4.92 4.02 4.78 4.08 3.33 2.72
65 11.56 9.52 7.76 6.35 7.42 6.34 5.18 4.24
70 17.91 14.45 11.78 9.64 11.79 10.07 8.22 6.72
75 29.20 22.99 18.73 15.32 19.43 16.59 13.55 11.08
80 50.08 40.37 32.91 26.92 33.95 28.99 23.67 19.37
85 85.15 71.11 59.77 50.40 61.47 53.37 44.92 37.87
90 142.28 125.35 110.90 98.33 110.05 98.21 86.93 77.08
100 319.64 302.44 280.38 260.09 287.41 271.95 252.12 233.87

Chart 4 shows the historical and projected life expectancies at age 65 since the Plan’s inception in 1966, based on each given year’s mortality rates (i.e. without future mortality improvements). Table 39 shows projected Canadian life expectancies at various ages for the specified calendar years, also based on each given year’s mortality rates (without future improvements). Table 40 is similar to Table 39, the only difference being that it takes into account the assumed mortality improvements after the specified calendar years (with future improvements). Given the continuing trend in increased longevity, Table 40 is considered to be more realistic than Table 39, especially for the older ages. At the same time, the extended length of the projection period increases the uncertainty of the results presented in Table 40 for younger ages.

From 2013 to 2075, Canadian life expectancy at age 65 (with assumed future mortality improvements) is projected to grow from 20.9 to 24.3 years for males and from 23.3 to 26.5 years for females, as shown in Table 40.  The yearly increase in life expectancies at age 65 in the early years of the projection reflects the significant increase observed over the last decades.  Thereafter, there is a projected slowdown in the increase in life expectancies consistent with the lower rate of improvement in mortality assumed for 2030 and thereafter.

Chart 4 Life Expectancies at Age 65 for CanadaChart 4 Footnote (1)

Chart 4	Life Expectancies at Age 65 for Canada
Table 39 Life Expectancies for Canada, without improvements after the year shownTable 39 Footnote (1)
Age Males Females
2013 2025 2050 2075 2013 2025 2050 2075
0 80.0 82.0 83.9 85.7 84.0 85.4 87.1 88.6
10 70.5 72.4 74.3 76.0 74.5 75.8 77.4 78.9
20 60.7 62.6 64.4 66.1 64.6 65.9 67.5 69.0
30 51.1 52.9 54.7 56.4 54.8 56.1 57.6 59.1
40 41.5 43.3 45.0 46.6 45.0 46.3 47.8 49.3
50 32.2 33.9 35.5 37.1 35.5 36.8 38.2 39.6
60 23.5 25.1 26.5 27.9 26.5 27.6 29.0 30.2
65 19.4 20.9 22.3 23.5 22.2 23.2 24.5 25.7
70 15.6 17.0 18.2 19.3 18.1 19.0 20.2 21.3
75 12.1 13.3 14.3 15.3 14.2 15.1 16.1 17.1
80 9.1 10.0 10.8 11.6 10.7 11.5 12.3 13.1
85 6.6 7.2 7.8 8.4 7.8 8.3 8.9 9.5
90 4.6 5.0 5.4 5.8 5.4 5.8 6.2 6.6
100 2.3 2.5 2.7 2.9 2.6 2.7 2.9 3.1
Table 40 Life Expectancies for Canada, with improvements after the year shownTable 40 Footnote (1)
Age Males Females
2013 2025 2050 2075 2013 2025 2050 2075
0 86.1 86.9 88.6 90.1 89.1 89.9 91.3 92.5
10 75.9 76.7 78.4 79.9 79.0 79.7 81.1 82.4
20 65.3 66.2 67.9 69.4 68.5 69.2 70.7 72.0
30 55.0 55.8 57.5 59.1 58.1 58.8 60.3 61.6
40 44.7 45.5 47.2 48.7 47.7 48.4 49.9 51.3
50 34.7 35.5 37.1 38.6 37.6 38.3 39.8 41.1
60 25.3 26.1 27.5 28.9 27.9 28.6 30.0 31.2
65 20.9 21.7 23.0 24.3 23.3 24.0 25.3 26.5
70 16.7 17.5 18.7 19.9 19.0 19.6 20.8 21.9
75 12.9 13.6 14.7 15.7 14.9 15.5 16.5 17.5
80 9.5 10.2 11.0 11.9 11.2 11.7 12.5 13.4
85 6.8 7.3 7.9 8.5 8.0 8.4 9.1 9.7
90 4.7 5.0 5.4 5.8 5.5 5.8 6.3 6.7
100 2.4 2.5 2.7 2.9 2.6 2.7 2.9 3.1

D. Net Migration

Immigration and emigration are generally recognized as being volatile parameters of future population growth since they are subject to a variety of demographic, economic, social and political factors.  During the period from 1972 to 2012, annual immigration to Canada varied from 84,000 to 271,000, annual emigration from Canada fluctuated between 40,000 and 84,000 and the annual numbers of returning Canadians fluctuated between 14,000 and 41,000.  During the period from 1972 to 2012, the annual net increase in the number of non-permanent residents fluctuated between -71,000 and 141,000.

In previous CPP actuarial reports, the average annual net increase of non-permanent residents was assumed to be zero, because of the large historical variations (both positive and negative) in this migration component.  However, over the last 15 years, the number of non-permanent residents has constantly increased in Canada, and it is believed that non-permanent residents will continue filling the need for jobs in fields where it is difficult to recruit Canadian workers.  It is expected that the annual net increase of non-permanent residents will remain at a positive but lower level in the future.  It is projected that the annual net increase of non-permanent residents will reduce from its current level of 55,000 to an ultimate level of about 3,500 per year by 2017.

It is assumed that the net migration rate will reduce from its 2012 level of 0.77% of the population to 0.60% in 2017 and will remain stable at that level for the remainder of the projection period.  The ultimate level of 0.60% generally corresponds to the average experience over the last 30 to 40 years.  Chart 5 shows the net migration (immigration less emigration, plus the number of returning Canadians, plus the net increase of non-permanent residents) experience since 1972 and the assumed rate for the future.

For the purpose of projecting the population of Québec, historical percentages of the Canadian migration components attributed to Québec were determined.  In addition, based on historical data, it is assumed that the net interprovincial emigration level for Québec of 3,900 in 2012 will increase to 8,000 by 2017 and remain at that level thereafter.  These assumptions result in a net migration rate averaging 0.5% over the projection period for Québec.  The distributions of immigrants, emigrants, returning Canadians, and non-permanent residents by age and sex used for the demographic projections were derived from Statistics Canada data averaged over the period 2008 to 2012.

Chart 5 Net Migration Rate

(Canada)

Chart 5 Net Migration Rate

E. Projected Population and its Characteristics

The evolution of the Canada less Québec population age distribution since the inception of the Plan is shown in Chart 6.  One can easily observe that the triangular shape of the 1960s has become more rectangular over time.  This is projected to continue and indicates an aging population.  The effects of the baby boom, baby bust, and echo generations can be seen.  The chart also reveals that the number of people aged 85 and over is expected to increase dramatically over the next 40 years.

Chart 6 Age Distribution of the Population of Canada less Québec

(thousands)

Chart 6 Age Distribution of the Population of Canada less Québec

The population of Canada as at 1 July 2012 is 34.9 million, while the population of Canada less Québec is 26.8 million. Tables 41 and 42 present the projected populations of Canada and Canada less Québec as at 1 July for selected age groups and years, while Chart 7 shows the evolution of the total population of Canada less Québec and of those aged 20 to 64 from 1975 to 2075. Table 43 shows the variations in the relative proportions of various age groups for Canada less Québec throughout the projection period. The proportion of people aged 65 and over is expected to increase significantly from 14.9% of the total population in 2013 to 26.2% by 2075. The number of people aged 65 and older as a proportion of the number of people aged 20 to 64 more than doubles over the same period, from 23.8% in 2013 to 48.8% by 2075. This proportion significantly affects the ratio of benefits to contributions under the CPP.

Table 41 Population of Canada by Age
(thousands)
Year 0-17 18-69 70+ 0-19 20-64 65+ Total
2013 6,941 24,685 3,654 7,838 22,052 5,390 35,280
2014 6,976 24,924 3,775 7,863 22,224 5,590 35,676
2015 7,031 25,134 3,900 7,889 22,382 5,794 36,065
2016 7,100 25,305 4,040 7,926 22,517 6,002 36,444
2017 7,176 25,411 4,227 7,979 22,621 6,213 36,814
2018 7,256 25,519 4,408 8,051 22,695 6,437 37,183
2019 7,346 25,620 4,586 8,134 22,742 6,677 37,553
2020 7,440 25,714 4,767 8,219 22,774 6,928 37,920
2025 7,834 26,112 5,761 8,667 22,821 8,218 39,706
2030 8,029 26,430 6,864 8,911 22,918 9,493 41,322
2040 8,053 27,527 8,424 9,032 24,247 10,726 44,005
2050 8,397 29,010 8,934 9,352 25,358 11,630 46,340
2075 9,404 32,105 10,856 10,505 28,154 13,706 52,365
Table 42 Population of Canada less Québec by Age
(thousands)
Year 0-17 18-69 70+ 0-19 20-64 65+ Total
2013 5,409 18,997 2,745 6,111 16,998 4,041 27,151
2014 5,438 19,206 2,831 6,133 17,151 4,192 27,475
2015 5,481 19,395 2,919 6,156 17,293 4,346 27,795
2016 5,535 19,555 3,020 6,186 17,420 4,504 28,110
2017 5,593 19,661 3,164 6,230 17,523 4,665 28,418
2018 5,655 19,768 3,304 6,286 17,603 4,837 28,727
2019 5,726 19,871 3,439 6,350 17,665 5,021 29,036
2020 5,800 19,968 3,577 6,417 17,714 5,214 29,345
2025 6,122 20,394 4,344 6,776 17,864 6,220 30,860
2030 6,322 20,724 5,209 7,009 18,001 7,246 32,256
2040 6,380 21,715 6,520 7,157 19,116 8,342 34,615
2050 6,651 23,028 6,999 7,415 20,136 9,127 36,679
2075 7,527 25,654 8,711 8,413 22,498 10,981 41,892

Chart 7 Population of Canada less Québec

(millions)

Chart 7 Population of Canada less Québec
Table 43 Analysis of Population of Canada less Québec by Age
Year % of Total Population % of Total Population Age 65 +
as % of Age
20-64
0-17 18-69 70+ 0-19 20-64 65+
2013 19.9 70.0 10.1 22.5 62.6 14.9 23.8
2014 19.8 69.9 10.3 22.3 62.4 15.3 24.4
2015 19.7 69.8 10.5 22.1 62.2 15.6 25.1
2016 19.7 69.6 10.7 22.0 62.0 16.0 25.9
2017 19.7 69.2 11.1 21.9 61.7 16.4 26.6
2018 19.7 68.8 11.5 21.9 61.3 16.8 27.5
2019 19.7 68.4 11.8 21.9 60.8 17.3 28.4
2020 19.8 68.0 12.2 21.9 60.4 17.8 29.4
2025 19.8 66.1 14.1 22.0 57.9 20.2 34.8
2030 19.6 64.2 16.2 21.7 55.8 22.5 40.3
2040 18.4 62.7 18.8 20.7 55.2 24.1 43.6
2050 18.1 62.8 19.1 20.2 54.9 24.9 45.3
2075 18.0 61.2 20.8 20.1 53.7 26.2 48.8

Table 44 shows the components of population growth, which is defined as the projected number of births plus net migrants less the projected number of deaths for Canada less Québec from 2013 to 2075, and Chart 8 presents these figures graphically for the next 50 years. Over the period 2013 to 2020, the population of Canada less Québec is projected to grow by about 1.1% per year. The annual growth slows to about 0.8% between 2020 and 2040 and to 0.6% thereafter. The population of Canada less Québec is expected to reach 41.9 million by 2075.

Table 44 Births, Net Migrants, and Deaths for Canada less Québec
(thousands)
Year Population
1st July
Births Net
Migrants
Deaths Change in
Population
Annual Percentage Change
20-64 65+ Total
            (%) (%) (%)
2013 27,151 303 211 189 325 0.9 4.0 1.2
2014 27,475 312 204 192 324 0.9 3.7 1.2
2015 27,795 317 198 194 320 0.8 3.7 1.2
2016 28,110 321 191 197 315 0.7 3.6 1.1
2017 28,418 324 184 201 308 0.6 3.6 1.1
2018 28,727 327 186 204 309 0.5 3.7 1.1
2019 29,036 329 188 207 309 0.3 3.8 1.1
2020 29,345 330 190 211 309 0.3 3.8 1.1
2025 30,860 331 198 233 296 0.1 3.5 1.0
2030 32,256 323 206 263 267 0.2 2.6 0.8
2040 34,615 333 219 335 217 0.7 0.9 0.6
2050 36,679 364 231 393 202 0.3 1.1 0.6
2075 41,892 400 260 444 215 0.6 0.6 0.5

Chart 8 Components of Population Growth for Canada less Québec

(thousands)

Chart 8 Components of Population Growth for Canada less Québec

III. Economic Projections

The list of assumptions required to project the various economic indices, as well as CPP contributions and expenditures is quite extensive.  The following sections cover the more important assumptions.

The economic outlook rests on the assumed evolution of the labour market, that is, labour force participation, employment, unemployment, inflation, and the increase in average employment earnings.  Rates of return on CPP assets reflect the financial markets and are part of the investment assumptions described in section IV of this Appendix.  All of these factors must be considered together and form part of an overall economic perspective.

A. Economic Perspective

The future revenues and expenditures of the CPP depend on many demographic and economic factors.  It is important to define the individual economic assumptions in the context of a long-term overall economic perspective.  For this report, it is assumed that, despite the modest pace of recovery from the recent economic downturn and an uncertain short-term economic outlook for major foreign economies, a moderate and sustainable growth in the Canadian economy will persist throughout the projection period.

The actuarial examination of the CPP involves the projection of its revenues and expenditures over a long period of time.  Although best judgment is used regarding future economic trends, it is nonetheless difficult to anticipate all of the social and corresponding economic changes that may occur during the projection period.  There will always be some degree of uncertainty.  The projected aging of the population combined with the retirement of the baby boom generation over the next few decades will certainly create significant social and economic changes.  It is possible that the evolution of the working-age population, especially the active population, will be quite different from what has been historically observed and what has been assumed for the purpose of this report.

B. Annual Increase in Prices (Inflation Rate)

The inflation rate assumption is needed to determine the Pension Index for any given calendar year.  It is also used in the determination of the annual nominal increase in average employment earnings, the Year’s Maximum Pensionable Earnings, and the nominal rates of return on investments.

Price increases, as measured by changes in the Consumer Price Index, tend to fluctuate from year to year.  Over the last 50 years, the trend was generally upward through the early 1980s then downward until the introduction of the inflation-control targets in the early 1990s, at which point inflation began to stabilize.  For example, the average annual increases in the CPI for the 50, 20 and 10-year periods ending in 2012 were 4.2%, 1.9% and 2.0%, respectively.  Going forward, the Bank of Canada has reaffirmed its objective of keeping the inflation rate within a control range of 1% to 3%, with a target of 2%, until the end of 2016.

To reflect recent experience and the short-term expectation that inflation will remain subdued in the coming quarters, the price increase assumption was set at 1.5% in 2013.  For 2014 to 2019, it is assumed that the Bank of Canada will maintain its inflation target policy.  An assumption of 2.0% is set for this period, which corresponds to the average forecast from various economists and falls in the middle of the Bank of Canada control range.  Subsequently, the inflation rate is assumed to increase to 2.1% in 2020 and the ultimate assumption for price increases for 2021 and thereafter has been set at 2.2%.  This is lower than the assumption of 2.3% used in the 25th CPP Actuarial Report but remains higher than the level of inflation that has been experienced over the last decade, and is slightly higher than the Bank of Canada’s target.  The main reasons for the choice of an ultimate assumption of 2.2% are as follows:

  • The long-term nature of the 75-year projection period of the CPP.
  • The expected upward pressure on real wages due to a possible labour shortage may create upward pressure on prices.
  • The uncertainty about future energy costs.

C. Labour Market

Chart 9 shows the main components of the labour market that are used to determine the number of earners and contributors by age, sex, and calendar year.

Chart 9 Components of the Labour Market

Chart 9 Components of the Labour Market

The number of earners is defined as the number of persons who had earnings during a given calendar year. The earners become contributors if they have earnings during the year above the Year’s Basic Exemption (YBE) and they are between the ages of 18 and 70. This refers to all earners excluding working beneficiaries aged 65 to 70. For the latter group, contributing to the CPP is optional.

The proportion of earners and contributors assumptions (described in this section and section F) rely on the projected active population given in this report.  The projected effect of working beneficiaries is reflected in all these assumptions.

1. Active Population

The overall labour force participation rates in Canada (the active population expressed as a proportion of the population aged 15 and over) from 1976 to 2012 clearly show a narrowing of the gap between male and female rates.  Although the increase in participation rates of females aged 15 to 69 has slowed down since the mid-2000s, the increase has been significant over the past decades.  Furthermore, participation rates for those aged 55 and older have increased significantly over the last decade for both men and women.

In 1976, overall male participation was about 78% compared to only 46% for females, which represents a gap of 32%.  This gap has narrowed to 9% in 2012, with male and female participation at 71% and 62%, respectively.  It is assumed that females will continue to narrow the gap in participation rates but at a slower pace, with the gap gradually reducing to about 8% by 2030 and further reducing slightly by the end of the projection period.  In addition, over the next two decades, it is assumed that the participation of males and females aged 55 and over will continue to increase.  Tables 45 to 47 provide projections of the active and employed populations and associated participation, employment, and unemployment rates for Canada.

Table 45 Active Population (Canada, ages 15 and over)
Year PopulationFootnote 1 Active Population Employed
 Males Females  Total Males Females Total Males Females Total
  (thousands) (thousands) (thousands)
2013 14,140 14,533 28,674 10,081 9,029 19,110 9,316 8,430 17,747
2014 14,300 14,688 28,988 10,184 9,114 19,298 9,424 8,519 17,943
2015 14,454 14,838 29,292 10,281 9,194 19,475 9,526 8,604 18,130
2016 14,598 14,978 29,576 10,368 9,266 19,634 9,619 8,681 18,300
2017 14,734 15,109 29,843 10,441 9,328 19,769 9,700 8,748 18,448
2018 14,869 15,242 30,111 10,508 9,386 19,894 9,776 8,812 18,587
2019 15,008 15,377 30,384 10,574 9,442 20,017 9,850 8,875 18,725
2020 15,145 15,511 30,655 10,637 9,495 20,132 9,922 8,934 18,855
2025 15,858 16,220 32,079 10,921 9,804 20,725 10,227 9,254 19,481
2030 16,556 16,923 33,479 11,247 10,175 21,423 10,533 9,604 20,137
2040 17,818 18,245 36,062 11,870 10,749 22,619 11,114 10,148 21,262
2050 18,725 19,221 37,946 12,365 11,184 23,549 11,578 10,558 22,136
2060 19,612 20,101 39,713 12,785 11,564 24,349 11,972 10,916 22,888
Table 46 Labour Force Participation, Employment, and Unemployment Rates
(Canada, ages 15 and over)
Year Labour Force Participation Rate Employment Rate Unemployment Rate
Males Females Total Males Females Total Males Females Total
  (%) (%) (%)
2013 71.3 62.1 66.6 65.9 58.0 61.9 7.6 6.6 7.1
2014 71.2 62.1 66.6 65.9 58.0 61.9 7.5 6.5 7.0
2015 71.1 62.0 66.5 65.9 58.0 61.9 7.3 6.4 6.9
2016 71.0 61.9 66.4 65.9 58.0 61.9 7.2 6.3 6.8
2017 70.9 61.7 66.2 65.8 57.9 61.8 7.1 6.2 6.7
2018 70.7 61.6 66.1 65.7 57.8 61.7 7.0 6.1 6.6
2019 70.5 61.4 65.9 65.6 57.7 61.6 6.9 6.0 6.5
2020 70.2 61.2 65.7 65.5 57.6 61.5 6.7 5.9 6.3
2025 68.9 60.4 64.6 64.5 57.1 60.7 6.4 5.6 6.0
2030 67.9 60.1 64.0 63.6 56.8 60.1 6.4 5.6 6.0
2040 66.6 58.9 62.7 62.4 55.6 59.0 6.4 5.6 6.0
2050 66.0 58.2 62.1 61.8 54.9 58.3 6.4 5.6 6.0
2060 65.2 57.5 61.3 61.0 54.3 57.6 6.4 5.6 6.0
Table 47 Labour Force Participation Rates (Canada)
Age Group Males Females
2013 2020 2030 2050 2013 2020 2030 2050
  (%) (%) (%) (%) (%) (%) (%) (%)
15-19 49.1 54.0 56.0 56.0 51.4 56.0 59.0 59.0
20-24 77.6 81.0 83.0 83.0 75.2 77.0 80.0 80.0
25-29 90.1 91.0 93.0 93.0 81.9 83.0 86.0 86.0
30-34 92.6 93.0 94.0 94.0 81.3 82.0 85.0 85.0
35-39 93.1 94.0 94.0 94.0 82.5 84.0 86.0 86.0
40-44 92.6 93.0 94.0 94.0 83.8 85.0 87.0 87.0
45-49 90.2 92.0 93.0 93.0 84.4 85.0 87.0 87.0
50-54 88.0 89.0 91.0 91.0 81.1 82.0 85.0 85.0
55-59 79.2 81.0 84.0 84.0 69.7 72.0 75.0 75.0
60-64 58.1 59.0 62.0 62.0 46.1 49.0 52.0 52.0
65-69 30.2 31.0 33.0 33.0 19.5 21.0 23.0 23.0
70 and Over 10.2 11.0 12.0 12.0 4.1 5.0 6.0 6.0
15-69 78.5 79.3 80.2 80.2 70.7 71.3 73.4 73.4
15 and Over 71.3 70.2 67.9 66.0 62.1 61.2 60.1 58.2

Given that participation rates start to decline mostly after age 50, the aging of the population will exert downward pressure on the overall labour force participation rate in Canada. If current participation rates by age and sex were to apply throughout the projection period, the effect of population aging would cause the overall participation rate from Table 46 to fall from 66.6% in 2013 to 58.5% in 2050, instead of 62.1% as projected under the best-estimate assumption.

However, it is expected that a number of factors will contribute toward partially offsetting the decline that results from population aging.

The main assumption underlying the future overall participation rate is a significant increase in participation rates for those aged 55 and over as a result of an expected continued trend toward delayed retirement.  Government policies aimed at increasing participation rates of older workers, the removal of the work cessation test to receive the CPP retirement pension, the increase in life expectancy, and possible insufficient retirement savings are assumed to encourage older workers to delay their retirement and exit the labour force at a later age.

However, despite the assumed future increase in participation rates of older workers and a reliance on skilled immigrant workers, it is still expected that there will be moderate labour shortages in the future as the working-age population expands at a slower pace and as baby boomers retire and exit the labour force.  The participation rates for all age groups are expected to increase due to the attractive employment opportunities resulting from labour shortages.

It is also expected that future participation rates will increase with the aging of cohorts that have a stronger labour force attachment compared to previous cohorts.  The stronger labour force attachment of later cohorts is attributable to different reasons, including higher attained education.  The aging of more educated workers with higher labour force attachment, and the exit from the workforce of less educated older workers is expected to create upward pressure on participation rates.  Over the shorter term, the participation rates of younger age groups are assumed to gradually increase to their pre-recession levels.  Finally, although historical increases in participation rates for women are not expected to continue in the future, their participation rates are expected to increase faster than the participation rates for men.

Based on the foregoing, the participation rates of both men and women are expected to increase over the projection period from their 2012 levels for all age groups, especially for those aged 55 and over.  Nonetheless, these increases in participation rates are not sufficient to offset the decrease in the overall participation rate due to the demographic shift.

For the purpose of projecting the participation rates, the projection period has been divided into three periods:  2013 to 2020, 2020 to 2030, and from 2030 onward. From 2013 to 2020, and from 2020 to 2030, the projected participation rates are based on the expected impact of the above-mentioned factors through time for each age group and sex.  From 2030 onward, the participation rates are kept constant.  This long-term assumption combined with a slow growth in the working-age population, results in a low rate of growth of approximately 0.5% for the Canadian active population (that is, the labour force) after 2030.

2. Employment

In Canada, the average annual job creation rate (i.e. the change in the number of persons employed) has been about 1.6% since 1976.  However, this rate has varied over the years.  It is assumed that the job creation rate will be 1.4% in 2013, based on the most recent experience and various economic forecasts.  It is further assumed that the job creation rate over the short term will be slightly higher than the labour force growth rate so that the unemployment rate slowly decreases from its 2012 level of 7.2%.

Over the long term, the job creation rate is assumed to be the same as the labour force growth of 0.5%.  This is projected to occur since the unemployment rate is not expected to fall below 6.0%, which is in line with various economic forecasts and reflects moderate economic growth.  It is assumed that the unemployment rate will be slightly lower than in the 25th CPP Actuarial Report, reaching 6.0% by 2023 and remaining at that level thereafter.

Table 48 shows the projected number of employed persons, aged 18 to 69, in Canada.

Table 48 Employment of Population (Canada, ages 18 to 69)
Year Population Employed Employment Rate
Males Females Males Females Males Females
  (thousands) (thousands) (%)
2013 12,367 12,318 8,964 8,139 72.5 66.1
2014 12,486 12,438 9,064 8,224 72.6 66.1
2015 12,591 12,543 9,159 8,305 72.7 66.2
2016 12,675 12,630 9,244 8,379 72.9 66.3
2017 12,727 12,683 9,313 8,440 73.2 66.5
2018 12,781 12,738 9,376 8,496 73.4 66.7
2019 12,832 12,788 9,435 8,549 73.5 66.9
2020 12,879 12,834 9,491 8,598 73.7 67.0
2025 13,082 13,029 9,710 8,852 74.2 67.9
2030 13,238 13,191 9,925 9,139 75.0 69.3
2040 13,779 13,748 10,405 9,618 75.5 70.0
2050 14,512 14,498 10,851 10,019 74.8 69.1
2060 14,919 14,924 11,174 10,335 74.9 69.2

Given that the CPP covers contributors in all provinces except Québec, economic assumptions were developed for Québec, and the results for Canada less Québec were derived. Tables 49 and 50 show the projected active population, number of employed, and labour force participation rates for Canada less Québec.

Table 49 Active Population (Canada less Québec, ages 15 and over)
Year PopulationFootnote 1 Active Population Employed
Males Females Total Males Females Total Males Females Total
  (thousands) (thousands) (thousands)
2013 10,828 11,153 21,981 7,788 6,975 14,764 7,216 6,518 13,734
2014 10,960 11,286 22,246 7,879 7,055 14,935 7,310 6,600 13,909
2015 11,088 11,414 22,502 7,966 7,132 15,097 7,400 6,679 14,079
2016 11,208 11,535 22,743 8,044 7,202 15,246 7,483 6,753 14,236
2017 11,323 11,649 22,972 8,112 7,263 15,374 7,556 6,817 14,373
2018 11,437 11,764 23,202 8,175 7,321 15,496 7,625 6,880 14,505
2019 11,555 11,882 23,437 8,238 7,378 15,616 7,694 6,942 14,636
2020 11,671 11,999 23,670 8,297 7,432 15,730 7,760 7,000 14,760
2025 12,264 12,604 24,868 8,554 7,712 16,267 8,033 7,289 15,322
2030 12,850 13,208 26,058 8,833 8,030 16,862 8,294 7,588 15,882
2040 13,938 14,368 28,306 9,378 8,529 17,907 8,804 8,062 16,866
2050 14,750 15,257 30,006 9,833 8,927 18,760 9,230 8,437 17,668
2060 15,520 16,038 31,557 10,193 9,256 19,449 9,570 8,746 18,316
Table 50 Labour Force Participation Rates (Canada less Québec)
Age Group Males Females
2013 2020 2030 2050 2013 2020 2030 2050
  (%) (%) (%) (%) (%) (%) (%) (%)
15-19 48.2 53.7 55.7 55.7 50.2 55.5 58.7 58.7
20-24 77.2 80.7 83.0 83.0 74.4 76.5 80.0 80.0
25-29 90.2 91.3 93.0 93.0 81.2 82.4 85.7 85.7
30-34 92.8 93.0 94.0 94.0 80.4 81.2 84.2 84.2
35-39 93.6 94.3 94.0 94.0 81.6 83.4 85.4 85.5
40-44 92.9 93.0 94.0 94.0 83.4 84.4 86.7 86.7
45-49 89.9 92.0 93.0 93.0 83.8 84.5 86.7 86.8
50-54 87.8 89.0 91.0 91.0 81.0 82.0 85.3 85.2
55-59 80.3 82.5 85.1 85.1 71.5 73.8 76.3 76.3
60-64 61.2 61.5 64.6 64.3 48.4 51.5 53.9 53.7
65-69 32.9 33.3 35.1 35.0 21.9 23.3 25.0 24.8
70 and Over 10.7 11.7 12.6 12.6 4.6 5.7 6.3 6.3
15-69 79.0 80.0 80.7 80.7 70.9 71.7 73.8 73.6
15 and Over 71.9 71.1 68.7 66.7 62.5 61.9 60.8 58.5

3. Number of Earners

The number of earners for any given year, namely anyone who had employment earnings during the year, is always more than the employed population and sometimes even close to the labour force because it includes all individuals who had earnings at any time during the year, whereas the employed population only indicates the average number of employed in any given year.  The projected number of earners is obtained by a regression based on a highly correlated historical relationship between the number of employed persons and the number of earners over the period 1976 to 2010.  Table 51 shows the projected average number of employed persons and the projected number and proportion of earners (relative to the population) aged 18 to 69, for Canada less Québec.  The projected number and proportion of earners shown in Table 51 pertain to all earners, including those who are CPP retirement beneficiaries.  The effect of CPP retirement beneficiaries with earnings, that is, working beneficiaries, is discussed more in detail in section V‑E of this Appendix.

Table 51 Employment of Population (Canada less Québec, ages 18 to 69)
Year Population Employed Earners Proportion of Earners
(earners as % of population)
Males Females Males Females Males Females Males Females
  (thousands) (thousands) (thousands) (%)
2013 9,502 9,495 6,942 6,289 7,569 6,945 79.7 73.1
2014 9,604 9,602 7,029 6,367 7,670 7,041 79.9 73.3
2015 9,697 9,698 7,112 6,443 7,764 7,130 80.1 73.5
2016 9,774 9,781 7,188 6,513 7,850 7,212 80.3 73.7
2017 9,825 9,836 7,251 6,572 7,913 7,270 80.5 73.9
2018 9,877 9,891 7,309 6,627 7,969 7,321 80.7 74.0
2019 9,927 9,943 7,365 6,680 8,024 7,373 80.8 74.1
2020 9,975 9,993 7,419 6,730 8,077 7,421 81.0 74.3
2025 10,185 10,209 7,625 6,971 8,281 7,667 81.3 75.1
2030 10,343 10,381 7,814 7,222 8,466 7,930 81.9 76.4
2040 10,829 10,887 8,234 7,637 8,937 8,394 82.5 77.1
2050 11,482 11,546 8,642 8,002 9,382 8,788 81.7 76.1
2060 11,842 11,925 8,922 8,275 9,675 9,080 81.7 76.1

D. Real Wage Increases

The assumed increase in average annual employment earnings (AAE) is used to project the total employment earnings of CPP contributors, while the assumed increase in Average Weekly Earnings (AWE) is used to project the increase in the YMPE from one year to the next.  The difference between real (net of inflation) increases in the AWE and the AAE has been relatively small over the period from 1966 to 2011, that is, an absolute difference of approximately 0.01% per year.  For several years in the 1990s this difference was more pronounced; however, the real increases in AAE and AWE have shown a tendency to converge toward each other over time.  Taking these factors into consideration, the real increases in AWE and AAE are assumed to be the same for 2013 and thereafter.

The real wage increase has fluctuated significantly from year to year. For example, the ten-year average annual real wage increase, as measured by the difference between the increases in the nominal AWE and the CPI, was -0.1% for the period ending in 2002 and 0.9% for the period ending in 2012.  The average annual real wage increase was 0.9% for the 46-year period ending in 2012.

The real wage increase can also be measured using the difference between the increase in the nominal average wage and the CPI.  In this case, the nominal average wage is defined as the ratio of the total nominal earnings to total civilian employment in the Canadian economy as a whole.  Historically, the nominal average wage increase has been similar to the nominal AAE increase, and therefore it is assumed that they can be used interchangeably.

The growth in the real wage increase is related to the growth in total labour productivity as follows:

Real Wage Increase = Growth in Labour Productivity + Growth in Compensation Ratio + Growth in Earnings Ratio + Growth in Average Hours Worked + Growth in Price Differential.

In addition to the factors included in the above equation, labour demand has a significant impact on real wage increases.  Real wages are subject to downward pressure as the demand for workers decreases.  On the other hand, one could expect upward pressure on wages if the size of the labour force fails to keep pace with a growing economy.

Labour productivity in the above equation is defined as the ratio of the real Gross Domestic Product (GDP) to total hours worked in the Canadian economy.  The average annual growth in labour productivity was 1.7% for the 50-year period ending in 2011, and 0.8% for the 11-year period ending in 2011.  Long-term productivity is expected to increase as a result of the anticipated labour shortages and the government’s policies aimed at enhancing productivity growth.  At the same time, increasing labour force participation rates of older workers and a reliance on immigration for future labour force growth are expected to moderate the labour shortage and its impact on productivity.  Labour productivity growth of 1.3% is assumed for the long term.

The compensation ratio is the ratio of the total compensation received by workers to the nominal GDP.  Changes in the compensation ratio reflect the extent to which changes in productivity are shared between labour and capital.  The compensation ratio has decreased on average by 0.1% per year for the 50-year period ending in 2011 with a more significant decrease between 1991 and 2000 (an average decrease of 1.0% per year).  However, starting in 2000 the compensation ratio stabilized with a negligible average increase over the period 2000 to 2011.  It is assumed that there will be no growth in the compensation ratio over the long term.

The earnings ratio is the ratio of total workers’ earnings, defined as the sum of total wages, salary disbursements, and total self-employment earnings, to total compensation.  Changes in the earnings ratio reflect changes in the compensation structure offered to employees.  The historical decline in the earnings ratio of 0.2% per year from 1961 to 2011 has been primarily due to the faster growth in supplementary labour income, such as employer contributions to pension plans, health benefit plans, the CPP, and the Employment Insurance program, compared to earnings.  Given that a significant portion of the historical decrease in the earnings ratio can be explained by the increase in CPP contributions resulting from the increase in the contribution rate from 3.6% in 1986 to 9.9% in 2003, the earnings ratio is not expected to decline as fast as it has in the past.  However, as a result of the aging of the population, it is expected that the cost of pension plans and health programs will continue to increase in the future and exert downward pressure on the earnings ratio.  Based on the foregoing, it is assumed that the long-term earnings ratio will decline by 0.1% per year.

The average hours worked is defined as the ratio of total hours worked to total employment in the Canadian economy.  The average annual growth rate for average hours worked was -0.4% over the 50-year period ending in 2011. The decrease in the average hours worked was significant between 1976 and 1983, with an average annual decrease over that period of 0.7% per year.  Despite short-term fluctuations, the average hours worked stabilized after 1983, with an average decrease of 0.1% per year between 1983 and 2011.  In the future, the assumed steady increases in productivity and the higher participation rates of older workers, who generally work fewer hours, could continue to apply negative pressure on the average hours worked.  However, higher wages due to productivity gains may encourage workers to work longer hours, and the assumed future increases in life expectancy may encourage older workers to work longer hours than in the past.  It is assumed that in the long term, the average hours worked will decrease by 0.1% per year, which is at a slower pace than observed over various periods in the past, but in line with the average experience since 1983.

Finally, the price differential or “labour’s terms of trade” is the ratio of the GDP deflator (defined as the ratio of nominal to real GDP) to the CPI.  Including this ratio is necessary because labour productivity is expressed in real terms by using real GDP, while current dollar earnings are converted to real earnings using the CPI.  The average annual growth in the price differential was 0.1% between 1961 and 2011.  However, during this period, the price differential experienced significant fluctuations. It increased at an average rate of 1.1% per year between 1961 and 1976 and decreased at an average rate of 0.6% per year between 1976 and 2002.  In more recent years, the decline has reversed, such that between 2002 and 2011 the price differential increased by 0.6% per year.  This recent trend is due to Canada’s improving international terms of trade.  However, it is not clear for how long such growth could be sustained.  It is assumed that the long-term increase in the price differential will be 0.1% per year, which is lower than recent experience, but in line with the average growth since 1961.

The result of the foregoing discussion is that the assumed real wage increase is 1.2% per year over the long term.  Table 52 summarizes the historical information and the assumptions described above.

Table 52 Real Wage Increase and Related ComponentsFootnote 1
  1961-2011 Average 1990-2011 Average 2000-2011 Average Ultimate Assumption
Labour Productivity Growth 1.7% 1.3% 0.8% 1.3%
+ Compensation Ratio Growth -0.1% -0.3% 0.0% 0.0%
+ Earnings Ratio Growth -0.2% -0.2% -0.2% -0.1%
+ Average Hours Worked Growth -0.4% -0.2% -0.4% -0.1%
+ Price Differential Growth 0.1% 0.1% 0.4% 0.1%
Real Wage Increase 1.1% 0.6% 0.6% 1.2%

The real wage increase in 2013 is assumed to be 0.5%, which is based on the average annual increase in the real AWE over the last 15 years (1997 to 2012). The real wage increase is then assumed to rise linearly to 1.2% by 2020. This is consistent with the assumed moderate economic growth implicitly reflected in the assumption on the unemployment rate, which is expected to decrease linearly until it reaches its ultimate level in 2023.

Table 53 shows the assumptions regarding the annual increases in prices, real AAE, and real AWE.

Table 53 Inflation, Real AAE and AWE Increases
Year Price Increases Real Increases
Average Annual Earnings (AAE)
Real Increases
Average Weekly Earnings (AWE), (YMPE)
(%) (%) (%)
2013 1.50 0.50 0.50
2014 2.00 0.60 0.60
2015 2.00 0.70 0.70
2016 2.00 0.80 0.80
2017 2.00 0.90 0.90
2018 2.00 1.00 1.00
2019 2.00 1.10 1.10
2020 2.10 1.20 1.20
2021+ 2.20 1.20 1.20

E. Average Annual Earnings, Pensionable Earnings and Total Earnings

Average annual earnings are projected by taking into account past and expected structural demographic changes as well as the narrowing of the gap between average female and male employment earnings.  As part of these projections, the average annual earnings of working beneficiaries are also taken into account.  The ratio of female to male average employment earnings stood at about 48% in 1966 and was 75% in 2010.  This ratio is projected to increase to 86% by 2050.  Table 54 shows the projected average annual earnings by age group and sex for selected years.

Table 54 Average Annual Earnings (Canada less Québec, ages 18 to 69)
Age Group Males Females
2013 2025 2050 2013 2025 2050
  ($) ($) ($) ($) ($) ($)
20-24 23,927 33,798 77,638 18,317 26,717 63,730
25-29 40,175 56,711 128,770 31,896 47,141 112,729
30-34 50,342 70,548 159,526 37,501 55,821 134,930
35-39 55,860 77,957 176,575 41,577 61,718 149,484
40-44 57,663 80,747 182,993 44,081 65,329 157,476
45-49 58,461 81,901 185,612 45,098 66,789 160,574
50-54 58,833 82,315 186,581 45,092 67,005 161,220
55-59 54,421 76,015 172,179 41,662 61,577 148,533
60-64 47,132 65,286 147,275 34,518 51,152 123,738
65-69 32,241 43,927 98,850 22,743 34,456 84,127
All Ages 47,986 67,646 152,013 36,633 54,542 130,322

Total earnings are the product of average earnings and the number of earners. Table 55 shows the projected average earnings and number of earners for each sex, the resulting total earnings, and the annual percentage increase in total earnings for Canada less Québec. The ultimate annual increase in total earnings is set to reach about 3.9%. This nominal increase comprises an ultimate inflation rate of 2.2%, real wage growth of 1.2%, and population growth for the age group 18 to 69 of 0.5%.

Table 55 Total Earnings (Canada less Québec, ages 18 to 69)
Year Average Annual Earnings Earners Total Earnings Annual Increase in Total Earnings
Males Females Males Females
  ($) ($) (thousands) (thousands) ($ million) (%)
2013 47,986 36,633 7,569 6,945 617,660 3.6
2014 49,093 37,680 7,670 7,041 641,857 3.9
2015 50,286 38,798 7,764 7,130 667,064 3.9
2016 51,564 39,986 7,850 7,212 693,173 3.9
2017 52,939 41,258 7,913 7,270 718,862 3.7
2018 54,430 42,619 7,969 7,321 745,778 3.7
2019 56,012 44,061 8,024 7,373 774,282 3.8
2020 57,749 45,633 8,077 7,421 805,050 4.0
2025 67,646 54,542 8,281 7,667 978,361 3.9
2030 79,402 65,163 8,466 7,930 1,189,013 4.0
2040 109,803 92,453 8,937 8,394 1,757,364 4.0
2050 152,013 130,322 9,382 8,788 2,571,355 3.7
2060 210,664 183,708 9,675 9,080 3,706,251 3.8

Average pensionable earnings are computed by removing from average annual earnings the earnings of those earning less than the YBE and the portion of earnings in excess of the YMPE. Such removal is made using the distributions of earners and earnings, which are based on individual earnings statistics. The average pensionable earnings by age, sex and calendar year used in the calculation of the average contributory earnings correspond to the average portion of individual employment earnings below the YMPE for a cohort of earners earning more than the YBE. For 2013, the YMPE and YBE are respectively $51,100 and $3,500. The YMPE is increased annually based on the average industrial aggregate wage in Canada as published by Statistics Canada. Table 56 shows the projected average pensionable earnings by age and sex for selected years.

Table 56 Average Pensionable Earnings (Canada less Québec)
 Age Group Males Females
2013 2025 2050 2013 2025 2050
  ($) ($) ($) ($) ($) ($)
20-24 24,561 33,839 74,960 20,126 28,248 64,080
25-29 34,947 48,839 109,452 30,631 43,580 99,506
30-34 38,993 54,584 123,046 33,196 47,370 108,680
35-39 40,480 56,655 128,211 34,893 49,780 114,495
40-44 40,920 57,341 129,914 36,075 51,529 118,644
45-49 41,214 57,779 130,931 36,632 52,380 120,649
50-54 41,135 57,615 130,407 36,624 52,421 120,527
55-59 39,217 54,683 122,572 34,922 49,673 113,315
60-64 32,498 46,000 100,310 28,510 41,146 91,592
65-69 29,576 39,564 81,140 25,317 35,085 73,502
All Ages 36,637 51,305 114,102 32,012 45,661 103,415

The evolution of the ratio of average pensionable earnings for males and females as a percentage of the YMPE is shown in Chart 10. The freezing of the YBE has the effect that, over time, fewer and fewer workers are exempt from participating in the CPP. This, in turn, has the effect of increasing the number of earners with low earnings participating in the Plan. The ratio reduces over time for males mainly due to this YBE effect. For females, the ratio is stable as the YBE effect is offset by the greater increase in their average pensionable earnings.

Chart 10 Ratio of Average Pensionable Earnings to Maximum

Chart 10 Ratio of Average Pensionable Earnings to Maximum

F. Contributions

Contributions are determined by multiplying together the number of contributors, average contributory earnings, and the contribution rate.

1. Proportion of Contributors

In order to be considered a contributor in any given calendar year, one must have employment earnings exceeding the YBE.  Accordingly, the proportion of contributors is determined by multiplying the proportion of earners by the complement of the proportion of earners earning up to the YBE.  This last proportion is determined for each age, sex, and calendar year by expressing the YBE as a percentage of average employment earnings and using the distributions of earners and their earnings.  These distributions were determined using earnings statistics from 2008 to 2010 and are assumed to remain constant in the future.  Starting in 2012, the proportion of contributors is adjusted to reflect working beneficiaries.  Table 57 presents the proportions of contributors by selected age groups and years for males and females.

Table 57 Proportions of Contributors by Age Group
Age Group Males Females
2013 2025 2050 2013 2025 2050
(%) (%) (%) (%) (%) (%)
20-24 74.9 83.1 87.8 71.9 80.9 86.8
25-29 83.1 87.8 90.5 75.3 81.3 85.7
30-34 86.3 88.7 91.0 75.1 79.6 83.9
35-39 87.9 91.1 92.5 77.2 81.9 85.1
40-44 85.5 88.1 89.6 78.4 82.0 84.8
45-49 84.0 88.5 89.8 78.9 82.7 85.4
50-54 81.2 84.5 86.4 75.5 79.8 82.8
55-59 72.7 77.8 80.2 64.0 69.6 72.5
60-64 54.6 58.4 62.2 45.3 50.1 53.7
65-69 19.2 19.1 20.1 12.9 13.5 14.5
All Ages 74.6 77.0 79.3 67.0 70.3 73.6

2. Average Contributory Earnings

Average contributory earnings, which also reflect working beneficiaries, are determined for each age, sex, and year by subtracting the YBE from the average pensionable earnings as shown in Table 56.  Table 58 shows the resulting average contributory earnings by age group and sex for selected years.

Table 58 Average Contributory Earnings
Age Group Males Females
2013 2025 2050 2013 2025 2050
  ($) ($) ($) ($) ($) ($)
20-24 21,061 30,339 71,460 16,626 24,748 60,580
25-29 31,447 45,339 105,952 27,131 40,080 96,006
30-34 35,493 51,084 119,546 29,696 43,870 105,180
35-39 36,980 53,155 124,711 31,393 46,280 110,995
40-44 37,420 53,841 126,414 32,575 48,029 115,144
45-49 37,714 54,279 127,431 33,132 48,880 117,149
50-54 37,635 54,115 126,907 33,124 48,921 117,027
55-59 35,717 51,183 119,072 31,422 46,173 109,815
60-64 28,998 42,500 96,810 25,010 37,646 88,092
65-69 24,346 33,448 72,490 20,483 29,370 65,489
All Ages 33,108 47,747 110,484 28,494 42,121 99,831

3. Total Contributory Earnings

Contributory earnings for each given age, sex, and year are calculated as the product of the proportion of contributors, average contributory earnings, and the corresponding population.  Total contributory earnings for each year are obtained by summing contributory earnings for each age and sex in that year.

Total contributory earnings are then adjusted upward to take into account the non-refundable portion of employer contributions arising generally in respect of (1) employees with multiple employers during a given year, (2) employees earning less than the YBE during a given year, and (3) employees who work only part of the year and do not have full access to the YBE.  The amount of non-refundable employer contributions increases total CPP contributions, which indicates higher underlying contributory earnings.

The records of earnings from Service Canada, the annual report on contributors published by the Department of Employment and Social Development Canada, and the information from the Canada Revenue Agency on CPP contribution refunds were used to calculate the adjustment.  The adjustment is about 2.1% in 2013 and gradually reduces to 1.9% over the projection period to take into account the freeze on the YBE at $3,500 and the portion of the adjustment related to those earners earning less than the YBE.

Annual contributions are equal to the product of adjusted contributory earnings and the contribution rate.  The contribution rate is set by law and has been 9.9% since 2003.  Table 59 presents the projected components of total unadjusted contributory earnings, the total adjusted contributory earnings, as well as the projected YMPE.

Table 59 Total Adjusted Contributory Earnings
Year Unadjusted Average Contributory Earnings   YMPE  Contributors Total Adjusted Contributory Earnings Annual Increase in Total Adjusted Contributory Earnings
Males Females Males Females
  ($) ($) ($) (thousands) (thousands) ($ million) (%)
2013 33,137 28,512 51,100 7,087 6,366 427,762 3.6
2014 33,926 29,266 52,200 7,176 6,454 444,048 3.8
2015 34,787 30,085 53,400 7,265 6,541 461,583 3.9
2016 35,816 31,032 54,900 7,350 6,627 481,371 4.3
2017 36,872 32,014 56,400 7,424 6,698 501,091 4.1
2018 37,978 33,045 58,000 7,495 6,767 521,723 4.1
2019 39,148 34,137 59,700 7,562 6,831 543,322 4.1
2020 40,403 35,309 61,500 7,622 6,890 566,009 4.2
2025 47,805 42,161 72,500 7,847 7,174 695,678 4.2
2030 56,602 50,320 85,700 8,070 7,479 854,642 4.2
2040 79,180 71,063 119,800 8,616 8,044 1,285,576 4.2
2050 110,602 99,915 167,400 9,101 8,503 1,904,295 3.8
2060 154,765 140,642 233,900 9,435 8,851 2,772,797 3.9

IV. Investment Assumptions

A. Investment Strategy

The CPPIB invests funds according to its own investment policies that take into account the needs of contributors and beneficiaries, as well as financial market constraints.  For the purpose of this report, the investments have been grouped into three broad categories: equities, fixed income securities, and real assets.  Equities consist of Canadian, foreign developed market, and emerging market equities.  Fixed income securities consist of federal, provincial, corporate, and real return bonds, and short-term investments.  Real assets include such categories as real estate and infrastructure.

The total assets of the CPP portfolio ($175.1 billion as at 31 December 2012) consist of amounts invested by the CPPIB ($172.6 billion), the amount held in the CPP Account ($133 million) and amounts receivable ($2.4 billion).  As at 31 December 2012, the asset mix of the CPPIB consisted of 50% equities, 33% fixed income securities, and 17% real assets.  The CPPIB has an approved CPP reference portfolio which consists of 65% equities (55% global equities and 10% Canadian equities) and 35% debt (30% Canadian nominal bonds and 5% foreign sovereign bonds).  According to the CPPIB, the CPP reference portfolio “can reasonably be expected to generate the long-term returns needed to help sustain the CPP at its current [9.9%] contribution rate"Footnote 1.

The CPP reference portfolio is not necessarily representative of the actual holdings of the CPPIB.  Therefore, the initial CPP portfolio asset mix is derived using the actual amount held in the CPP Account, amounts receivable, and investments reported by the CPPIB as at 31 December 2012.  The initial asset mix of the CPP portfolio as at 31 December 2012 consists of 49% equities, 34% fixed income securities, and 17% real assets.  It is assumed that investment in real assets, which accounted for only 10% of the portfolio in 2009, will continue to grow, reaching 20% of the portfolio in 2016.  Bond yields are expected to gradually increase over the next six years.  Thus, bond returns are assumed to be low over that period.  It is therefore assumed that equity allocation will be slightly higher between 2014 and 2018 to mitigate the impact of low bond returns.  In 2019, once bond yields have stabilized, equity allocation is assumed to reduce, and investments in equities and fixed income securities will represent 50% and 30% of the portfolio, respectively.

This report provides a projection over the next 75 years.  As such, a long-term asset mix assumption is required.  As the CPP matures and the Plan’s participants age, the ratio of contributors to beneficiaries will decrease, and the proportion of investment income required to pay benefits will increase.  Starting in 2023, it is expected that contributions will be insufficient to cover all expenditures, and that a proportion of investment income will be required to cover the contribution shortfall.  The contribution shortfall will be small as a proportion of total assets at the beginning (0.2% in 2023) and will increase as the Plan matures, reaching 1.6% of total assets in 2050.

Over the period 2023 to 2030, it is expected that the assumed asset mix of 50% equities, 30% fixed income securities, and 20% real assets will generate enough investment income through fixed income security coupons to cover the contribution shortfall.  After 2030, investment income from fixed income security coupons and dividends on equities are assumed to be sufficient to cover the larger shortfall, such that the risk that assets of the CPP portfolio have to be sold at an inopportune time to cover expected contribution shortfalls is minimal.  Thus, the assumed ultimate asset mix of the CPP portfolio consists of 50% equities, 30% fixed income securities, and 20% real assets, which differs slightly from the actual CPPIB asset mix as at 31 December 2012 in order to reflect an expected increase over time in allocations to real assets.  The assumed ultimate asset mix is equivalent to a portfolio invested 60% in equities and 40% in fixed income securities, assuming real assets behave half like equities and half like fixed income securities.

When deriving the assumed ultimate asset mix of the CPP portfolio, consideration was also given to the asset mix policy of other major Canadian pension plans.  Table 60 shows the assumed asset mix of the CPP portfolio for selected years of the projection period.

Table 60 Asset Mix
Year Equity Fixed Income Securities Real Assets (Real Estate and Infrastructure)
Canadian Foreign Developed Market Emerging Market Marketable Bonds Non-Marketable Bonds Short Term
  (%) (%) (%) (%) (%) (%) (%)
2013 9 33 7 19 14 1 17
2014 11 35 7 15 13 1 18
2015 11 35 7 16 11 1 19
2016 11 35 7 16 10 1 20
2017 11 35 7 17 9 1 20
2018 11 35 7 18 8 1 20
2020 10 33 7 22 7 1 20
2025 10 33 7 26 3 1 20
2030 10 33 7 27 2 1 20
2035 10 33 7 27 2 1 20
2044+ 10 33 7 29 0 1 20

B. Investment Income

In general, investment income from a given asset within a portfolio is the product of the market value of that asset and its projected nominal rate of return (which is obtained by adding the applicable projected real rate of return, as described in section C below, to the projected inflation rate).

The investment income of the CPP is based on the assumed real rate of return applicable to each type of asset, projected inflation, and the projected asset mix and cash flows.  Investment income is also adjusted downward to recognize investment expenses (discussed in section D).

C. Real Rates of Return

For comparison purposes with the discussion and assumptions described in this section, the following Table 61 presents the real rates of return based on Canadian dollars for various asset classes as well as inflation levels for periods ending 31 December 2012.  Table 61 was prepared based on the Canadian Institute of Actuaries’ Report on Canadian Economic Statistics 1924 – 2012.

Table 61 Historical Inflation and Real Rates of Return by Asset Type
Length of Period ending 31 December 2012 (years) 25 50 65 75
  (%) (%) (%) (%)
Level of Inflation 2.2 4.1 3.7 3.7
Real Return on Canadian Equity 6.0 5.4 6.8 6.3
Real Return on U.S. Equity 6.2 5.4 7.2 n/a
Real Return on Canadian Real Estate 6.9 n/a n/a n/a
Real Yield on Long-Term Federal Bonds 3.9 3.3 2.8 2.4
Real Return on Long-Term Federal Bonds 7.6 4.1 2.9 2.6
Average Real Return on Diversified Portfolios 5.9 4.2 n/a n/a

Real rates of return are required for the projection of revenue arising from investment income. They are assumed for each year of the projection period and for each of the main asset categories in which CPP assets are invested. All real rates of return described in this section are shown before reduction for assumed investment expenses.

In addition, the assumed real rate of return for each asset class includes an allowance for rebalancing and diversification to take into account the beneficial effect of reduced volatility that comes from diversification within a portfolio.  If the expected rates of return for each asset class were not increased to reflect their respective share of this allowance, then the expected long-term portfolio rate of return calculated as the weighted average rate of return of each asset class would be underestimated.

The real rates of return were developed by looking at historical returns (expressed in Canadian dollars) and adjusting the returns upward or downward to reflect expectations that differ from the past.  Future currency variations will impact the real rates of return over the projection period, creating gains and losses.  However, as the projection period is 75 years, these gains and losses are expected to offset each other over time.  Thus, it is assumed that currency variations will not have an impact on the real rates of return.

Real Rates of Return on Assets under the Management of the CPPIB

As discussed earlier, CPPIB assets are invested in three broad categories of investments:  equities, fixed income securities, and real assets.  The projected annual real rates of return for each of these asset classes have been determined by taking into consideration the current economic environment, various economic forecasts, as well as historical experience.

The future outlook is based on the assumption that, over the short term, federal bond yields are expected to increase, since their recent low levels were prompted mainly by large government economic stimulus interventions and a flight to quality assets following the global recession of 2008-2009.  The projected real rates of return for different types of investments also reflect that projections are over a 75‑year time horizon and thus, should be generally consistent with the long-term averages of real rates of return.

With the exception of fixed income securities, real rates of return for all asset classes are assumed to be constant for the entire projection period.  The current context of extremely low bond yields and the general expectation that bond yields will increase over the coming years are reflected in the expected real rates of return for fixed income securities.  A constant real rate of return is assumed for the more volatile asset classes, reflecting the difficulty in projecting yearly market returns.

1. Fixed Income Securities

As at 31 December 2012, the CPPIB had 33% of its portfolio invested in fixed income securities, split between a non-marketable bond portfolio composed of bonds with various terms to maturity, representing loans made to the provinces, and a marketable bond portfolio consisting of federal, provincial, corporate, and real return bonds.

Non-Marketable Bond Portfolio and Rollover Rates (Loans to Provinces)

The non-marketable bond portfolio at the end of 2012 represented 14% of all CPP assets.  The provinces are allowed to roll over at maturity for a further 20-year term any bonds that were purchased prior to the 1997 CPP amendments (that came into effect on 1 January 1998).  In lieu of exercising their statutory rollover right, an agreement between the provinces and the CPPIB permits each province to repay a bond and contract a replacement bond or bonds for a term of at least five years, with a total principal amount not exceeding the principal amount of the maturing bond and total successive terms not more than 30 years.  During the 14-year period 1999 to 2012, 67% of provincial bonds available for rollover were rolled over.  The rollover proportion increases to 91% when considering the four-year period from 2009 to 2012, and to 98% when considering only 2012.  Using this rollover experience and considering current stakeholders’ balance sheets, it is assumed that the rollover rate will be approximately 97% for 2013 and thereafter.  The last non-marketable bond is expected to mature in 2043.

On the basis of the average long-, medium-, and short-term experience of the spread between the annual yields on federal and provincial bonds, the current outlook of the economy, and data on rollovers since 1999, a spread over the federal yield was determined for each province.  The initial spreads on rollover bonds are set at the actual market spreads at the end of 2012 for provincial bonds issued by the given province.  The ultimate spreads, applicable starting at the end of 2017, are set at the average spreads for the 10-year period ending in 2009 for provincial bonds issued by the given province.  Spreads over the last three years (2010-2012) were abnormally high due to the current extremely low federal bond yield environment and were thus ignored in the determination of the ultimate spreads.  The ultimate annual long-term real federal yield is assumed to be 2.8%, as discussed in the following section.  This is consistent with the long-term average of long-term real federal yields.  The weighted long-term average spread for all provinces is approximately 55 basis points.  Therefore, an ultimate annual real yield of approximately 3.35% for provincial rollover bonds is assumed for 2018 and thereafter. 

The real rate of return of the non-marketable bond portfolio is calculated by taking into consideration any coupon payments made throughout the year, as well as the change in the market value of the portfolio due to changes in the assumed yield rates and in the term to maturity of each bond.  Coupons paid and redemption values of bonds at maturity are assumed to be reinvested in the marketable bond portfolio.

Marketable Bond Portfolio

As the non-marketable bond portfolio matures over the next 30 years, it is assumed that the proceeds will be invested in marketable bonds and that this marketable bond portfolio will consist of federal, provincial, corporate, and real return bonds in varying proportions.  The initial asset mix of the marketable bond portfolio is based on actual CPPIB investments as at 31 December 2012, that is, 39% federal, 30% provincial, 23% corporate, and 8% real return bonds.

It is assumed that the CPPIB will purchase a variety of federal, provincial, and corporate bonds in proportions consistent with the CPPIB’s investment strategy.  It is also assumed that since the real return bonds asset class has been removed from the CPP reference portfolio, there will be no more investments in real return bonds.  It is also assumed that a greater proportion of corporate bonds, compared to other bond types, will be purchased.  It is thus assumed that the ultimate marketable bond mix applicable for 2015 and thereafter will be composed of 35% federal, 30% provincial, 35% corporate, and 0% real return bonds.

The real yield on long-term federal bonds as at 31 December 2012 is 0.88% and is assumed to gradually increase to 2.8% for 2019 and thereafter.  The real yields for federal bonds of shorter maturities as well as for provincial, corporate, and real return bonds are based on the real yield on long-term federal bonds adjusted based on historical spreads.  The initial spreads over the federal long-term bond real yield are based on spreads prevailing as at 31 December 2012 and reflect the current economic environment.  The assumed average maturity of federal, provincial, and corporate bonds are estimated based on CPPIB’s holdings as at 31 December 2012 and are assumed to remain constant throughout the projection period.  The average maturity of the marketable bond portfolio is therefore much shorter than in the previous CPP actuarial report where the marketable bond portfolio was assumed to be invested in long-term bonds.  Since bond yields are expected to increase in the next few years, a marketable bond portfolio with a shorter average maturity is desirable as it is less negatively impacted by the increase in bond yields.  This shorter maturity bond portfolio will result in higher returns than a portfolio with a longer average maturity during periods of increasing bond yields.  However, the assumed real rate of return of the marketable bond portfolio once bond yields have stabilized is lower than the corresponding assumed real rate of return of the previous actuarial report (2.9% instead of 3.35% before investment expenses).

The real rate of return for the marketable bond portfolio is calculated for each year using the proportion invested in each bond type and the bonds’ real rates of return.  The expected real rates of return for individual bonds take into account the coupons and market value fluctuations due to the expected movement of their respective yield rates.  Since the long-term federal bond yield is assumed to increase between 2013 and 2018 and only stabilize at the end of 2018, bond returns are quite low for the first six years of the projection.  The assumed ultimate real rate of return for long-term federal bonds is 2.8% starting at the end of 2018.  The assumed average ultimate real rates of return for federal, provincial, and corporate bonds of various maturities are 2.3%, 2.9% and 3.4%, respectively.  An ultimate real rate of return of 2.9% is assumed for the bond portfolio for 2019 and thereafter.

Short-Term Investments and CPP Account

The CPP Account is established in the accounts of Canada to record the transactions of the Plan and amounts transferred to and from the CPPIB.  Historically, the CPP Account, held by the federal Department of Finance, consisted of an operating balance and short-term investments.  The assets of the CPP Account not needed to meet immediate Plan obligations were transferred to the CPPIB in monthly installments between September 2004 and August 2005.  As such, the balance in the CPP Account is now minimal, serving only as a flow-through account with investments solely in short-term securities.  The Account is assumed to earn a real rate of return of 1.0% for 2019 and thereafter.  CPPIB short-term investments are also assumed to earn a real rate of return of 1.0% for 2019 and thereafter.  The initial assumed real rate of return is lower, reflecting the current environment, with a smooth transition assumed from the initial to ultimate assumption of 1.0%.

2. Equity

The CPPIB assets invested in equities are currently diversified among Canadian, foreign developed, and emerging market equities.  In the derivation of the real rates of return for these equity investments, consideration was given to the long-term equity risk premiums for the respective equity classes.  The rates of return also include dividends from the equities and market value fluctuations.  No distinction is made between realized and unrealized capital gains.

Consistent with the assumption that risk taking must be rewarded, equity real rates of returns are developed by adding an equity risk premium to the long-term federal bond real rate of return.  The historical equity risk premium over long-term government bond returns for 19 countries, representing almost 90% of global stock market value, for the 113-year and 50-year periods ending in 2012 were 3.2% and 0.9% respectively (3.4% and 1.0% for Canada)Footnote 1.  Historical equity risk premiums over the 113-year period were higher than expected due to several non-repeatable factors (mainly diversification and globalization).  As a result, the long-term expected equity risk premium is assumed to be lower than what was realized in the past 113 years.  However, the equity risk premium is assumed to be higher in the first six years of the projection, reflecting assumed low bond returns over the same period, before reaching an assumed ultimate rate of 2.2% for Canadian and foreign developed markets.  The equity risk premium for emerging market equities is expected to be 100 basis points higher than for Canadian and foreign developed market equities, reflecting the additional risk inherent with investments in emerging countries.

As described in the previous section, the annual long-term federal bond real rate of return is set at 2.8% for 2019 and thereafter.  The real rates of return are thus projected at 5.0% for developed market equities and 6.0% for emerging market equities throughout the projection period.

3. Real Assets

Real assets such as real estate and infrastructure are considered to be a hybrid of debt and equity, usually in equal proportions.  If these assets are considered to be an equal split between marketable bonds and developed market equities, then the assumed return should be composed of half the return on marketable bonds and half the return on developed market equities.  Considering the inherent difficulties in modeling short-term returns for volatile assets, real rates of return for real assets are projected to be 3.9% throughout the projection period.

Table 62 summarizes the assumed real rates of return by asset type throughout the projection period, before reduction for investment expenses.  Prior CPP actuarial reports showed real rates of return after expenses.  To obtain comparative values, real rates of return shown in Table 62 must be reduced by 20 basis points (see the following section D).

Table 62 Real Rates of Return by Asset Type (before investment expenses)
Year Equity Fixed Income Securities Real Assets (Real Estate and Infrastructure) Total Real Rate of ReturnFootnote 1
Canadian Foreign Developed Market Emerging Markets Marketable Bonds Non-Marketable Bonds Short Term
  (%) (%) (%) (%) (%) (%) (%) (%)
2013 5.0 5.0 6.0 (1.4) (0.4) (0.5) 3.9 2.9
2014 5.0 5.0 6.0 (1.2) (2.1) (0.4) 3.9 3.0
2015 5.0 5.0 6.0 (0.8) (0.9) (0.3) 3.9 3.2
2016 5.0 5.0 6.0 (0.3) (0.4) 0.0 3.9 3.4
2017 5.0 5.0 6.0 0.3 0.0 0.3 3.9 3.6
2018 5.0 5.0 6.0 0.4 (0.2) 0.6 3.9 3.6
2019 5.0 5.0 6.0 2.9 3.1 1.0 3.9 4.2
2020 5.0 5.0 6.0 2.9 2.4 1.0 3.9 4.2
2025 5.0 5.0 6.0 2.9 3.4 1.0 3.9 4.2
2030 5.0 5.0 6.0 2.9 3.5 1.0 3.9 4.2
2035 5.0 5.0 6.0 2.9 2.9 1.0 3.9 4.2
2044+ 5.0 5.0 6.0 2.9 0.0 1.0 3.9 4.2

D. Investment Expenses

In the previous CPP actuarial report, operating expenses of the CPPIB were included as part of the CPP operating expenses and were treated as expenditures.  In this report, following a recommendation made by the external peer reviewers of the previous CPP actuarial report, CPPIB operating expenses are included as a reduction to the rates of return, while CPP operating expenses arising from the Department of Employment and Social Development Canada, the Canada Revenue Agency, Public Works and Government Services Canada, the Office of the Superintendent of Financial Institutions Canada, and the Department of Finance Canada are still treated as expenditures.  Over the last three calendar years, CPPIB’s total investment expenses consisting of operating expenses, transaction costs, and investment management fees have averaged 0.82% of average assets.  The majority of those investment expenses were incurred through active management decisions.  It is assumed that going forward CPPIB investment expenses will be 0.80% of average assets.

The active management objective is to generate returns in excess of those from the CPP reference portfolio, after reduction for the additional expenses incurred from active management.  Thus, the additional returns from a successful active management program should equal at least the cost incurred to pursue active management.  For the purpose of this report, it is assumed that the additional returns generated by active management will equal the additional expenses incurred from active management.  Those expenses are assumed to be 0.6%, which is the difference between the assumed total investment expenses of 0.8% and the investment expenses of 0.2% that would be incurred from passive management of the portfolio, given that part of the portfolio is invested in real estate and infrastructure.  The assumed investment expenses of 0.2% represent $363 million and $574 million in years 2013 and 2020, respectively.

The next section shows the overall rate of return on CPP assets net of investment expenses.

E. Overall Rate of Return on CPP Assets

The best-estimate rate of return on total assets is derived from the weighted average assumed rate of return on all types of assets, using the assumed asset mix proportions as weights.  The best-estimate rate of return is further increased to reflect additional returns due to active management and reduced to reflect all investment expenses.  The ultimate real rate of return is developed as follows:

  Nominal Real
Weighted average rate of return
(before investment expenses)
6.4% 4.2%
Additional rate of return due to active management 0.6% 0.6%
Expected investment expenses    
Expenses due to passive management -0.2% -0.2%
Additional expenses due to active management -0.6% -0.6%
Total expected investment expenses = -0.8% = -0.8%
Ultimate rate of return 6.2% 4.0%

The resulting nominal and real rates of return for each projection year are shown in Table 63. Excluding the first six years, the projected average real rate of return for the period 2019 and thereafter is 4.0%.

Table 63 Rates of Return on CPP Assets
Year Nominal Real
  (%) (%)
2013 4.2 2.7
2014 4.8 2.8
2015 5.0 3.0
2016 5.2 3.2
2017 5.4 3.4
2018 5.4 3.4
2019 6.0 4.0
2020 6.1 4.0
2021 6.2 4.0
2022 6.2 4.0
2023+ 6.2 4.0
Average over:
2013-2018 5.0 3.1
2019+ 6.2 4.0

V. Expenditures

The approach used in this report to project future benefits paid is based on macrosimulation, which means that the projections rely on grouped data.  The amount of benefit expenditures is determined by taking into account the administrative agreement between the Canada Pension Plan and the Québec Pension Plan for beneficiaries who contributed to both plans.

The initial average annual retirement pension of all persons born in a given calendar year, split by sex, is obtained for the cohort by summing for each year over the contributory period the product of the proportion of contributors and the average pensionable earnings deemed to apply to the cohort, dividing this sum by the number of years included in the contributory period, and then multiplying by 25%.

All benefit projections are done using 1966 as the starting point instead of the beginning of the statutory projection period (2013).  This is done for the following reasons:

  • The valuation methodology can be validated for the historical period up to the valuation year (1966 to 2012) by comparing for that period the projected values (contributions, benefits, beneficiaries, etc.) with actual experience.
  • The projection of those benefits already in pay as at the valuation date (31 December 2012) is fully integrated with the projection of benefits emerging after that date, thus ensuring full consistency between past experience and the future.

The estimated number of beneficiaries in pay and average monthly benefits payable as at 31 December 2012 are shown in Table 64.

Table 64 Pensions Payable as at 31 December 2012
Benefit Type Number of Beneficiaries in pay Average Monthly Benefit
Males Females Males Females
  (in thousands) ($) ($)
Retirement 2,087 2,174 639 410
Survivor
- Aged less than 65 52 179 329 392
- Aged 65 and over 130 686 99 347
Disability 155 176 891 808
Benefit Type Number of Beneficiaries in pay Average Monthly Benefit
Males and Females Males and Females
  (in thousands) ($)
Orphan 70 225
Disabled Contributor’s Child 86 225

A. Adjustments to Proportion of Contributors and Pensionable Earnings

The effect of credit-splitting of unadjusted pensionable earnings between spouses or common-law partners in the event of divorce or separation is accounted for by adjusting the projected proportion of contributors and average pensionable earnings of the respective spouses or common-law partners.

The average pensionable earnings used to determine the initial amounts of the retirement pensions are also adjusted to exclude the earnings of those who are already receiving their retirement pension.  The resulting adjusted proportion of contributors and average pensionable earnings for benefit computation purposes appear in Tables 65 and 66, respectively.

Table 65 Proportion of Contributors (adjusted for benefit computation purposes)
Age Group Males Females
2013 2025 2050 2013 2025 2050
  (%) (%) (%) (%) (%) (%)
20-24 75.9 83.9 88.4 74.8 83.0 88.2
25-29 84.9 89.3 91.7 80.1 85.2 88.7
30-34 88.5 90.6 92.6 80.9 84.5 87.8
35-39 89.9 92.7 93.9 82.4 86.1 88.6
40-44 87.6 90.0 91.3 82.4 85.4 87.7
45-49 86.0 90.0 91.2 81.9 85.4 87.7
50-54 83.1 86.1 87.9 78.2 82.1 84.8
55-59 74.3 79.2 81.5 66.5 71.9 74.6
60-64 41.1 46.4 50.2 35.4 40.8 44.4
65-69 6.5 6.9 8.1 4.3 5.0 6.0
All Ages 74.1 75.9 78.1 68.7 71.1 73.9
 
Table 66 Average Pensionable Earnings (adjusted for benefit computation purposes)
Age Group Males Females
2013 2025 2050 2013 2025 2050
  ($) ($) ($) ($) ($) ($)
20-24 23,991 33,251 73,974 19,720 27,931 63,698
25-29 33,403 47,109 106,351 29,697 42,629 97,938
30-34 36,736 51,893 117,992 32,231 46,305 106,904
35-39 38,394 54,272 123,613 34,026 48,905 112,925
40-44 39,085 55,172 125,686 35,190 50,494 116,617
45-49 39,593 55,955 127,379 35,862 51,527 118,955
50-54 39,662 55,913 127,096 35,846 51,518 118,744
55-59 37,859 53,091 119,405 34,084 48,687 111,283
60-64 38,618 52,476 114,547 34,179 47,624 106,371
65-69 31,615 42,518 87,521 27,300 37,639 79,049
All Ages 35,599 50,286 112,615 31,640 45,461 103,430

B. Benefit Eligibility Rates

As described in Appendix C (Plan Provisions), eligibility for benefits varies according to the type of benefit.  Benefit eligibility rates (the proportions of the population eligible to benefits, for each age and sex) are used in the valuation process for the computation of historical retirement rate proportions, disability incidence rates, and benefits of all types.

Benefit eligibility rates for retirement, disability, and survivor benefits are computed using regression formulae that were developed to closely reproduce historical eligibility rates observed from the CPP records of earnings data for the period 1966 to 2010.  The projected eligibility rates take into account the applicable eligibility rules for each type of benefit, the proportion of contributors, and the length of the contributory period for existing and future cohorts of earners.

The disability and survivor benefit eligibility rates developed as above must be adjusted for the purpose of computing the earnings-related portion of these two types of benefits.  Table 67 shows the resulting eligibility rates for the various benefit types by sex and age for selected years.  The retirement eligibility rates for some ages and years are greater than 100% due to individuals who contributed to the CPP and then left the country with no further information available as to their status.  Since these individuals are not counted in the population, the retirement eligibility rates can be higher than 100%.

Table 67 Benefit Eligibility Rates by Type of Benefit
Year Retirement Benefit Eligibility Rate at Age 65 Survivor/Death Benefit Eligibility Rate at Age 65
Males Females Males Females
2013 1.07 1.01 1.00 0.66
2014 1.07 1.01 1.00 0.68
2015 1.07 1.01 1.00 0.69
2016 1.07 1.01 1.00 0.70
2017 1.06 1.01 1.00 0.71
2018 1.06 1.00 1.00 0.72
2019 1.05 1.00 1.00 0.73
2020 1.05 1.00 1.00 0.74
2025 1.03 1.00 1.00 0.78
2030 1.01 0.99 0.98 0.80
2040 1.01 0.99 0.97 0.82
2050 1.02 1.01 0.97 0.83
2060 1.02 1.01 0.97 0.84
Year Survivor/Death Benefit Eligibility Rate at Ages 20-64 Disability Benefit Eligibility Rate at Ages 20-64
Males Females Males Females
2013 0.79 0.72 0.73 0.65
2014 0.80 0.73 0.74 0.66
2015 0.80 0.74 0.74 0.66
2016 0.80 0.74 0.74 0.66
2017 0.80 0.74 0.74 0.66
2018 0.80 0.74 0.75 0.67
2019 0.81 0.75 0.76 0.68
2020 0.81 0.75 0.76 0.68
2025 0.83 0.77 0.78 0.70
2030 0.84 0.79 0.80 0.73
2040 0.85 0.80 0.80 0.74
2050 0.86 0.81 0.80 0.74
2060 0.86 0.82 0.81 0.75

C. Average Earnings-Related Benefit

The average earnings-related benefit is used in the calculation of the total emerging earnings‑related benefit expenditures for a given calendar year, for each sex, and all relevant ages.

The gross (i.e. before taking into account the drop-out provisions and earnings index) average earnings-related benefit is determined by sex and calendar year for each attained age from 18 to 70 as the product of the retirement benefit proportion (25%), the MPEA, and the ratio of:

  • the sum over all years in the elapsed contributory period (i.e. from age 18 to the attained age) of the ratio in each year of:
    • the average pensionable earnings of contributors (the product of the proportion of contributors and the average pensionable earnings, both components adjusted for benefit computation purposes),
    • to the YMPE
  • to the number of years in the elapsed contributory period at the attained age.

The earnings-to-YMPE ratios that have to be dropped from the numerator of the gross average earnings-related benefit described above, in respect of an individual, are the lowest ratios for a number of years equal to the sum of the child-rearing period, disability period, and general drop-out period.  However, since the general approach is based on macrosimulation (aggregate), there is no explicit way of determining the lowest ratios for each individual that would have to be dropped from the numerator to take into account the drop-out provisions.  Consequently, a formula was developed to help determine the lowest earnings ratios that can be dropped.  The formula is based on the length of the contributory period, the general drop-out percentage, the child-rearing period expressed as a percentage of the elapsed contributory period, and the average proportion of contributors over the elapsed contributory period.

The average period that must be dropped from the elapsed contributory period (the denominator of the gross average earnings-related benefit described above) is computed as the sum of the three periods determined in respect of the disability, child-rearing, and general drop-out provisions.

The average earnings-related benefit is finally determined by adjusting the gross average earnings-related benefit determined above for the drop-out provisions.

Table 68 shows the resulting projected average earning-related benefit as a percentage of the maximum benefit at ages 60 and 65 by sex and year of birth for various cohorts of contributors.  The average earnings-related benefit for males at age 65 as a percentage of the maximum is about 10 to 13 percentage points lower than at age 60 due to the fact that males who take their benefit at age 65 have a longer contributory period and an historical lower earnings profile than those who take an early benefit at age 60.  For females, the difference between age 60 and 65 is less pronounced.  The earnings-related benefits for males as a percentage of the maximum are expected to generally decrease over time because of the lower participation and pensionable earnings (as a proportion of the YMPE) of younger contributors in the early years of their contributory period.  For females, this decline is offset by the expected higher earnings of future female cohorts.  As a result, the gap between the male and female average earnings-related benefits is expected to decrease over time.

Table 68 Average Earnings-Related Benefit as Percentage of Maximum Benefit
Year of Birth Average Earnings-Related Benefit (%)
Males Females
Age 60 Age 65 Age 60 Age 65
1950 79 67 58 53
1951 79 66 59 54
1952 79 66 62 54
1953 77 66 59 54
1954 78 65 60 54
1955 78 65 60 54
1960 75 63 60 53
1965 71 60 60 52
1970 71 59 60 52
1980 73 60 63 54
1990 72 60 64 55
2000 74 61 66 56
2010 74 61 66 57
2020+ 74 61 66 57

D. Retirement Expenditures

For each cohort of contributors taking their retirement pension at a given age starting from age 60 or above in each of the calendar years starting in 1967, an average retirement benefit was computed to determine the emerging retirement benefit expenditures.  The average retirement benefit is computed by age, sex, and calendar year of emergence of the pension as the product of:

  • the assumed proportion of contributors electing to opt for their retirement benefit;
  • the actuarial adjustment factor in connection with the flexible retirement age provision; and
  • the average earnings-related benefit.

The assumed proportions by age, sex, and calendar year of contributors electing to start receiving the retirement pension at a given age were determined by taking into account the assumed future work patterns of earners aged 60 and over and the corresponding CPP experience from 1996 to 2012.  These proportions correspond to the ratio of the number of emerging retirement beneficiaries to the product of the population and the retirement benefit eligibility rate (i.e. the ratio of the number of new retirement beneficiaries to the eligible population).

Retirement rates at age 60 for the cohort reaching age 60 in 2012 are 41% and 44% for males and females, respectively.  These rates reflect the increase in early retirement rates that may have resulted from two provisions of the Economic Recovery Act (stimulus).  First, the removal in 2012 of the work cessation test to receive the pension early (prior to age 65) may have increased the early retirement rates.  Second, the anticipation of the greater reductions in early retirement pensions due to the increased actuarial adjustments (starting in 2012 and phased in by 2016) may have also contributed toward the observed increase in pension take-up at age 60 in 2012.

After peaking in 2012, the early retirement rates are assumed to decrease as the higher actuarial adjustments are phased in and the effect of the removal of the work cessation test diminishes.  For cohorts reaching age 60 in 2016 and thereafter, the retirement rates are assumed to decrease to 34% and 38% for males and females, respectively and to increase to 41% and 39%, respectively at age 65 in 2021 and thereafter.  These rates reflect trends in recent experience.

For each year in the projection period after 2015, the retirement rates for ages 61 to 64 are determined based on the observed averages over the five-year period ending in 2011.  The retirement rates for ages 66 and above are determined based on the observed rates in 2012.  Most contributors elect to commence receiving their retirement pensions on or before age 65, with only a small proportion of contributors electing to start their pensions after that age.

The rates at age 65 are derived such that the sum of the retirement rates for each cohort is 100%.  With this approach, it is implicitly assumed that all eligible contributors will have applied for their retirement pension before they reach age 80.  Table 69 shows the projected retirement rates by age for both males and females.

Table 69 Retirement Rates
Age Male Cohort Aged 60 in Female Cohort Aged 60 in
2012Footnote 1 2016Footnote 2+ 2012Footnote 1 2016Footnote 2+
  (%) (%) (%) (%)
60 41.3 34.0 43.7 38.0
61 8.2 6.0 8.0 6.0
62 6.1 5.0 6.1 5.0
63 4.5 4.0 4.5 4.0
64 4.0 4.0 4.0 4.0
65 29.5 40.6 29.9 39.2
66 1.2 1.2 0.9 0.9
67 1.1 1.1 0.6 0.6
68 1.1 1.1 0.6 0.6
69 1.0 1.0 0.6 0.6
70 0.6 0.6 0.5 0.5
71+ 1.4 1.4 0.6 0.6
Total 100.0 100.0 100.0 100.0

The retirement pension expenditures for each year following the year of benefit take-up for a given age, sex, and cohort is computed as the product of:

  • the population of retirement beneficiaries at emergence;
  • the relevant annualized average rate of retirement pension payable during the year of emergence (described earlier);
  • the probability of survival from the emergence age to the attained age; and
  • the Pension Index, which recognizes the annual inflation adjustment to a pension each 1 January after the pension’s emergence.

The mortality rates of CPP retirement beneficiaries used in the projections vary by age, sex, calendar year, and level of emerging pension.  The mortality rates were developed based on CPP retirement beneficiaries’ mortality experience over the period 1966 to 2012 and the July 2009 actuarial study of the mortality of CPP retirement and survivor beneficiaries (Canada Pension Plan Mortality Study: Actuarial Study No. 7 by the Office of the Chief Actuary) adjusted to reflect recent experience and the mortality improvement assumptions for the general population in this report.  The resulting mortality rates and life expectancies are shown in Tables 70, 71, and 72.

Table 70 Mortality Rates of Retirement Beneficiaries
(annual deaths per 1,000)
Age Males Females
2013 2025 2050 2075 2013 2025 2050 2075
60 5.6 4.6 3.7 3.0 3.3 2.8 2.3 1.9
65 12.1 9.9 8.1 6.6 7.6 6.5 5.3 4.3
70 18.2 14.6 11.9 9.7 11.8 10.0 8.2 6.7
75 30.2 23.6 19.2 15.7 19.6 16.6 13.6 11.1
80 52.1 41.7 34.1 27.9 34.7 29.6 24.2 19.8
85 90.8 75.3 63.3 53.5 62.5 54.2 45.6 38.5
90 157.3 137.8 121.9 108.1 114.1 101.3 89.7 79.6
Table 71 Life Expectancies of Retirement BeneficiariesFootnote 1
Age Males Females
2013 2025 2050 2075 2013 2025 2050 2075
60 25.0 25.8 27.3 28.6 27.9 28.6 29.9 31.1
65 20.5 21.3 22.6 23.9 23.2 23.9 25.1 26.3
70 16.4 17.2 18.4 19.5 18.8 19.4 20.6 21.6
75 12.5 13.3 14.3 15.3 14.7 15.3 16.3 17.3
80 9.1 9.8 10.6 11.5 11.0 11.5 12.3 13.1
85 6.4 6.9 7.5 8.1 7.8 8.3 8.9 9.5
90 4.4 4.7 5.1 5.5 5.3 5.6 6.0 6.5
Table 72 Life Expectancies of Retirement Beneficiaries by Level of Pension (2013)Footnote 1
Age CPP Level of Pension as % of Maximum CPP Level of Pension as % of Maximum
Males Females
< 37.5% 37.5-75% 75-100% 100% < 37.5% 37.5-75% 75-100% 100%
60 23.5 24.1 25.2 26.2 27.3 28.2 28.5 29.1
65 19.5 19.7 20.5 21.5 22.7 23.4 23.6 24.2
70 15.8 15.8 16.4 17.1 18.5 18.9 19.1 19.5
75 12.1 12.1 12.5 13.0 14.5 14.8 14.9 15.2
80 8.9 8.9 9.1 9.5 10.8 11.0 11.2 11.3
85 6.2 6.2 6.4 6.6 7.7 7.8 7.9 8.0
90 4.3 4.3 4.4 4.4 5.3 5.3 5.4 5.4

The amounts of all retirement pensions payable during any given calendar year are obtained by simply summing the annual expenditures applicable for the year as described above, in respect of all age and sex cohorts having emerged in the given and all previous calendar years.

Based on comparisons between actual experience and projections for 1966 to 2012, experience adjustment factors at emergence are applied to all future emerging retirement pensions calculated using the methodology previously described, and are shown in Table 73.  A final calibration factor based on experience for the benefits in pay is further applied to all future benefit in pay.  Table 74 shows the projected number of new retirement beneficiaries along with their projected average monthly retirement benefits by sex and year.

Table 73 Retirement Benefit Experience Adjustment Factors
Age at Emergence
60-65 66 and Over All Ages
Males 0.99 0.57 0.97
Females 0.98 0.60 0.96
Table 74 New Retirement Pensions
Year Number of Beneficiaries Average Monthly Pension
Males Females Total Males Females Total
        ($) ($) ($)
2013 179,870 177,827 357,697  608.06  465.94  537.41
2014 172,094 173,329 345,423  615.31  479.62  547.22
2015 171,025 171,311 342,335  623.93  489.49  556.65
2016 168,128 169,415 337,543  633.46  501.33  567.14
2017 160,221 163,860 324,081  639.21  509.53  573.64
2018 170,629 173,706 344,334  655.55  525.89  590.14
2019 180,165 182,668 362,833  673.39  544.35  608.43
2020 190,175 191,523 381,697  689.47  561.03  625.02
2025 205,726 206,479 412,205  780.73  652.85  716.67
2030 195,791 197,154 392,945  899.02  774.87  836.73
2040 190,732 198,966 389,698  1,261.18  1,111.51  1,184.76
2050 236,017 238,878 474,895  1,768.56  1,580.40  1,673.91
2060 227,143 232,469 459,612 2,502.86 2,268.64 2,384.39

E. Post-Retirement Benefits

Under the Economic Recovery Act (stimulus), individuals younger than age 65 who receive the CPP retirement benefit and work, as well as their employers, are required to make CPP contributions.  Contributing to the Plan is voluntary for retirement beneficiaries aged 65 to 69 who continue to work, but employers of those opting to continue to contribute to the CPP are required to contribute also.  Contributions to the Plan are not permitted upon attaining age 70.  Contributions from working beneficiaries will be applied toward providing a post-retirement benefit with the result that the total pension received from the combination of the retirement pension and the post-retirement benefit could exceed the maximum pension payable under the CPP.  The post-retirement benefit is earned at a rate of 1/40th of the maximum pension amount for each year of additional contributions post-benefit take-up and is adjusted for the earnings level and age of the beneficiary.  This working beneficiaries provision came into effect on 1 January 2012.

To estimate the cost impact of the working beneficiaries provision, it is first necessary to project the number and proportions of working beneficiaries by age and sex.  To project these figures, Canada Revenue Agency and Service Canada data were used.  The proportions of working beneficiaries by age and sex were derived from these data using years 2005 to 2009 to reflect recent experience.  The proportions observed over those years were projected to 2012 based on the trends observed over the years 2005 to 2009.  The projected proportions of working beneficiaries by age and sex for 2012 are also assumed to apply for all subsequent years in order to project the number of working CPP retirement beneficiaries.  The assumed proportions are presented in Table 75.  Since contributing to the Plan is voluntary for beneficiaries aged 65 to 69 who also work, the proportion of working beneficiaries aged 65 to 69 who contribute is assumed to be 50%, and this is reflected in the proportions shown in Table 75.

Table 75 Proportions of CPP Retirement Beneficiaries who are Contributors
Age Males Females
60 41.0% 31.0%
61 41.0% 33.0%
62 41.0% 31.0%
63 38.0% 29.0%
64 35.0% 25.0%
65 16.5% 12.0%
66 15.5% 11.5%
67 14.0% 10.5%
68 12.0% 7.5%
69 11.0% 7.0%

In order to project the additional contributions that will result from working beneficiaries, an assumption is required with respect to their average contributory earnings (i.e., average earnings between the YBE and YMPE on which contributions are made). Based on data for the years 2005 to 2009, the average contributory earnings of working beneficiaries aged 60 to 64 are about 35% to 45% lower than the contributory earnings of contributors of the same age who are not yet beneficiaries. For those aged 65 to 69, their contributory earnings are slightly lower than the contributory earnings of contributors who are not beneficiaries. Contributory earnings of working beneficiaries aged 60 to 64 are assumed to be 40% for males and 45% for females lower than for contributors of the same age who are not beneficiaries. For ages 65 to 69, contributory earnings of working beneficiaries are assumed to be 5% lower for both sexes than for contributors who are not beneficiaries. The resulting average annual contributory earnings for working beneficiaries are presented in Table 76.

Table 76 Average Contributory Earnings of Working Beneficiaries
Year Below Age 65 Age 65 and Above
Males Females Males Females
  ($) ($) ($) ($)
2013 20,336 15,639 23,813 19,988
2014 20,897 16,124 24,244 20,494
2015 21,464 16,619 24,671 21,012
2016 22,130 17,186 25,245 21,596
2017 22,660 17,656 25,846 22,231
2018 23,265 18,179 26,527 22,907
2019 23,954 18,740 27,250 23,628
2020 24,669 19,321 28,023 24,390
2025 29,287 23,096 32,566 28,644
2030 34,341 27,503 38,040 33,569
2040 47,416 38,307 51,899 46,496
2050 65,851 53,346 70,374 63,641
2060 91,854 74,676 94,690 86,241

Table 77 shows the projected number of working beneficiaries with the additional contributions and resulting post-retirement benefits by year. The additional contributions from working beneficiaries are projected to be about $838 million in 2012 and $4.2 billion by 2050. The post-retirement benefits start to be payable in 2013 and are projected to be about $62 million that year and $4.7 billion by 2050. The projected number of working beneficiaries who contribute, their corresponding earnings, and contributions are reflected in all other tables in this report that present contributors, earnings, and contributions projections, unless otherwise indicated. Similarly, the post-retirement benefits are presented in combination with the retirement benefits as total retirement expenditures in all other tables in this report where expenditures are shown by type of benefit.

Table 77 Working Beneficiaries – Contributors, Contributions, and Post-Retirement Benefits
Year Number of Contributing Working Beneficiaries Total Contributions Total Post-Retirement Benefits
  (000s) ($ million) ($ million)
2012 431 838 -
2013 458 914 62
2014 478 979 129
2015 493 1,035 202
2016 504 1,089 280
2017 506 1,123 362
2018 509 1,162 448
2019 516 1,213 536
2020 526 1,275 628
2025 578 1,655 1,169
2030 558 1,889 1,824
2040 539 2,499 3,180
2050 651 4,158 4,718
2060 658 5,799 7,101

F. Disability Expenditures

The general approach used to estimate disability pensions is to compute the value of benefits emerging by age and sex each year starting in 1970 as the product of:

  • the population;
  • the probability of being eligible for disability benefits;
  • the actual or assumed disability incidence rate; and
  • the annual amount of the benefit (flat-rate and average earnings-related benefits).

The value of the emerging earnings-related benefit by age and sex is equal to 75% of the average retirement earnings-related benefit adjusted upward to reflect the fact that eligibility rules are more stringent for disability than for retirement benefits.  These emerging benefits are then projected by age and sex for each future year until termination (due to recovery, death, or attainment of age 65) using the disability termination rates for the appropriate duration and the Pension Index.  Historical and projected disability incidence rates are shown in Chart 11 and Table 78, respectively.

Chart 11 Historical Disability Incidence Rates

(per 1,000 eligible)

Chart 11 Historical Disability Incidence Rates
Table 78 Ultimate Disability Incidence Rates (2017+)Table 78 Footnote (1)
(per 1,000 eligible)
Age Males Females
25 0.39 0.36
30 0.67 0.87
35 1.09 1.56
40 1.58 2.28
45 2.56 3.49
50 4.00 4.92
55 7.12 7.68
60 10.96 10.59
61 11.25 10.73
62 11.54 10.86
63 11.85 11.00
64 12.16 11.14
All Ages 3.30 3.75

It can be seen from Chart 11 that the incidence of new CPP disability cases (i.e. the number of new cases as a proportion of the eligible population) generally increased from 1970 to the early 1990s. The annual rate of change in incidence rates was particularly acute between 1989 and the recession of the early 1990s. After reaching a peak in 1992, disability incidence rates then declined rapidly during the 1990s and have remained relatively stable since the early 2000s up to recently. The decline after 1992 reflects the economic recovery that occurred following the 1990 91 recession as well as the administrative changes put in place in the mid-1990s. The following changes to the CPP disability program contributed to the reduction in disability incidence rates:

  • beginning in 1994, the CPP administration initiated a range of measures designed to effectively manage the growing pressure on the disability program;
  • in September 1995, the guidelines for the determination of disabilities were revised to put the emphasis back on a medical basis and to de-emphasize the use of socioeconomic factors.  The guidelines are used at all levels in the determination process, thus greatly increasing consistency in decision-making;
  • implementation of more stringent eligibility rules since 1998;
  • increased reassessments of the disability status;
  • expansion of vocational rehabilitation services; and
  • implementation of a formal quality assurance program.

After considering the above factors and the fact that the overall female incidence rate has been higher than the overall male incidence rate since 1996, the aggregate (all ages combined using the 2012 population for weights) ultimate incidence rate for 2017 and thereafter is projected to be 3.30 and 3.75 per thousand eligible for males and females, respectively.  These projected ultimate aggregate rates are then distributed by age in accordance with the 2012 eligible population for each sex.  The projected ultimate aggregate rates take into account the adjustments for the 2008 amendments to the Plan and correspond to the average experience over the years 1998 to 2012.

For year 2012, the male and female disability incidence rates are determined to be 3.10 and 3.59 per thousand eligible, respectively.  For the years 2013 to 2016, the male and female rates by age are then assumed to increase gradually from their 2012 levels toward their assumed aggregate ultimate levels in 2017 and thereafter.

The projected disability termination rates presented in Table 79 apply by age, sex, and duration of disability (i.e. receipt of the disability benefit) on an attained calendar year basis.  The average graduated experience over the period 1997 to 2011 is used to produce base year rates for 2010 from which termination rates are projected for 2013 and thereafter.  For 2013 and subsequent calendar years, the disability termination rates are projected for each sex by age at onset of disability and duration of disability, based on expected corresponding recovery and mortality improvement rates.

Both recovery and mortality improvement rates for disability beneficiaries are assumed to trend to ultimate levels by 2018.  Recovery improvement rates are assumed to trend to an ultimate level of 0% (i.e. recovery rates are assumed to be constant after 2018), since the degree to which recovery from disability occurs can vary significantly by age, sex, and year.  Mortality improvement rates of disability beneficiaries are assumed to trend to an ultimate level of 0.8%, which is consistent with the assumed ultimate mortality improvement rate for the general CPP population aged younger than 65.

Table 79 Disability Termination Rates in 2013 and 2030
(per 1,000 people)
Age 2013
Males Females
1st Year 2nd Year 3rd Year 4th Year 5th Year 6+ Year 1st Year 2nd Year 3rd Year 4th Year 5th Year 6+ Year
30 45 54 62 51 51 23 33 48 46 46 48 24
40 43 47 46 28 29 19 32 49 43 28 30 17
50 73 82 54 39 35 24 52 66 47 31 24 16
60 80 80 53 41 42 0 55 60 36 30 29 0
Age 2030
Males Females
1st Year 2nd Year 3rd Year 4th Year 5th Year 6+ Year 1st Year 2nd Year 3rd Year 4th Year 5th Year 6+ Year
30 39 50 61 49 49 21 29 46 46 45 49 24
40 37 43 44 27 27 17 28 46 42 27 30 17
50 62 76 51 37 33 22 45 62 46 30 23 15
60 68 73 48 38 38 0 47 55 33 28 26 0

Based on comparisons of actual results and projections for 1966 to 2012, experience adjustment factors are applied to all future emerging disability pensions calculated using the methodology described above. These factors appear in Table 80.

Table 80 Disability Benefit Experience Adjustment Factors
Number Average Benefit
Males 1.00 0.94
Females 1.01 0.89

Table 81 shows the projected number of new disability beneficiaries along with their projected average disability benefit by sex and year.

Table 81 New Disability Pensions
Year Number of Beneficiaries Average Monthly Pension Average Pension as % of Maximum
Males Females Total Males Females Total Males Females
        ($) ($) ($) (%) (%)
2013 19,452 20,013 39,464 944.32 860.10 901.61 77.9 70.9
2014 19,869 20,383 40,252 961.83 878.52 919.64 77.7 71.0
2015 20,607 20,950 41,557 980.74 898.85 939.46 77.5 71.0
2016 21,205 21,434 42,639 1,001.10 920.46 960.56 77.2 71.0
2017 21,817 21,952 43,769 1,020.89 941.82 981.23 77.0 71.1
2018 22,295 22,416 44,711 1,041.90 964.20 1,002.94 76.8 71.1
2019 22,597 22,730 45,327 1,063.93 987.48 1,025.59 76.5 71.0
2020 22,673 22,825 45,499 1,087.53 1,012.14 1,049.71 76.3 71.0
2025 23,164 23,564 46,729 1,235.62 1,161.46 1,198.22 75.5 70.9
2030 23,433 24,353 47,786 1,424.28 1,343.76 1,383.25 75.1 70.9
2040 25,887 27,012 52,899 1,906.90 1,809.29 1,857.05 74.7 70.9
2050 27,653 28,502 56,155 2,549.26 2,436.08 2,491.81 74.1 70.8
2060 27,244 28,683 55,927 3,413.42 3,267.67 3,338.67 73.3 70.2

G. Survivor Expenditures

Starting in 1968, the number of male and female contributor deaths, derived from the demographic projections for each individual aged 18 and over, is multiplied by the survivor eligibility rates and the proportion of contributors married or in a common-law partnership at the time of death to produce the number of survivor beneficiaries emerging by age, sex, and calendar year.

For each age and sex, the actual proportions of contributors married or in a common-law relationship at the time of death are determined from benefit statistics.  The smoothed averages from recent experience over the years 2009 to 2011, with further adjustments for younger and older ages, are used to determine the assumed proportions for future years.  On the basis of the trends shown over the period 1999 to 2011, the proportions are extrapolated to 2014 and kept constant thereafter.  These proportions account for benefits extended to same-sex couples.  Values are shown in Table 82.

For the purpose of projecting emerging survivor pensions, the number of spousal deaths by sex and calendar year was categorized by the age of the surviving spouse using the age distributions of spouses, and each resulting number was multiplied by:

  • the annual amount of the benefit (flat-rate and average earnings-related benefits);
  • the probability of the deceased contributor being eligible for a survivor benefit;
  • the appropriate factor taking into account the reductions to survivor pensions in respect of survivors emerging under age 45 without dependent children and who are not disabled; and
  • if applicable, the appropriate factor taking into account the limits applying to combined survivor-disability pensions and/or to combined survivor-retirement pensions.

The value of the emerging earnings-related survivor benefit is equal to 37.5% or 60% of the average retirement earnings-related benefit depending on whether the surviving spouse or common-law partner is under age 65 or aged 65 or older.  It is further adjusted upward to account for the fact that eligibility rules are more stringent for survivor benefits than for retirement benefits.

All survivor pensions emerging by year, age, and sex of the surviving spouse or common-law partner are then projected to each subsequent year using the Pension Index and assumed mortality rates to reflect the higher mortality of widows and widowers as compared to that of the general population.  The assumed survivor mortality rates are developed based on survivor beneficiaries’ mortality experience over the period 1966 to 2012 and the July 2009 actuarial study of the mortality of CPP retirement and survivor beneficiaries (Canada Pension Plan Mortality Study: Actuarial Study No. 7 by the Office of the Chief Actuary) adjusted to reflect recent experience and the mortality improvement assumptions for the general population in this report.

Based on comparisons of actual results and projections for 1966 to 2012, experience adjustment factors are applied to survivor pensions, calculated using the methodology described above.  Survivor experience adjustment factors reflect both methodology and assumption adjustments.  The adjustment factors for the number of survivors and average amounts of benefits correspond to the average of the last five known values (2008-2012) and are shown in Table 83.  The projected number of new survivor beneficiaries and average monthly survivor pensions by sex for selected years are shown in Table 84.

Table 82 Proportion of Contributors Married or in Common Law Relationship at Death
Age Males Females
(%) (%)
20 2 1
30 24 30
40 52 63
50 58 65
60 64 58
70 70 49
80 67 30
90 52 10
Table 83 Survivor Benefit Experience Adjustment Factors
Number Average Benefit
Widows 1.04 1.00
Widowers 0.95 0.79
Table 84 New Survivor Pensions
Year Number of Beneficiaries Average Monthly Pension
Under 65 65 and Over Total Under 65 65 and Over
        ($) ($)
2013 23,614 49,754 73,369 391.27 294.36
2014 23,765 51,241 75,006 398.43 297.81
2015 23,831 52,521 76,352 405.91 300.41
2016 23,863 53,891 77,754 414.19 303.59
2017 23,856 55,346 79,202 423.07 306.14
2018 23,888 56,890 80,778 432.17 309.91
2019 23,973 58,536 82,509 441.69 314.45
2020 23,985 60,277 84,262 451.63 319.90
2025 23,872 70,584 94,456 510.37 358.63
2030 23,646 83,260 106,905 582.68 416.86
2040 23,169 105,638 128,807 774.76 574.27
2050 23,195 115,051 138,246 1,037.87 778.05
2060 22,274 116,890 139,164 1,389.64 1,058.31

H. Death Expenditures

The amount of lump sum death benefits payable each year starting in 1968 is determined by age and sex as the product of:

  • the number of deaths, derived for individuals aged 18 and over, consistent with the population data and projections;
  • 50% of the average annual earnings-related benefit (the lump sum death benefit is equivalent to six months of retirement pension) reduced, using the maximum retirement pension and the assumed distribution of average retirement pensions, to allow for the provision limiting the death benefit to a maximum of 10% of the YMPE for the year of death prior to 1998 and to $2,500 thereafter; and
  • the proportion of the deceased contributor’s earnings eligible for survivor benefits.

Based on the comparison of actual results and projections for the years 1966 to 2012, experience adjustment factors were derived.  To account for the maximum death benefit, which is set at $2,500 for 1998 and thereafter, initial adjustment factors for average benefits are set at their current level and then are gradually increased to a value of one for the year 2030 and thereafter for both males and females.  Table 85 shows the experience adjustment factors, and Table 86 shows the projected number of death benefits by sex for selected years.

Table 85 Death Benefit Experience Adjustment Factors
  Initial Ultimate
  Number Average Benefit Number Average Benefit
Males 0.94 0.95 0.93 1.00
Females 1.00 0.89 1.00 1.00
Table 86 Number of Death Benefits
Year Males Females Total
2013 83,667 53,090 136,757
2014 85,253 54,939 140,192
2015 86,763 56,805 143,569
2016 88,381 58,780 147,161
2017 90,033 60,773 150,806
2018 91,814 62,842 154,656
2019 93,812 65,004 158,816
2020 96,023 67,205 163,228
2025 108,088 79,743 187,831
2030 123,541 95,249 218,790
2040 155,679 131,605 287,284
2050 175,374 161,246 336,620
2060 180,652 172,583 353,235

I. Children’s Expenditures

The number of disabled contributor’s child and orphan benefits emerging each year starting in 1970 and 1968, respectively, are determined using the assumed fertility rates to correspond to the number of children of emerging beneficiaries of disability and/or survivor pensions. The resulting number of emerging child beneficiaries by age, sex, and calendar year are thereafter projected from one year to the next, incorporating the following reasons for termination of benefits:

  • attainment of age 25 by the child;
  • ceasing full-time attendance at school while over age 18; and
  • regarding disabled contributor’s child benefits only, termination (by reason of recovery, death, or attainment of age 65) of the parent’s disability benefits.

Total eligible children’s benefits are then obtained for any given calendar year as the product of the aggregate number of child beneficiaries who emerged before and during the year and survived to the applicable year, and the applicable annualized amount of the child flat-rate benefit obtained by adjusting the 2013 rate in accordance with the Pension Index.

Based on historical data from 1966 to 2012, the assumption for the number of children under age 18 is adjusted by a factor of about 0.90 for both disabled contributors’ children and orphans.  The assumption for the number of children aged 18 and over attending school full-time is adjusted by a factor of about 0.59 for both disabled contributors’ children and orphans.  Table 87 shows the projected number of new children’s benefits by type and year.

Table 87 New Children’s Benefits
Year Disabled Contributor’s Child Orphans Total
2013 15,334 10,355 25,689
2014 15,926 10,515 26,440
2015 16,542 10,554 27,096
2016 17,015 10,561 27,575
2017 17,568 10,560 28,128
2018 17,994 10,582 28,575
2019 18,450 10,670 29,120
2020 18,787 10,729 29,516
2025 20,709 11,110 31,818
2030 22,626 11,676 34,302
2040 24,776 12,076 36,851
2050 25,088 11,376 36,464
2060 26,352 10,953 37,305

J. Operating Expenses

The operating expenses of the CPP have historically arisen from different sources including the Department of Employment and Social Development Canada, the Canada Revenue Agency, Public Works and Government Services Canada, the Office of the Superintendent of Financial Institutions Canada, the Department of Finance Canada, and the CPPIB.  Since the 23rd CPP Actuarial Report, operating expenses from all above-mentioned sources were projected as part of the same assumption.  In response to a recommendation made by the independent peer reviewers of the 25th CPP Actuarial Report, operating expenses of the CPPIB are now included in the investment expenses assumption.  In the calendar year 2012, operating expenses from all sources other than the CPPIB amounted to about $735 million, of which $108 million was a one-time charge for the settlement of legal proceedings for medical adjudicators.  Another $61 million of this settlement remains to be charged in 2013.

Based on recent experience from 2008 to 2012, the annual operating expenses (excluding the CPPIB and the one-time charge described above) were on average 0.097% of total annual employment earnings, and were 0.107% in 2012.  The large increase in the CPP operating expenses for 2012 is in part a consequence of implementation costs resulting from the changes emanating from the Economic Recovery Act (stimulus), which should not be permanent.  In light of the above, it is assumed that the CPP operating expenses will represent 0.097% of total annual earnings for 2013 and thereafter which equals the average over the last 5 years.  However, considering the remaining $61 million to be charged in 2013 for the settlement of legal proceedings, the 2013 operating expenses assumption is increased to 0.107% of total annual earnings.

Since the working beneficiaries provision only took effect in 2012, the total employment earnings basis used in the determination of the assumption and projection of operating expenses exclude earnings from working beneficiaries.  For future CPP actuarial reports, as experience data on working beneficiaries become available, the relative basis will be changed to include working beneficiaries’ earnings.

Table 88 shows total operating expenses as a percentage of total earnings over the last three years 2010 to 2012 as well as their projected values.

Table 88 Operating ExpensesFootnote 1
($ million)
Year Operating Expenses Total EarningsFootnote 2 Operating Expenses as % of Total Earnings
      (%)
2010 550 539,374 0.102
2011 530 564,108 0.094
2012 626 585,042 0.107
2013 648 605,660 0.107
2014 610 629,007 0.097
2015 634 653,488 0.097
2020 765 788,499 0.097
2025 928 957,019 0.097
2030 1,130 1,164,826 0.097
2040 1,673 1,724,896 0.097
2050 2,441 2,516,473 0.097

VI. Net Assets as at 31 December 2012

The total assets of the CPP at the end of any given year throughout the projection period are simply determined by adding together the total assets at the end of the previous year, projected investment income and contribution revenues of the given year and then subtracting the projected benefits and operating expenses of the given year.

The actual value of the CPP assets on a market value accrual basis as at 31 December 2012 was $175,095 million.  This is the sum of the CPP Account ($133 million) and the CPPIB invested assets ($172,581 million) for a total of $172,714 million before being adjusted by the amounts receivable minus amounts payable.  The CPP Account was established to record the contributions, interest, pensions, other benefits and operating expenses.  It also records the amounts transferred to and received from the CPPIB.  The receivables include the contributions due but not yet deposited into the CPP Account, benefit overpayments, and net transfers between the CPP and the QPP for dual contributors.  The amounts payable include operating expenses, pensions and other benefits, as well as amounts due to the Canada Revenue Agency.  Table 89 reconciles the assets as at 31 December 2012.

Table 89 Net Assets as at 31 December 2012
($ million)
CPP Account 133
CPPIB Invested Assets 172,581
Subtotal CPP Account and CPPIB Invested Assets 172,714
Plus Amounts Receivable
Contributions 2,652
Benefit Overpayments 3
Net Transfers Due from QPP 117
Minus Amounts Payable
Operating Expenses 4
Pensions and Other Benefits 250
Amounts Due to the Canada Revenue Agency 137
Net Assets 175,095

Appendix F – Acknowledgements

Service Canada provided statistics on the Canada Pension Plan contributors, beneficiaries, and assets.

The CPP Investment Board provided data on the Canada Pension Plan assets. 

Statistics Canada provided information on Canadian demographic and economic variables.

The Canadian Human Mortality Database (CHMD) created by the Department of Demography, Université de Montréal has been used for the historical mortality data. 

The Canada Revenue Agency provided information on Canada Pension Plan contributors and contributions.

The co-operation and able assistance received from the above-mentioned data providers deserve to be acknowledged.

The following people assisted in the preparation of this report:

Assia Billig, Ph.D., F.S.A., F.C.I.A.
Mounia Chakak, A.S.A.
Yu Cheng, A.S.A.
Mathieu Désy, F.S.A., F.C.I.A.
Patrick Dontigny, A.S.A.
Christine Dunnigan, F.S.A., F.C.I.A.
Laurence Frappier, F.S.A., F.C.I.A.
Alain Guimond, A.S.A.
Sari Harrel, F.S.A., F.C.I.A.
Jonathan Petrin, F.S.A., F.C.I.A.
Melissa Pion
Louis-Marie Pommainville, F.S.A., F.C.I.A.
Annie St-Jacques, F.S.A., F.C.I.A.

 

Footnotes

Footnote 1

As at 31 December 2012, under the closed group approach, the actuarial liability of the Plan is equal to $1,004.9 billion, the assets are $175.1 billion, and the assets shortfall is equal to $829.8 billion.

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Footnote 2

The 2013 current service cost of the Plan is estimated to be $27.6 billion or 6.4% of contributory earnings.

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Footnote 3

CPPIB, 2012 Annual Report, March 31, 2012, p. 24.

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Footnote 4

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment Returns Yearbook 2013.

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Table 1 Footnotes

Footnote 1

For the 26th CPP Actuarial Report, the real rate of return assumption is net of all investment expenses, including CPPIB operating expenses. On a comparable basis, the ultimate real rate of return assumption of the 25th CPP Actuarial Report would be restated as 3.9% to reflect this improvement in the methodology.

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Footnote 2

The ultimate disability incidence rates assumption of the 25th CPP Actuarial Report has been adjusted based on the 2012 eligible population in order to compare with the assumption for this 26th CPP Actuarial Report on the same basis.

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Table 5 Footnotes

Footnote 1

Numbers of beneficiaries by sex in Table 6 may not sum to total numbers of beneficiaries shown in Table 5 due to rounding.

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Footnote 2

The number given for retirement beneficiaries does not take into account that the retirement pension can be shared between spouses.

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Footnote 3

A beneficiary who receives concurrently a retirement and a survivor’s pension is counted in each category.

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Footnote 4

This is the number of deceased contributors entitled to a death benefit during the given year.

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Table 6 Footnotes

Footnote 1

Numbers of beneficiaries by sex in Table 6 may not sum to total numbers of beneficiaries shown in Table 5 due to rounding.

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Footnote 2

The number given for retirement beneficiaries does not take into account that the retirement pension can be shared between spouses.

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Footnote 3

A beneficiary who receives concurrently a retirement and a survivor’s pension is counted in each category.

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Footnote 4

This is the number of deceased contributors entitled to a death benefit during the given year.

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Table 7 Footnotes

Footnote 1

Retirement expenditures include expenditures related to post-retirement benefits for working beneficiaries.

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Footnote 2

Plan operating expenses exclude CPPIB operating expenses, which are accounted for separately in the investment expenses assumption.  This is a change from the 25th CPP Actuarial Report.

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Table 8 Footnotes

Footnote 1

For a given year, the value in 2013 constant dollars is equal to the corresponding value in current dollars divided by the cumulative index of the indexation rates for benefits provided as of 2013 in the projections.

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Footnote 2

Retirement expenditures include expenditures related to post-retirement benefits for working beneficiaries.

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Footnote 3

Plan operating expenses exclude CPPIB operating expenses, which are accounted for separately in the investment expenses assumption.  This is a change from the 25th CPP Actuarial Report.

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Table 9 Footnotes

Footnote 1

Retirement expenditures include expenditures related to post-retirement benefits for working beneficiaries.

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Footnote 2

Plan operating expenses exclude CPPIB operating expenses, which are accounted for separately in the investment expenses assumption.  This is a change from the 25th CPP Actuarial Report.

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Table 10 Footnotes

Footnote 1

The pay-as-you-go rates have been calculated using the historical contributory earnings, while the contributions are based on estimates made by the Department of Finance.

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Footnote 2

Investment income includes both realized and unrealized gains and losses.

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Footnote 3

Results for years 1966 to 1998 are on a cost basis, while results for years 1999 to 2012 are presented on a market value basis.  If assets were shown at market value at the end of 1998, total assets would be $44,864 million instead of $36,535 million.

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Footnote 4

For this 26th CPP Actuarial Report, historical numbers for years 2006 to 2009 were revised to reflect a change in the methodology used to allocate fiscal year-end accounting adjustments.  Since 2010, fiscal year-end adjustments are no longer allocated between two calendar years and are now included in the calendar year in which they are reported.

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Table 11 Footnotes

Footnote 1

Investment income includes both realized and unrealized gains and losses.

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Footnote 2

Returns are net of all investment expenses.

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Table 12 Footnotes

Footnote 1

For a given year, the value in 2013 constant dollars is equal to the corresponding value in current dollars divided by the cumulative index of the indexation rates for benefits provided as of 2013 in the projections.

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Footnote 2

Investment income includes both realized and unrealized gains and losses.

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Table 13 Footnote

Footnote 1

Investment income includes both realized and unrealized gains and losses.

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Table 14 Footnotes

Footnote 1

As at 1/1/2013 based on the contributory earnings as projected under this report and using a discount rate equal to the assumed overall rate of return on CPP assets

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Footnote 2

Present values are taken as at 1/1/2013 for the increase in benefits due to participation prior to the effective date (B) and on or after the effective date (E) using a discount rate equal to the assumed overall rate of return on CPP assets.

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Table 15 Footnote

Footnote 1

Investment income includes both realized and unrealized gains and losses.

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Table 16 Footnotes

Footnote 1

Reports are prepared as at 31 December of the valuation year.  Any changes to the steady-state rate as a result of a valuation are effective following the triennial review period.  That is, for the current valuation as at 31 December 2012, any changes to the steady-state rate will become effective 1 January 2016.

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Footnote 2

Target years refers to the beginning and end of the 50-year interval over which the steady-state contribution rate is determined.  This rate is the lowest level rate that results in the asset/expenditure (A/E) ratio being the same in the two target years.  For a given triennial review period of the Plan, the target years are 13 and 63 years after the valuation year.  For this report, the valuation year is 2012 and thus the target years are 2025 to 2075.

Return to footnote (2) referrer

Footnote 3

The steady-state target A/E ratio is the ratio obtained in the target years relating to the determination of the corresponding steady-state contribution rate.  Where the ratios in the target years do not match exactly, the ratio presented pertains to the first target year.

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Footnote 4

The legislated contribution rate of 9.9% is assumed to apply for all years prior to the period the minimum contribution rate is applicable for a given valuation.

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Table 17 Footnote

Footnote 1

Components may not sum to totals due to rounding.

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Table 19 Footnotes

Footnote 1

Components may not sum to totals due to rounding.

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Footnote 2

For each triennial CPP actuarial report, the minimum contribution rate is determined for all years following the three-year review period in which the report is prepared, with the legislated contribution rate applied during the review period.  For the 25th CPP Actuarial Report, the minimum contribution rate was determined for the year 2013 and thereafter, with the legislated rate of 9.9% applied for the 2010-2012 review period.  For the 26th CPP Actuarial Report, the minimum contribution rate is determined from 2016 onward, with 9.9% applied for 2013-2015.

Return to footnote (2) referrer

Footnote 3

The rounded full funding rate for the years 2013-2022 in respect of the 2008 amendments to the Plan is determined to be 0.01%, which is lower than the minimum level of 0.02% required by the CPP Calculation of Contribution Rates Regulations, 2007.  According to the Regulations, the full funding rate is thus deemed to be zero, and as a result, the corresponding funding for the 2008 amendments is provided by the steady-state rate, as shown by the adjustments to the rates in the table.

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Table 22 Footnotes

Footnote 1

The minimum contribution rate in this table refers to the rate applicable for 2016 and thereafter.

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Footnote 2

Assumes the portfolio is invested fully in long-term Government of Canada bonds.

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Footnote 3

Assumes the portfolio is invested in a diversified bond portfolio consisting of federal, provincial, corporate and real return bonds.

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Table 23 Footnotes

Footnote 1

Minimum contribution rate.

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Footnote 2

The probability of earning the positive returns in the table corresponds to the probability that the annual return is greater than or equal to the indicated return.  Similarly, the probability of earning the negative portfolio return corresponds to the probability of earning the indicated return or less.

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Table 24 Footnote

Footnote 1

The minimum contribution rate in this table refers to the rate applicable for 2016 and thereafter.

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Table 25 Footnote

Footnote 1

For these tests, a deterministic instead of a stochastic approach was used to derive the low- and high-cost estimates.

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Table 26 Footnote

Footnote 1

These are cohort life expectancies that take into account future improvements in mortality of the general population and therefore differ from calendar year life expectancies, which are based on the mortality rates of the given attained year.

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Table 27 Footnote

Footnote 1

These are cohort life expectancies that take into account future improvements in mortality of the general population and therefore differ from calendar year life expectancies, which are based on the mortality rates of the given attained year.

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Table 28 Footnotes

Footnote 1

The minimum contribution rate in this table refers to the rate applicable for 2016 and thereafter.

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Footnote 2

Projections use the minimum contribution rate.

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Table 29 Footnotes

Footnote 1

Assets depleted by 2069.

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Footnote 2

Assets depleted by 2076.

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Table 30 Footnote

Footnote 1

The minimum contribution rate in this table refers to the rate applicable for 2016 and thereafter.

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Table 33 Footnote

Footnote 1

Components may not sum to totals due to rounding.

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Table 34 Footnotes

Footnote 1

Components may not sum to totals due to rounding.

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Footnote 2

For each triennial CPP actuarial report, the minimum contribution rate is determined for all years following the three-year review period in which the report is prepared, with the legislated contribution rate applied during the review period.  For the 25th CPP Actuarial Report, the minimum contribution rate was determined for the year 2013 and thereafter, with the legislated rate of 9.9% applied for the 2010-2012 review period.  For the 26th CPP Actuarial Report, the minimum contribution rate is determined from 2016 onward, with 9.9% applied for 2013-2015.

Return to footnote (2) referrer

Footnote 3

The rounded full funding rate for the years 2013-2022 in respect of the 2008 amendments to the Plan is determined to be 0.01%, which is lower than the minimum level of 0.02% required by the CPP Calculation of Contribution Rates Regulations, 2007.  According to the Regulations, the full funding rate is thus deemed to be zero, and as a result, the corresponding funding for the 2008 amendments is provided by the steady-state rate, as shown by the adjustments to the rates in the table.

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Table 36 Footnotes

Footnote 1

Ranges for years of birth correspond to the oldest to youngest ages for an age group.  For example, in the first row of the table, 1956 is the year of birth for those aged 19, 24, 29, etc., 1957 is the year of birth for those aged 18, 23, 28, etc., and so forth.

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Footnote 2

Fertility rates below and to the right of the dotted line are projected.

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Table 39 Footnote

Footnote 1

These are calendar year life expectancies based on the mortality rates of the given attained year.

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Table 40 Footnote

Footnote 1

These are cohort life expectancies that take into account assumed future improvements in mortality of the general population and therefore differ from calendar year life expectancies, which are based on the mortality rates of the given attained year.

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Table 45 Footnote

Footnote 1

Adjusted to the basis used by Statistics Canada in its Labour Force Survey.

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Table 49 Footnote

Footnote 1

Adjusted to the basis used by Statistics Canada in its Labour Force Survey.

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Table 52 Footnote

Footnote 1

Components may not sum to totals due to rounding.

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Table 62 Footnote

Footnote 1

The assumed total real rate of return is shown before reduction for investment expenses.  The assumed total real rate of return net of expenses is obtained by reducing the total real rate of return by 20 basis points.

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Table 69 Footnotes

Footnote 1

As of 1 January 2012, the work cessation test is removed in accordance with the Economic Recovery Act (stimulus).

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Footnote 2

By 2016, the new pension adjustment factors for early or late pension take-up will be fully phased in accordance with the Economic Recovery Act (stimulus).

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Table 71 Footnote

Footnote 1

These are cohort life expectancies that take into account assumed future improvements in mortality of the general population and therefore differ from calendar year life expectancies, which are based on the mortality rates of the given attained year.

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Table 72 Footnote

Footnote 1

These are cohort life expectancies that take into account assumed future improvements in mortality of the general population and therefore differ from calendar year life expectancies, which are based on the mortality rates of the given attained year.

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Table 78 Footnote

Footnote 1

The disability incidence rates shown are adjusted by the eligible population in 2012.

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Table 88 Footnotes

Footnote 1

For this report, CPPIB operating expenses are not included in Plan operating expenses, but are accounted for separately in the investment expenses assumption.  This represents a change from previous CPP actuarial reports.

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Footnote 2

Total earnings used to project operating expenses exclude earnings from working beneficiaries.

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Chart 3 Footnote

Footnote 1

Cohort fertility rates are based on the age of a woman being 29 in a given calendar year.

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Chart 4 Footnote

Footnote 1

These are calendar year life expectancies based on the mortality rates of the given year.

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