Document Properties
- Type of Publication: Presentation
- Subject: Actuarial Report on the Canada Pension Plan as at 31 December 2012
- Date: 12 February 2014
Presentation
- Purpose of the Report
- Demographic Assumptions
- Economic (other than investment) Assumptions
- Investment Assumptions
- Main Findings
Page: 1
Purpose of the Report
- Inform contributors and beneficiaries of the current and projected future financial status of the Canada Pension Plan
- Calculate the minimum contribution rate
- Actuarial report is based on “best-estimate” assumptions over a long period of time (75 years). Although secondary, recent trends are also taken into account.
Page: 2
Demographic Assumptions
Sources: Statistics Canada, CPP/QPP Seminars, Human Mortality Database, World Population Reference Bureau
Page: 3
Total Fertility Rate for Canada
Page: 4
Net Migration Rate
Page: 5
Contribution to increase in life expectancy at birth has gradually shifted to people over age 65
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For ages 65 to 74, 7 deaths per 1,000 are from cancer, while only 3 deaths per 1,000 are from heart diseases
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Male mortality rates for ages 75 to 84 for Canada are projected to become lower than US female mortality rates
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Increase in Life Expectancy at 65
More contributors are expected to reach the retirement age of 65 (93% for someone age 18 in 2013). Retirement beneficiaries are expected to receive their benefits for a longer period.
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The working-age population is projected to slightly increase
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The elderly population is projected to significantly increase
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Economic (other than investment) Assumptions
- Participation rates
- Employment increase (Job creation rate)
- Unemployment rate
- Inflation rate
- Increase in average employment earnings
Sources:
- Statistics Canada (Labour Force Survey 2012),
- Conference Board of Canada (March 2013),
- Towers Watson Economic Expectations Survey (March 2013)
- U of T Policy and Economic Analysis Program (March 2013)
- CPP/QPP Seminars (Sept and Nov 2012)
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Increasing Participation Rates at older ages (Canada)
Page: 13
Age at Labour Force Exit Has Been Increasing
Page: 14
Participation Rates (Canada, 15-69)
Page: 15
Job Creation Rate (Canada, 15+ )
Page: 16
Forecast Comparison for Canada, 2030
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Real Increase in Total Employment Earnings (18-69, Canada less Québec)
Page: 18
A building block methodology is used to determine the real rates of return
- Bonds:
- Start with Long-term Federal bond yield (10+)
- Add bond spread above long-term Federal bond yield
- Convert bond yields to real bond returns
- Add an allowance for rebalancing & diversification (R & D)
- Equities
- Start with Long-term Federal bond real rates of return (10+)
- Add ERP which includes an allowance for R & D
- Real Estate & Infrastructure
- 1/2 Canadian equity return + 1/2 marketable bond return
- Investment Expenses
- Applied as a reduction of expected real rates of return
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Federal bond yield curve is expected to increase
Page: 20
CPP26 marketable bond portfolio is well aligned with the current CPPIB bond portfolio
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The future ERP is expected to be lower than in the past (3.4% for Canada)
Source: Credit Suisse Global Investment Returns Yearbook 2013, Dimson, Marsh and Staunton
Equity risk premium is set at 2.2 %, unchanged from the previous report.
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Portfolio Real Rates of Return
Page: 23
Real rate of return assumed by the OCA is in line with assumptions of peers
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Comparison with Previous Report
Page: 25
Uncertainty of Results: Variation of the MCR
Page: 26
Evolution of Asset/Expenditure Ratio
Page: 27
Open Group CPP Balance Sheet Confirms the Sustainability of the Plan
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Open Group Modified Balance Sheet – Description and Purpose
- Open group balance sheet may be presented in alternative format: split out into pay-as-you-go and funded components of the Plan
- Modified balance sheet emphasizes hybrid nature of partial (steady-state) funding of the Plan and thus allows for better understanding of how future expenditures are financed
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Open Group Modified Balance Sheet
Page: 30
Changes in demographic environment impact funded component
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Real-wage increases affect contributions volume immediately
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The legislated contribution rate of 9.9% is sufficient to sustain the Plan over the projection period of 75 years
- With the legislated contribution rate of 9.9%, contributions are more than sufficient to cover expenditures until 2023.
- Starting from 2023, a proportion of investment income is required to pay the expenditures. In 2030, 22% of investment earnings is required to pay for benefits.
- Results contained in this report confirm that the 9.9% contribution rate is sufficient to financially sustain the Plan and to accumulate assets of $300 billion in 2020.
- 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.
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Actuarial Report on the Canada Pension Plan as at 31 December 2012
Presentation to the Board of Directors of the Canada Pension Plan Investment Board
Thank you
12 February 2014
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