Presentation to the Board of Directors of the Canada Pension Plan Investment Board

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

CPP-RPC 

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.

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Demographic Assumptions

Demographic Assumptions 

Sources: Statistics Canada, CPP/QPP Seminars, Human Mortality Database, World Population Reference Bureau

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Total Fertility Rate for Canada

Total Fertility Rate for Canada 

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Net Migration Rate

Net Migration Rate 

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Contribution to increase in life expectancy at birth has gradually shifted to people over age 65

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

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

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

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

The working-age population is projected to slightly increase 

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The elderly population is projected to significantly increase

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)

Increasing Participation Rates at older ages (Canada) 

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Age at Labour Force Exit Has Been Increasing

Age at Labour Force Exit Has Been Increasing 

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Participation Rates (Canada, 15-69)

Participation Rates (Canada, 15-69) 

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Job Creation Rate (Canada, 15+ )

Job Creation Rate (Canada, 15+ ) 

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Forecast Comparison for Canada, 2030

Forecast Comparison for Canada, 2030 

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Real Increase in Total Employment Earnings (18-69, Canada less Québec)

Real Increase in Total Employment Earnings (18-69, Canada less Québec) 

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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

Federal bond yield curve is expected to increase 

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CPP26 marketable bond portfolio is well aligned with the current CPPIB bond portfolio

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)

 

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

Portfolio Real Rates of Return 

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Real rate of return assumed by the OCA is in line with assumptions of peers

Real rate of return assumed by the OCA is in line with assumptions of peers 

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Comparison with Previous Report

Comparison with Previous Report 

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Uncertainty of Results: Variation of the MCR

Evolution of Asset/Expenditure Ratio 

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Evolution of Asset/Expenditure Ratio

Uncertainty of Results: Variation of the MCR 

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Open Group CPP Balance Sheet Confirms the Sustainability of the Plan

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

Open Group Modified Balance Sheet 

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Changes in demographic environment impact funded component

Changes in demographic environment impact funded component 

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Real-wage increases affect contributions volume immediately

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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