Actuarial Report (30th) on the Canada Pension Plan

1. Executive Summary

1.1 Main Findings

1.2 Introduction

This is the 30^th Actuarial Report on the Canada Pension Plan since the inception of the Canada Pension Plan (CPP or the Plan) in 1966. The valuation date is 31 December 2018. 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.

As of 1 January 2019, the CPP has two components: the base and additional Plans. The CPP consisted only of the base Plan (or base CPP) prior to 2019, and this component continues. The additional Plan (or additional CPP) is the new enhancement to the CPP as of 2019. An important purpose of the report is to inform contributors and beneficiaries of the current and projected financial states of the base and additional CPP. The report provides information to evaluate the base and additional Plans’ financial sustainability over a long period, assuming that the legislation remains unchanged. Such information should facilitate a better understanding of the financial states of the base and additional Plans and the factors that influence costs, and thus contribute to an informed public discussion of issues related to the finances of the two components of the CPP.

The previous triennial report was the 27^th Actuarial Report on the Canada Pension Plan as at 31 December 2015, which was tabled in the House of Commons on 27 September 2016.

The Canada Pension Plan was subject to a series of amendments since the 27^th CPP Actuarial Report but prior to 31 December 2018 pursuant to the adoption of Bills C-26, C-74, and C-86. These Bills are described further in Appendix A of this report. The 28^th CPP Actuarial Report was prepared to show the estimates for the Plan in respect of the introduction of the additional Plan (Bill C-26). The 29^th CPP Actuarial Report was prepared to show the effect of Bill C-74 on the long-term financial states of the base and additional Plans. There was no supplemental actuarial report in respect of Bill C-86 since the cost impacts on the CPP were deemed to be small to negligible.

Under Bill C-97 – Budget Implementation Act, 2019, No. 1, the application for a CPP retirement pension is waived upon reaching age 70, effective 1 January 2020. Bill C-97 was introduced in 2019 and received Royal Assent on 21 June 2019. This amendment is considered to be a subsequent event for the purpose of this report, since it became known to the Chief Actuary after the valuation date but before the report date and was determined to have an effect on the financial state of the CPP.

In addition, amendments to the regulations regarding the calculation of the CPP contribution rates were proposed in 2018 to clarify the determination of full funding rates and introduce the calculation of the additional CPP minimum contribution rates. These regulations as well as proposed regulations regarding the sustainability of the additional CPP, namely the Calculation of Contribution Rates Regulations, 2018 and the Additional Canada Pension Plan Sustainability Regulations^{Footnote 1} are awaiting formal consent by the provinces.

This 30^th CPP Actuarial Report takes into account all the above listed amendments and proposed regulations as well as the subsequent event of the amendment under Bill C-97. Further, this CPP Actuarial Report takes into account the updated population estimates from Statistics Canada that became available in January 2019. This is also considered to be a subsequent event for the purpose of this report.

1.3 Independent Peer Review Process

As part of its policy of ensuring that it provides sound and relevant actuarial advice to Members of Parliament and to the Canadian population, as was done for previous reports, the Office of the Chief Actuary (OCA) has commissioned an external peer review^{Footnote 2} of this actuarial report on the CPP.

The external peer review is intended to ensure that the actuarial reports meet high professional standards, and are based on reasonable methods and assumptions. Over the years, peer review recommendations have been carefully considered and many of them implemented.

1.4 Scope of the Report

Section 2 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 3. The results for the base Plan and additional Plan are presented separately in sections 4 and 5, respectively, and include for each component the projections of the revenues, expenditures, and assets over more than the next 75 years. Section 6 provides the reconciliation of the results for the base Plan with those of the 27^th CPP Actuarial Report as well as the reconciliation of the results for the additional Plan with those of the 28^th CPP Actuarial Report. Section 7 presents a general conclusion about the financial states of the base and additional Plans, and section 8 provides the actuarial opinion.

The various appendices provide a summary of the Plan provisions, a description of the data, assumptions and methodology employed, supplemental information on the financing of the CPP, detailed reconciliations of the results with previous reports, the uncertainty of results, and acknowledgements of data providers and staff who contributed to this report.

1.5 Uncertainty of Results

This actuarial report on the Canada Pension Plan presents projections of its revenues and expenditures for both of its components, the base and additional CPP, over a long period of time. 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 projections.

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

These tests show that the minimum contribution rate (MCR) of the base CPP as well as the first and second additional minimum contribution rates (FAMCR and SAMCR) of the additional Plan would deviate significantly compared to their best estimates, if other than best-estimate assumptions were realized.

Real rates of return on investments, the future evolution of mortality, and future economic growth are among the important factors that could result in the minimum contribution rates being higher than the respective legislated rates. The following table highlights some of the impacts of these factors on the MCR of the base CPP and the FAMCR and SAMCR of the additional Plan.

1.6 Conclusion

The actuarial projections of the financial states of the base and additional Plans presented in this report reveal the following.

Base CPP

This report confirms that the legislated contribution rate of 9.9% is sufficient to finance the base CPP over the long term. Under the legislated contribution rate, contributions to the base Plan are projected to be higher than expenditures over the period 2019 to 2021, with a portion of investment income thereafter required to pay for expenditures. Total assets of the base Plan are expected to increase significantly over the next decade and then to continue increasing, but at a slower pace. Under the legislated contribution rate of 9.9%, base CPP assets are projected to accumulate to $688 billion by the end of 2030 and $1.7 trillion by 2050, while the ratio of assets to the following year’s expenditures is projected to remain relatively stable at a level of 7.6 over the period 2021 to 2031, then grow to 8.8 in 2050 and continue increasing over the projection period.

The MCR of the base CPP is 9.75% for years 2022 to 2033 and 9.72% for the year 2034 and thereafter, which is lower than the legislated contribution rate of 9.9%. Thus, despite the projected substantial increase in benefits paid as a result of an aging population, the legislated rate exceeds the MCR, and the base Plan is expected to be able to meet its obligations throughout the projection period.

Since the MCR of the base CPP is below the legislated contribution rate of 9.9%, the insufficient rates provisions in subsections 113.1(11.05) to 113.1(11.15) of the Canada Pension Plan 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 2019 and thereafter.

Additional CPP

This report confirms that the legislated first and second additional contribution rates of 2.0% for 2023 and thereafter and 8.0% for 2024 and thereafter, respectively, result in projected contributions and investment income that are sufficient to fully pay the projected expenditures of the additional CPP over the long term. Under the legislated additional contribution rates, contributions to the additional Plan are projected to be higher than expenditures up to the year 2057 inclusive, with a portion of investment income thereafter required to pay for expenditures. As such, total assets of the additional Plan are expected to increase rapidly over the first several decades. Under the legislated additional contribution rates, additional CPP assets are projected to grow to $191 billion by the end of 2030 and to $1.3 trillion by 2050, while the ratio of assets to the following year’s expenditures is projected to increase rapidly until 2025 and then decrease to a level of about 26 by 2080.

The FAMCR is 1.98% for the year 2023 and thereafter, and the SAMCR is 7.92% for the year 2024 and thereafter, which are lower than the respective legislated additional contribution rates.

In accordance with the Additional Canada Pension Plan Sustainability Regulations, the AMCRs are sufficiently close to the legislated additional contribution rates such that no immediate action is required to address the differences. Therefore, in the absence of specific action by the federal and provincial governments, the legislated additional contribution rates will remain at their scheduled values.

Base and Additional CPP

To measure the sensitivity of the financial projections of each of the base and additional Plans to future changes in the demographic, economic, and investment environments, a variety of sensitivity tests were performed. Analyses of different asset allocations, the impacts of varying investment experience, and sensitivity tests on key assumptions show that the minimum contribution rates of the base and additional CPP could deviate significantly from their best-estimate values if other than best-estimate assumptions were to be realized, as shown in Appendix E of this report.

The projected financial states of the base and additional Plans presented in this report are based on the assumed demographic, economic, and investment outlooks over the long term. Given the length of the projection period and the number of assumptions required, it is unlikely that the actual experience will develop precisely in accordance with the assumptions. Therefore, it remains important to assess the financial states of the two components on a regular basis by producing periodic actuarial valuation reports. For this purpose, as required by the Canada Pension Plan, the next such actuarial valuation will be as at 31 December 2021.

2. Methodology

As of 1 January 2019, the CPP has two components: the base and additional Plans. The base Plan was the CPP prior to 2019, and this component continues. The additional Plan is the new enhancement to the CPP as of 2019. When not qualified, the term CPP or the Plan used in this report refers to the entire CPP, that is, to both its components.

The actuarial examination of the CPP involves projections of the revenues and expenditures of both components 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 2018,^{Footnote 3} data regarding the starting point for the projections, and best-estimate assumptions regarding future demographic, economic, and investment experience.

The revenues of the base and additional Plans 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 for each component of the Plan 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 for each of the components of the CPP are obtained by applying the respective component’s contribution rate(s) to the respective contributory earnings. Investment income is projected on the basis of the existing portfolio of assets (for the base CPP), 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. Since the assumptions regarding the future asset mix differ between the base and additional Plans, the resulting assumptions regarding investment income differ as well.

Expenditures for each component of the Plan 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 for benefits, together with the benefit provisions and the earnings histories of participants (actual and projected). The projection of total benefits, which includes the continuation of benefits already in pay at the valuation date, requires further assumptions. Operating expenses, excluding Canada Pension Plan Investment Board (CPPIB) operating expenses, are projected by considering the historical and projected relationship between expenses and total employment earnings, while CPPIB operating expenses are considered in the determination of the rates of return.

The assumptions and results presented in the following sections make it possible to measure the financial states of the base and additional CPP separately in each projection year and to calculate the minimum contribution rates. For the base Plan, the minimum contribution rate (MCR) is the sum of two types of rates. The first of these excludes the full funding provision for increased or new benefits, and is referred to as the “steady-state” contribution rate. The second type of rate that makes up the MCR is the full funding rate for increased or new benefits.

For the additional CPP, there are two additional minimum contribution rates (AMCRs), the first additional minimum contribution rate (FAMCR) and the second additional minimum contribution rate (SAMCR). The FAMCR is applicable to contributory earnings below the Year’s Maximum Pensionable Earnings (YMPE) and the SAMCR is applicable to earnings between the YMPE and the Year’s Additional Maximum Pensionable Earnings (YAMPE).

Details of the methodology used to determine the MCR and AMCRs are presented in Appendix C.

A wide variety of factors influence both the current and projected financial state of the components of the CPP. 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.

3. Best-Estimate Assumptions

3.1 Introduction

The information required by statute, which is presented in sections 4 and 5 of this report, necessitates making numerous assumptions regarding future demographic, economic, and investment trends. The projections included in this report cover a long period of time (over 75 years), and the assumptions are determined by examining historical long-term and short-term trends and applying judgment as to the extent these trends will continue in the future. 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 reasonable and appropriate in the aggregate, taking into account certain interrelationships between them.

The assumptions were developed taking into account two subsequent events, that is, events that became known to the Chief Actuary after the valuation date, but before the report date, that were deemed to have an effect on the financial states of the base or additional CPP as at the valuation date. The first subsequent event is the amendment to the Plan under Bill C-97 – Budget Implementation Act, 2019, No. 1, which received Royal Assent on 21 June 2019 (application for a CPP retirement pension is waived upon reaching age 70, effective 1 January 2020). This amendment is further described in Appendices A and B of this report. The second subsequent event is the use of updated population estimates (for years 2018 and prior) from Statistics Canada that became available in January 2019.

The Chief Actuary held a seminar in September 2018 on the long-term demographic, economic, and investment outlook for Canada to obtain opinions from a wide range of individuals with relevant expertise. Five experts in the fields of demographics, economics, investments, and foresight were invited to present their views. Among the participants at the seminar were representatives from the OCA, federal departments including Statistics Canada, Employment and Social Development Canada (ESDC), and the Department of Finance, representatives from provincial and territorial governments, as well as representatives from Retraite Québec, the CPPIB, and other organizations. Representatives of the OCA also attended a seminar on the demographic, economic and financial outlook for 2018-2068 held by Retraite Québec in November 2018. 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 B of this report.

3.2 Demographic Assumptions

The population projections start with the Canada and Québec populations on 1 July 2018, 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.

3.2.1 Fertility

The first cause of the aging of the Canadian population is the decline in the total fertility rate that occurred during the last 50 years. The total fertility rate in Canada decreased 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 declined to a level of 1.5 by the late 1990s. Canada is one of many industrialized countries that saw their fertility rates increase starting in the 2000s. 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 attributable to the most recent economic downturn experienced. As of 2017, the total fertility rate for Canada stood at 1.55.^{Footnote 4}

Similar to Canada, the total fertility rate in Québec fell from a high of about 4.0 children 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 in the 2000s, with the rate reaching 1.74 in 2008. However, similar to Canada’s fertility rate, the fertility rate for Québec has been decreasing in recent years and stood at 1.60^{Footnote 4} in 2017.

The overall decrease in the total fertility rate over the last 50 years 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.

The assumed age-specific fertility rates lead to an assumed total fertility rate for Canada that will increase from its 2017 level of 1.55 children per woman to an ultimate level of 1.62 in 2027. The assumed age-specific fertility rates for Québec lead to a total fertility rate for the province that will increase from its 2017 level of 1.60 to an ultimate level of 1.65 in 2027.

3.2.2 Mortality

Another element that has contributed to the aging of the population is the significant reduction in the age-specific mortality rates. This can be 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, i.e. reductions in mortality) at age 65 increased by 42% between 1966 and 2015, rising from 13.6 to 19.3 years. For women, life expectancy at age 65 (without future improvements) increased by 31%, from 16.9 to 22.1 years over the same period. Although the overall gains in life expectancy at age 65 since 1966 are similar for males and females (between 5 and 6 years), about 65% of the increase occurred after 1991 for males, while for females, only about 45% of the increase occurred in that period.

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 2015. Further, it is assumed that ultimately, mortality improvement rates for males will decrease to the same level as for females. The analysis of the Canadian experience over the period 1925 to 2015, including the recent slowdown trends observed in mortality improvement rates for Old Age Security (OAS) beneficiaries^{Footnote 5}, was combined with an analysis of the possible drivers of future mortality improvements.

The 15-year average mortality improvement rates by age and sex for the period ending in 2015 are the starting point for the projected annual mortality improvement rates from 2016 onward. For ages 65 and over, the annual mortality improvement rates for 2016 to 2017 were estimated using the trends derived from the administrative data on OAS beneficiaries, representing 98% of the general population.

Starting from 2015 (2017 for ages 65 and over), the rates are assumed to gradually reduce to their ultimate levels in 2035, which are for both sexes 0.8% per year for ages below 90, 0.5% for ages 90 to 94, and 0.2% for ages 95 and above. Considering future mortality improvements, life expectancy at age 65 in 2019 is projected to be 21.4 years for males, and 23.9 years for females. This represents a decrease of 0.1 years in life expectancy at age 65 in 2019 for males and no change for females, relative to the 27^th CPP Actuarial Report projections.

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 B of this report.

3.2.3 Net Migration

Net migration corresponds to the number of immigrants less the number of emigrants, plus the number of returning Canadians and the net increase in the number of non-permanent residents.

The net migration rate is expected to decrease from its current (2018) level of 1.11% of the population to 0.86% in 2019, 0.73% in 2020, and reach an ultimate level of 0.62% of the population for the year 2021 and thereafter. The ultimate net migration rate of 0.62% corresponds to the average experience observed over the last 10 years, excluding the net increase in non-permanent residents during that period. For the Québec population, the 2021 ultimate net migration rate assumption corresponds to the 10-year average historical experience for the province of 0.43%, excluding the net increase in non-permanents residents.

3.2.4 Population Projections

Table 2 shows the population of Canada less Québec 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 is projected to drop from 3.6 in 2019 to about half its value or 1.9 in 2095.

3.3 Economic and Investment Assumptions

The main economic assumptions for the Canada Pension Plan are: labour force participation rates, job creation rates, unemployment rates, the rate of increase in prices, and real increases in average employment earnings. For asset projections, further assumptions on real rates of return on invested assets are required.

One of the key elements underlying the best estimate economic assumptions relates to the continued trend toward longer working lives. 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 baby boomers exit the labour force. As a result, labour shortages together with projected improvements in productivity growth are assumed to create upward pressure on real wages until 2025.

3.3.1 Labour Force

Employment levels vary with the rate of unemployment, and reflect trends in increased workforce participation by women, longer periods of formal education among young adults, as well as changing retirement patterns of older workers.

As the population ages, older age groups with lower labour force participation increase in size. As a result, the labour force participation rate for Canadians aged 15 and over is expected to decline from 65.2% in 2019 to 63.0% in 2035. A more useful measure of the working-age population is the participation rate of those aged 18 to 69, which is expected to increase from 76.0% in 2019 to 79.2% in 2035.

The increase in the participation rate for those aged 18 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 longer working lives. Furthermore, labour shortages create attractive employment opportunities that will continue to 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 previous 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. Overall, the male participation rate of those aged 18 to 69 is expected to increase from 79.8% in 2019 to 82.8% in 2035, while the female participation rate for the same age group is expected to increase from 72.1% in 2019 to 75.6% in 2035. Thereafter, the 2035 gap of 7.2% between males and females in this age group is expected to vary between 7.0% and 7.2%.

The job creation rate (i.e. the change in the number of persons employed) in Canada was on average 1.6% from 1976 to 2018 based on available employment data, and it is assumed that the rate will be 1.1% in 2019. The job creation rate assumption is determined on the basis of expected moderate economic growth and an unemployment rate for Canada, ages 15 and over, that is expected to increase from 5.8% in 2018 to 5.9% in 2019 and then reach an ultimate level of 6.2% by 2030. The assumed job creation rate for Canada, ages 15 and over, is on average about 0.7% from 2019 to 2025 and 0.6% from 2025 to 2030, which is slightly lower than the labour force growth rate. It is assumed that, starting in 2030, the job creation rate will follow the labour force growth rate, with both averaging 0.7% per year between 2030 and 2035, and 0.5% per year thereafter. The aging of the population is the main reason behind the expected slower long-term growth in the labour force and job creation rate.

3.3.2 Price Increases

Price increases, as measured by changes in the Consumer Price Index (CPI), tend to fluctuate from year to year. In Canada, increases in prices (inflation) was 2.3% in 2018.

In 2016, the Bank of Canada and the Government renewed their commitment to keep inflation between 1% and 3% until the end of 2021. The Senior Deputy Governor of the Bank of Canada indicated in November 2018 that the Bank was undergoing an extensive review of its monetary policy framework. A number of variants to replace the inflation target are being explored. The Bank is also looking at a possible dual mandate of targeting inflation as well as GDP growth or employment^{Footnote 6}. Nevertheless, given the success of the 2% inflation target, it is considered very likely that the Bank will renew its inflation target commitment or that the target will at least constitute an important part of the Bank’s future mandate.

Price increase forecasts from various economists indicate an average increase in prices of 2.0% from 2019 to 2040. To reflect these forecasts and the expectation that the Bank of Canada will renew its inflation target, the price increase assumption is set at 2.0% for 2019 and thereafter.

3.3.3 Real Wage Increases

Wage increases affect the financial state 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 long term, higher average wages produce higher benefits.

The difference between nominal wage increases and inflation represents increases in the real wage, which is also referred to in this report as the real wage increase. There are five main factors that 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^{Footnote 7}.

The real wage increase is projected to gradually rise from 0.3% in 2019 to an ultimate value of 1.0% by 2025. The ultimate real wage increase assumption is developed taking into account the relationships described above, historical trends, labour shortages, and other changes in the labour market. The ultimate real wage increase assumption combined with the ultimate price increase assumption results in an assumed annual increase in average nominal wages of 3.0% in 2025 and thereafter.

The assumptions regarding the increase in average real annual employment earnings and job creation rates result in projected average annual real increases in total Canadian employment earnings of about 1.6% for the period 2018 to 2035. After 2035, this decreases to about 1.5% on average over the remainder of the projection period, reflecting the assumed 1.0% 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 annual employment earnings and the YMPE, it is assumed that the nominal wage increase assumption is also applicable to the increases in the YMPE from one year to the next.

3.3.4 Real Rates of Return on Investments

Real rates of return on investments 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 the base and additional CPP assets are invested. The assumed long-term real rates of return on base and additional CPP assets take into account the assumed asset mixes 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 75-year average real rate of return on the base CPP assets is assumed to be 3.95%. The additional CPP, which is assumed to have a different asset mix than the base CPP, has an expected 75-year average real rate of return of 3.38%.

For the period 2019 to 2028, the assumed annual real rates of return are lower than the assumed ultimate real rates of return in 2029 due to lower expected bond returns during the period. The average real rates of return over the period 2019-2028 for the base and additional CPP are respectively 3.6% and 2.1%. The ultimate real rates of return for the base and additional CPP are respectively 4.0% and 3.6%. Table 3 summarizes the main economic assumptions over the projection period.

3.4 Other Assumptions

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

3.4.1 Retirement Benefit Take-up Rates

The retirement benefit take-up rates are determined on a cohort basis. The sex-distinct retirement benefit take-up rate for any given age and year from age 60 and above corresponds to the number of emerging (new) retirement beneficiaries divided by the total number of people eligible for retirement benefits 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 an average age of 62.5 over the decade ending in 2018.

In 2012, there was a significant increase observed in the retirement benefit take-up rates at age 60 for the cohort reaching age 60 that year. The retirement benefit take-up rates at age 60 in 2012 were 41% and 43% for males and females, respectively, compared to the corresponding rates of 32% and 35% in 2011. The observed increase in the retirement benefit take-up 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 take-up rates at age 60 in 2012. Second, greater reductions in early retirement pensions were scheduled to be 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 benefit take-up rates at age 60 in 2012.

After 2012, the age 60 retirement benefit take-up rates have continually decreased as the higher actuarial adjustments were phased in and the effect of the removal of the work cessation test diminished. For cohorts reaching age 60 in 2018, the retirement benefit take-up rates are 27.9% for males and 30.6% for females, which are the lowest such rates since 1992.

The retirement take-up rates at age 60 observed for 2018 are assumed to further decrease over the next three years such that, for cohorts reaching age 60 in 2021 and thereafter, the retirement benefit take-up rates are assumed to be 27.0% for males and 29.5% for females. For cohorts reaching age 65 in 2026 and thereafter, the retirement benefit take-up rates are 46.4% for both sexes. These rates result in a projected average age at retirement pension take-up in 2030 of 63.5 for males and 63.3 for females. The same retirement take–up rates apply to the additional CPP.

3.4.2 Disability Incidence Rates - Disability Pension

The sex-distinct disability incidence rate in respect of the disability pension at any given age is the number of new disability beneficiaries divided by the total number of people eligible for the disability pension at that age. The disability incidence rates for the base Plan are the same as for the additional Plan.

Based on the experience over the period from 2003 to 2018, the overall incidence rates for the year 2019 and thereafter are assumed to remain constant at the values in 2018, which are 2.95 per thousand eligible for males and 3.65 per thousand eligible for females.

The assumptions for the disability incidence rates in respect of the disability pension recognize that current disability incidence rates are significantly below the levels experienced from the mid-1970s to mid-1990s for males and during the early 1980s and early to mid-1990s for females. It is also recognized that incidence rates for both sexes have been relatively stable since 1997 as a result of administrative changes made to the disability program.

4. Results - Base CPP

4.1 Overview

The key observations and findings of the actuarial projections of the financial state of the base Canada Pension Plan presented in this report are as follows.

• With the legislated contribution rate of 9.9%, contributions to the base CPP are projected to be more than sufficient to cover the expenditures over the period 2019 to 2021. Thereafter, a portion of investment income is required to make up the difference between contributions and expenditures. Between 2030 and 2050, it is projected that about 22% of investment income will be required to pay for expenditures. In 2095, it is projected that 37% of investment income will be required to cover expenditures.

• With the legislated contribution rate of 9.9%, total assets of the base Plan are expected to increase significantly over the next decade and then will continue increasing, but at a slower pace. Total assets are expected to grow from $372 billion at the end of 2018 to $688 billion by the end of 2030. Assets are then projected to reach $1.7 trillion by 2050 and $9.9 trillion by 2095. The ratio of assets to the following year’s expenditures is projected to remain relatively stable at a level of 7.6 over the period 2021 to 2031 and then grow thereafter to values of 8.8 in 2050 and 9.5 in 2095.

• With the legislated contribution rate of 9.9%, investment income of the base Plan, which is expected to represent 26% of revenues (i.e. contributions and investment income) in 2019, is projected to represent 37% of revenues in 2050 and 42% of revenues by 2095. This illustrates the importance of investment income as a source of revenues for the base Plan.

• The minimum contribution rate (MCR) to sustain the base Plan is 9.75% of contributory earnings for years 2022 to 2033 and 9.72% for the year 2034 and thereafter. The legislated contribution rate of 9.9% applies to the first three years after the valuation year, that is, to the current triennial review period of 2019-2021.

• The MCR consists of two separate components. First, the steady-state contribution rate, which is the lowest rate that results in the projected ratio of the assets to the following year’s expenditures of the base Plan remaining generally constant over the long term, before consideration of any full funding of increased or new benefits, is 9.71% for the year 2022 and thereafter. The second component is the full funding rate that is required to fully fund the recent amendments made to the Canada Pension Plan under Bill C-74 – Budget Implementation Act, 2018, No. 1. The full funding rate is 0.04% for years 2022 to 2033 and 0.01% for the year 2034 and thereafter.

• Under the MCR, the ratio of assets to the following year’s expenditures is projected to decrease slightly from 7.6 in 2022 to 7.5 in 2031 and to be the same fifty years later in 2081.

• The MCR determined for this report is lower than the MCR of 9.79% determined under the 27^th CPP Actuarial Report. Experience over the period 2016 to 2018 was better than expected overall, especially regarding investment returns, leading to a decrease in the MCR. This decrease is partially offset by changes in assumptions. As well, the amendments under Bills C-74 and C-97 have the effects of increasing the MCR. The net result of all changes since the 27^th CPP Actuarial Report is an overall absolute decrease in the MCR of 0.07% for the year 2034 and thereafter.

• Although the pay-as-you-go rate is expected to increase over time from 9.4% in 2019 to 12.5% by 2095 due to the retirement of the baby boom generation and the projected continued aging of the population, the legislated contribution rate of 9.9% is sufficient to finance the base Plan over the long term. The pay-as-you-go rate is the contribution rate that would need to be paid if there were no assets.

• The number of contributors to the CPP is expected to grow from 14.5 million in 2019 to 18.4 million in 2050 and 23.1 million by 2095. Under the legislated contribution rate of 9.9%, base CPP contributions are expected to increase from $51.7 billion in 2019 to $165.5 billion in 2050 and to continue increasing thereafter.

• The number of base CPP retirement beneficiaries is expected to increase from 5.6 million in 2019 to 9.9 million in 2050 and to continue increasing thereafter.

• There continues to be more female than male base CPP retirement beneficiaries, and by 2050 there is expected to be approximately 750,000 (or 16%) more female than male retirement beneficiaries. Thereafter, the relative difference is projected to fall.

• Total expenditures of the base Plan are expected to grow rapidly from approximately $49.3 billion in 2019 to $86.8 billion in 2030. Thereafter, total expenditures are projected to grow at a slower pace, reaching $187.9 billion in 2050 and $1.0 trillion by 2095.

4.2 Contributions

Projected contributions are the product of the contribution rate, the number of contributors, and the average contributory earnings. The contribution rate for the base CPP is set by law and is 9.9%. As of 1 January 2019, all contributors to the base CPP also contribute to the additional CPP.

Table 4 presents the projected number of CPP contributors, including CPP retirement beneficiaries who are working (i.e. “working beneficiaries”), their base CPP contributory earnings and contributions. 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 generally decreasing pace, from 14.5 million in 2019 to 18.4 million in 2050 and 23.1 million by 2095. 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 base CPP contributory earnings, which are derived by subtracting the Year’s Basic Exemption (YBE) from pensionable earnings (up to the YMPE) 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 to the base CPP are expected to increase from $51.7 billion in 2019 to $165.5 billion in 2050 and to continue increasing thereafter, as shown in Table 4. The projected YMPE is also shown, which is assumed to increase according to the nominal wage increase assumption. The YMPE is projected to increase from $57,400 in 2019 to $67,100 in 2025 and $140,500 by 2050.

Since the legislated contribution rate is constant at 9.9% for the year 2019 and thereafter, contributions to the base CPP increase at the same rate as total contributory earnings over the projection period.

4.3 Expenditures

The projected number of base CPP 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 increase from 5.6 million in 2019 to 7.9 million by 2030 or by 42% due to the aging of the population and retirement of the baby boomers. By 2050, the number of retirement beneficiaries is projected to be 9.9 million. Female retirement beneficiaries continue to outnumber their male counterparts, and by 2050 there is projected to be 750,000 or 16% 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 base CPP expenditures by type. Total expenditures of the base Plan are expected to grow rapidly from approximately $49.3 billion in 2019 to $86.8 billion in 2030. Thereafter, total expenditures are projected to grow at a slower pace, reaching $187.9 billion in 2050. Table 8 shows the same information but in millions of 2019 constant dollars.

Table 9 shows the projected base CPP 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 9.4% in 2019 to 12.5% by the end of the projection period, the legislated contribution rate of 9.9% is sufficient to finance the base Plan over the projection period.

4.4 Financial Projections with Legislated Contribution Rate

4.4.1 Market Value of Assets as at 31 December 2018

Prior to 2001, CPP assets were valued at cost because they were traditionally limited to short-term investments and 20-year non-marketable bonds in the form of loans to the provinces. With the creation of the CPP Investment Board (CPPIB) in 1997, excess cash flows (contributions less Plan expenditures) not needed to pay benefits are invested in the capital markets as of 1999. Those assets, as is usually the case for private pension plans, are valued at market. The market value of base CPP assets is $371.7 billion as at 31 December 2018.

4.4.2 Projected Financial State

Table 10 presents historical results of the base CPP while Table 11 and Table 12 present the projected financial state of the base CPP using the legislated contribution rate of 9.9% in current dollars and in 2019 constant dollars, respectively. The projected financial state of the base CPP using the minimum contribution rate of 9.75% for years 2022-2033, and 9.72% for 2034 and thereafter is discussed in the next section 4.5.

Base CPP assets are projected to increase significantly over the next decade and then to continue increasing, but at a slower pace. As shown in Table 11, base CPP assets are projected to increase from $371.7 billion in 2018 to $687.6 billion in 2030 and to $1,718.2 billion by 2050.

The substantially better than expected investment experience of the base Plan over the previous three years and thus higher than expected level of base CPP assets as at the end of 2018 leads to projected base CPP assets that are significantly higher than projected under the previous triennial actuarial report (the 27^th CPP Actuarial Report as at 31 December 2015).

Over the period 2019 to 2021, contributions are projected to exceed expenditures for the base CPP. Thereafter, a small but increasing portion of investment income is required to cover the shortfall. This causes the total revenues (contributions and investment income) to continue to be higher than expenditures but to a lesser extent over the long term, which causes the assets to grow at a slower pace.

Table 13 shows in more detail the sources of the revenues required to cover the expenditures, from which several observations can be made:

• During the period 2019 to 2021, contributions are more than sufficient to cover expenditures.

• From 2022 onward, a portion of investment income is required to fund net cash outflows. It is project that in 2050, 23% of investment income is required to pay for expenditures.

• Investment income, which is expected to represent 26% of revenues in 2019, is further projected to represent 34% of revenues in 2030 and 37% of revenues by 2050. This clearly illustrates the importance of investment income as a source of revenues for the base Plan.

Chart 1 shows historical and projected revenues and expenditures of the base CPP for the period 2000 to 2050.

Chart 1 - Revenues and Expenditures - Base CPP, 9.9% legislated contribution rate (billions of 2019 constant dollars)

Description

Line chart showing the historical and projected base CPP’s revenues and expenditures using the 9.9% legislated contribution rate. Y axis represents billions of 2019 constant dollars. X axis represents the year.

Contributions are 19.9 in the year 2000, increase to 49.6 in 2018, and are projected to continue increasing to reach 89.6 in 2050.

Investment Income is 4.5 in 2000, increases overall to reach 28.4 in 2018, and is then projected to decrease in 2019 before increasing thereafter to reach 53.6 in 2050.

Total Revenues is 24.4 in 2000, increase overall to reach 78.0 in 2018, and are then projected to decrease in 2019 before increasing thereafter to reach 143.2 in 2050.

Expenditures is 19.7 in 2000, increase to 46.6 in 2018, and are projected to continue increasing to reach 101.7 in 2050.

4.5 Financial Projections with Minimum Contribution Rate

The results presented in Table 14 are based on the best-estimate assumptions, but use the MCR of 9.75% for 2022-2033 and 9.72% thereafter as opposed to the legislated contribution rate of 9.9% for 2022 and thereafter. The financial projections of the base Plan under the legislated rate of 9.9% were previously presented in Table 11. Under the MCR, the ratio of assets to the following year’s expenditures is projected to decrease slightly from 7.6 in 2022 to 7.5 in 2031 and to be the same fifty years later in 2081.

In the case that the MCR, as determined by an actuarial report, exceeds the legislated rate, the insufficient rates provisions of the CPP statute may result in adjustments to the base CPP 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 respect of this 30^th CPP Actuarial Report, the MCR 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 2019 and thereafter.

Table 15 shows the progression of the MCR over time under the best-estimate assumptions of this report.

As shown in Table 15, the MCR is relatively stable over the periods considered. If the best-estimate assumptions of this report are realized, the MCR will increase between 0.01% and 0.05% 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 sufficient over subsequent reports as long as the best-estimate assumptions remain the same and base Plan experience does not deviate materially from the assumptions.

5. Results – Additional CPP

5.1 Overview

The key observations and findings of the actuarial projections of the financial state of the additional CPP presented in this report are as follows.

• With the legislated first and second additional contribution rates of 2.0% for 2023 and thereafter and 8.0% for 2024 and thereafter, respectively, contributions to the additional CPP are projected to be higher than expenditures up to the year 2057 inclusive.

• With the legislated first and second additional contribution rates of 2.0% for 2023 and thereafter and 8.0% for 2024 and thereafter, total assets are expected to increase rapidly over the first several decades as contributions are projected to exceed expenditures. The additional CPP assets are projected to grow from $1.5 billion at the end of 2019 to $68 billion by 2025, $191 billion by 2030, $1.3 trillion by 2050, and $9.8 trillion by 2095. The ratio of assets to the following year’s expenditures is projected to increase rapidly until 2025 and then decrease after that, reaching a level of about 26 by 2075 and remaining at that level for the years following up to 2095.

• Due to the financing approach of the additional Plan, investment income will become the major source of revenues of the additional Plan. With the legislated first and second additional contribution rates of 2.0% for 2023 and thereafter and 8.0% for 2024 and thereafter, investment income is projected to represent about 70% of revenues (i.e. contributions and investment income) of the additional CPP by 2075.

• The first additional minimum contribution rate (FAMCR) applicable to pensionable earnings between the YBE and YMPE is 1.49% in 2022 and 1.98% for the year 2023 and thereafter. The second additional minimum contribution rate (SAMCR) applicable to pensionable earnings above the YMPE up to the YAMPE is 7.92% for the year 2024 and thereafter. The phased-in legislated first additional contribution rates of 0.3%, 0.6%, and 1.0% applies respectively to the first three years after the valuation year, that is, to the current triennial review period of 2019-2021.

• Under the FAMCR of 1.98% for 2023 and thereafter and the SAMCR of 7.92% for 2024 and thereafter, the additional CPP open group assets represent 107% of its open group actuarial obligations as at 1 January 2019, and the ratio of invested assets to expenditures stabilizes at a value of 25 for the target years 2088 and 2098.

• Although demographic experience over 2016 to 2018 was better than anticipated and acted to lower the AMCRs, changes in assumptions, especially those related to the CPPIB investment policy, and the amendments under Bills C-74 and C-97 have more than offset the decrease. As a result, the net result of all changes since the 28^th CPP Actuarial Report is an overall absolute increase in the FAMCR of 0.05% and corresponding increase in the SAMCR of 0.20%.

• Demographic changes affecting the base CPP, particularly the aging of the population, will also affect the additional Plan, but to a lesser extent than the base Plan due to the different financing approaches of the base and additional Plans.

• The number of contributors to the additional CPP is the same as to the base CPP, since an individual cannot contribute to the additional Plan without also contributing to the base Plan. Under the legislated first and second additional contribution rates of 2.0% and 8.0%, respectively, additional contributions are expected to increase from $1.6 billion in 2019 to $17 billion in 2025, $43 billion in 2050, and to continue increasing thereafter.

• The number of beneficiaries of additional retirement benefits is expected to increase from 0.2 million in 2019 to 1.8 million in 2025, 8.9 million in 2050, and to continue increasing thereafter.

• Total additional CPP expenditures are expected to steadily grow over time as the additional Plan matures and individuals accrue benefits. Total additional CPP expenditures are projected to increase from approximately $85 million in 2020 to $1.7 billion in 2030, $28 billion in 2050, and $359 billion by 2095.

5.2 Contributions

Projected additional contributions are the product of the additional contribution rates, the number of contributors, and the average first and second additional contributory earnings. The first and second additional contribution rates for the additional CPP are set by law and are 2.0% for 2023 and thereafter and 8.0% for 2024 and thereafter. The first additional contribution rate is phased in over the period 2019 to 2023 as: 0.3%, 0.6%, 1.0%, 1.5%, and 2.0%, and the second tier of the additional Plan starts in 2024.

Table 16 presents the projected number of contributors to the additional CPP, including retirement beneficiaries who receive additional retirement benefits and are working (working beneficiaries), their additional contributory earnings, and additional contributions.

As all contributors to the additional Plan are contributors to the base Plan, the number of contributors to the additional Plan is linked to the same assumed labour force participation rates applied to the working-age population and the job creation rates as for the base Plan.

The additional contributory earnings relating to the first tier of the additional CPP are the same as the base CPP contributory earnings (pensionable earnings between the YBE and YMPE). As such, the projected total first additional contributory earnings shown in Table 16 are the same as the projected total base CPP contributory earnings shown in Table 4.

The second additional contributory earnings relating to pensionable earnings above the YMPE up to the YAMPE are based on the assumed annual increases in wages and the assumed proportion of individuals with pensionable earnings between the YMPE and YAMPE.

As shown in Table 16, total contributions to the additional CPP are expected to be $1.6 billion in 2019 and then are projected to increase to about $12.1 billion in 2023 following the phase-in of the first additional contribution rate. The total additional contributions are projected to reach $17.0 billion by 2025, following the full phase-in of the additional CPP. Thereafter, total contributions to the additional Plan continue to increase, reaching $43.0 billion by 2050.

The projected YMPE and YAMPE are also shown, which are assumed to increase with the nominal wage increase assumption, with the YAMPE equal to 107% of the YMPE in 2024 and 114% of the YMPE from 2025 onward (rounded down to the nearest $100). The YAMPE is projected to be $69,700 initially in 2024 and to then increase to $160,100 by 2050.

After the end of the phase-in period in 2025, the first and second additional contributions to the additional CPP increase at the same rate as the first and second additional contributory earnings, respectively, throughout the projection period. This growth is reflected in the projected total additional contributions.

5.3 Expenditures

Under the additional CPP, there are only earnings-related benefits. There are no flat-rate components to the additional disability and survivor benefits, and no additional flat-rate children’s or death benefits.

The projected number of additional CPP beneficiaries by type of benefit is given in Table 17, while Table 18 presents information for male and female beneficiaries separately. The number of additional retirement beneficiaries increases over time as the number of contributors reaching age 60 (earliest retirement age) and over with at least one valid contribution to the additional CPP increases. The total number of retirement beneficiaries receiving additional retirement benefits is projected to increase from 182,000 in 2019 to 8.9 million by 2050.

The total number of disability and survivor beneficiaries receiving additional benefits increases over time as well. Since eligibility to these benefits is harmonized between the base and additional CPP, all new disability and survivor beneficiaries of the base CPP will also be entitled to additional benefits as long as they (in the case of disability beneficiaries) and their deceased partners (in the case of survivor beneficiaries) had made at least one contribution to the additional Plan. The total number of disability beneficiaries receiving additional benefits is projected to increase from 23,000 in 2019 to 541,000 in 2050. The total number of survivor beneficiaries receiving additional benefits is projected to increase from 15,000 to 1.6 million in 2050.

As the number of additional CPP retirement, disability, and survivor beneficiaries eventually becomes the same as those for the base CPP, the difference between female and male beneficiaries will likewise become equal.

Table 19 shows the amount of projected additional CPP expenditures by type. Projected additional benefit expenditures are low over the first few years of the additional Plan as additional benefits start to accrue. In 2019 and 2020, total expenditures are largely attributable to the operating expenses of the additional Plan. As higher additional benefits become payable to a greater number of beneficiaries, projected additional expenditures increase to reach $447 million in 2025 and $28 billion by 2050. Table 20 presents the same information but in 2019 constant dollars.

5.4 Financial Projections with Legislated Additional Contribution Rates

Table 21 and Table 22 present the projected financial state of the additional CPP using the legislated first and second additional contribution rates of 2.0% and 8.0% in current dollars and in 2019 constant dollars, respectively. The projected financial state of the additional CPP using the FAMCR and SAMCR of 1.98% and 7.92%, respectively is discussed in the next section 5.5.

Under the legislated additional contribution rates, additional contributions are projected to be higher than additional expenditures up to the year 2057 inclusive. Over that period, the additional assets are projected to grow rapidly, from $1.5 billion at the end of 2019 to $68 billion by 2025, $191 billion by 2030, and $1,284 billion by 2050.

In comparison with Table 11, additional CPP assets are projected to be 75% of base CPP assets by 2050, and this percentage is expected to further increase to 99% by 2095. The substantially better than expected investment experience of the base Plan over the previous three years and thus higher than expected level of base CPP assets as at the end of 2018, together with the decrease in the assumed best-estimate rates of return on the additional CPP assets, lead to projected base CPP assets exceeding the additional CPP assets over the entire projection period.

Table 23 shows the sources of the revenues (contributions and investment income) required to cover the additional CPP expenditures. With the growth in the additional assets, the importance of the investment income increases rapidly. By 2075, investment income is projected to represent about 70% of revenues of the additional CPP. The importance of investment income as a source of revenues is directly related to the financing approach of the additional CPP.

A strong reliance of the additional CPP on investment income as a source of revenues results in the additional contribution rates being much more sensitive to financial market environments than is the case for the base CPP. The sensitivity of the base and additional CPP to investment experience is examined in Appendix E of this report.

Chart 2 shows projected revenues and expenditures of the additional CPP for the period 2019 to 2069.

Chart 2 - Revenues and Expenditures - Additional CPP, 2.0%/8.0% legislated contribution rates (billions of 2019 constant dollars)

Description

Line chart showing the projected additional CPP’s revenues and expenditures by using 2.0% and 8.0% legislated contribution rates. Y axis represents billions of 2019 constant dollars. X axis represents the year.

Contributions start at 1.6 in 2019 and are projected to increase to 30.6 in 2069.

Investment Income starts from 0 in 2019 and grows to a projected 68.5 in 2069.

Total Revenues, which equals the sum of contributions and investment income, start at 1.6 in 2019 and are projected to be 99.1 in 2069.

Expenditures start at 0 in 2019 and are projected to increase to 44.4 in 2069.

Table 23 also shows the projected additional CPP expenditures as a percentage of total additional revenues. This percentage is projected to increase as the additional Plan matures from about 2% in 2022 to 10% in 2035. It continues to grow but at decreasing pace, and stabilizes at about 49% by 2095.

5.5 Financial Projections with Additional Minimum Contribution Rates

The results presented in Table 24 are based on the best-estimate assumptions, but use the FAMCR of 1.98% for 2023 and thereafter and SAMCR of 7.92% for 2024 and thereafter as opposed to the legislated first and second additional contribution rates of 2.0% and 8.0%, respectively. The financial projections of the additional Plan under the legislated rates were previously presented in Table 21. Under the AMCRs, the additional CPP open group assets represent 107% of its open group actuarial obligations as at 1 January 2019, and the ratio of invested assets to expenditures stabilizes at a value of 25 for the target years 2088 and 2098.

Table 25 shows the progression of the additional minimum contribution rates over time under the best-estimate assumptions of this report. As shown in Table 25, if the best-estimate assumptions of this report are realized, the FAMCR and SAMCR will remain at about 1.98% and 7.92%, respectively for each of the next four reports, which are below and very close to the legislated additional contribution rates of 2.0% and 8.0%. Thus, the current legislated additional contribution rates are projected to be sufficient over subsequent reports as long as the best-estimate assumptions remain the same and additional Plan experience does not deviate materially from the assumptions.

In the event that the AMCRs, as determined under a CPP actuarial report, deviate to a certain extent from their respective legislated additional rates and the federal and provincial Ministers of Finance do not reach an agreement on how to address such deviation, certain provisions of the Additional Canada Pension Plan Sustainability Regulations would be activated. The deviation in the rates is quantified in the regulations with respect to both the magnitude (absolute basis points difference between the legislated rates and AMCRs) and duration of time that a deviation exists. In such case, adjustments would be made to current and future benefits and possibly to the contribution rates. In respect of this 30^th CPP Actuarial Report, the AMCRs do not deviate materially from their respective legislated rates, and thus the provisions under the sustainability regulations do not apply. Therefore, in the absence of specific action by the federal and provincial governments, the legislated additional contribution rates will remain as scheduled.

6. Reconciliation with Previous Triennial Report

6.1 Base CPP

6.1.1 Introduction

The results presented in this report differ from those previously projected for a variety of reasons. Differences between the actual experience for 2016 through 2018 and that projected in the 27^th CPP Actuarial Report are addressed in section 6.1.2 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 base Plan (that is, the experience update from the period 2016-2018) and changes in the assumptions and methodology on the base CPP minimum contribution rate are addressed in section 6.1.3. Detailed reconciliations of the projected pay-as-you-go rates and the minimum contribution rate are presented in Appendix D.

6.1.2 Experience Update – 31 December 2015 to 31 December 2018

The major components of the change in the base CPP assets from 31 December 2015 to 31 December 2018 are summarized in Table 26.

Contributions during the period 2016 to 2018 were about $234 million lower than expected, mainly as a result of lower than anticipated growth in total employment earnings. This represents a deviation from the expected results of about -0.2%.

Expenditures during the period were $1.9 billion lower than expected. This represents a deviation from the expected results of about -1.4%. The difference between actual and expected expenditures is due to over-projections of retirement benefits (lower take-up of retirement benefits at age 60 than expected), disability benefits (lower disability incidence rates than expected), survivor benefits and operating expenses that outweigh under-projections of death and children benefits. The details by type of expenditure are given in Table 27.

Due to the strong investment performance over the period (actual average annual nominal rate of return of 7.9% compared to the anticipated 3.9%), investment income was $39.3 billion higher than expected. This represents a deviation from the expected results of about 107%. As a result, the change in assets was $86 billion or 90% higher than expected over the period. The resulting assets as at 31 December 2018 are about $41 billion or 12% higher than projected under the 27^th CPP Actuarial Report.

6.1.3 Changes in the Minimum Contribution Rate

Table 28 presents the main elements of change in the base Plan MCR since the 27^th CPP Actuarial Report and shows an overall decrease in the rate. The cost impacts of the amendments introduced under Bill C-74 – Budget Implementation Act, 2018, No. 1 were determined in the 29^th CPP Actuarial Report. It was determined under that report that the amendments had the effect of triggering the full funding provision of the CPP statute and introducing full funding rates, which increased the MCR. Bill C-97 – Budget Implementation Act, 2019, No. 1, which waives the application for the retirement pension upon reaching age 70, also had the effect of increasing the MCR. Since Bill C-97 does not involve a benefit improvement, it does not trigger the full funding provision of the CPP statute.

Experience over the period 2016 to 2018 was better than anticipated overall, especially regarding investment income, which lowers the MCR. Changes made to the demographic assumptions also act to lower the MCR. However, these reductions in the rate are partially offset by lower assumed real wage increases, changes to the assumed retirement take-up rates, assumed disability incidence rates, and investment assumptions. A more detailed reconciliation of changes in the MCR is provided in Table 106 in Appendix D of this report.

6.2 Additional CPP

6.2.1 Introduction

The results presented in this report differ from those previously projected for a variety of reasons. Differences between the actual experience for 2016 through 2018 and that first projected in the 28^th CPP Actuarial Report and then the 29^th CPP Actuarial Report provide a different starting point for the additional CPP projections shown in this report. The impact of a different starting point (that is, experience since the last triennial valuation of the base Plan) and changes in the assumptions and methodology on the additional minimum contribution rates relative to the 28^th and 29^th CPP Actuarial Reports are addressed in section 6.2.2. Detailed reconciliations of the first and second additional minimum contribution rates are presented in Appendix D.

6.2.2 Changes in the Additional Minimum Contribution Rates

Table 29 presents the main elements of change in the first and second additional minimum contribution rates (FAMCR, SAMCR) and shows an overall increase in the rates. The cost impacts of the amendments determined in the 29^th CPP Actuarial Report had the effect of increasing the AMCRs.

Although demographic experience over 2016 to 2018 was better than anticipated and acted to lower the AMCRs, changes in assumptions, especially those related to the assets allocation, and the amendments under Bills C-74 and C-97 have more than offset the decrease. As a result, the net result of all changes since the 28^th CPP Actuarial Report is an overall absolute increase in the FAMCR of 0.05% and corresponding increase in the SAMCR of 0.20%. A more detailed reconciliation of changes in the AMCRs is provided in Table 107 in Appendix D of this report.

7. Conclusion

The actuarial projections of the financial states of the base and additional Plans presented in this report reveal the following.

Base CPP

This report confirms that the legislated contribution rate of 9.9% is sufficient to finance the base CPP over the long term. Under the legislated contribution rate, contributions to the base Plan are projected to be higher than expenditures over the period 2019 to 2021, with a portion of investment income thereafter required to pay for expenditures.

Total assets of the base Plan are expected to increase significantly over the next decade and then to continue increasing, but at a slower pace. Under the legislated contribution rate of 9.9%, base CPP assets are projected to accumulate to $688 billion by the end of 2030 and $1.7 trillion by 2050, while the ratio of assets to the following year’s expenditures is projected to remain relatively stable at a level of 7.6 over the period 2021 to 2031 and then grow to 8.8 in 2050 and continue increasing over the projection period.

The MCR of the base CPP is 9.75% for years 2022 to 2033 and 9.72% for the year 2034 and thereafter, which is lower than the legislated contribution rate of 9.9%. Thus, despite the projected substantial increase in benefits paid as a result of an aging population, the legislated rate exceeds the MCR, and the base Plan is expected to be able to meet its obligations throughout the projection period.

Since the MCR of the base CPP is below the legislated contribution rate of 9.9%, the insufficient rates provisions of the Canada Pension Plan 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 2019 and thereafter.

Additional CPP

This report confirms that the legislated first and second additional contribution rates of 2.0% for 2023 and thereafter and 8.0% for 2024 and thereafter result in projected contributions and investment income that are sufficient to fully pay the projected expenditures of the additional CPP over the long term. Under the legislated additional contribution rates, contributions to the additional Plan are projected to be higher than expenditures up to the year 2057 inclusive, with a portion of investment income thereafter required to pay for expenditures.

Total assets of the additional Plan are expected to increase rapidly over the first several decades as contributions are projected to exceed expenditures. Under the legislated additional contribution rates, additional CPP assets are projected to grow to $191 billion by the end of 2030 and to $1.3 trillion in 2050, while the ratio of assets to the following year’s expenditures is projected to increase rapidly until 2025 and then decrease after that, reaching a level of about 26 by 2080.

The FAMCR is 1.98% for the year 2023 and thereafter, and the SAMCR is 7.92% for the year 2024 and thereafter. The AMCRs are lower than the legislated additional contribution rates.

In accordance with the Additional Canada Pension Plan Sustainability Regulations, the AMCRs are sufficiently close to the legislated additional contribution rates such that no immediate action is required to address the differences. Therefore, in the absence of specific action by the federal and provincial governments, the legislated additional contribution rates will remain at their scheduled values.

Base and Additional CPP

To measure the sensitivity of the long-term projected financial position of both the base and additional Plans to future changes in the demographic, economic, and investment environments, a variety of sensitivity tests were performed. Analyses of different asset allocations, the impacts of varying investment experience, and sensitivity tests on key assumptions show that the minimum contribution rates of the base and additional CPP could deviate significantly from their best-estimate values if other than best-estimate assumptions were to be realized. More details are provided in Appendix E.

The projected financial states of the base and additional Plans presented in this report are based on the assumed demographic, economic, and investment outlooks over the long term. Given the length of the projection period and the number of assumptions required, it is unlikely that the actual experience will develop precisely in accordance with the assumptions. Therefore, it remains important to assess the financial states of the two components on a regular basis by producing periodic actuarial valuation reports. For this purpose, as required by the Canada Pension Plan, the next such actuarial valuation will be as at 31 December 2021.

8. Actuarial Opinion

In our opinion, considering that this 30^th Actuarial Report on the Canada Pension Plan as at 31 December 2018 was prepared pursuant to the Canada Pension Plan:

• the data on which this report is based are sufficient and reliable for the purposes of this report;

• the assumptions used are, individually and in aggregate, reasonable and appropriate for the purposes of this report; and

• the methods employed are appropriate for the purposes of this report.

Based on the results of this valuation, we hereby certify that:

• the minimum contribution rate required to finance the base CPP is 9.75% for years 2022 to 2033 and 9.72% for the year 2034 and thereafter.

• the additional minimum contribution rates that result in projected contributions being sufficient, along with projected investment income, to fully pay projected expenditures of the additional CPP are determined to be:

  • first additional minimum contribution rate: 1.49% for the year 2022 and 1.98% for the year 2023 and thereafter, and

  • second additional minimum contribution rate: 7.92% for the year 2024 and thereafter.

This report has been prepared, and our opinions given, in accordance with accepted actuarial practice in Canada, in particular, the General Standards and the Practice-Specific Standards for Social Security Programs of the Standards of Practice of the Canadian Institute of Actuaries.

As of the date of the signing of this report, we have not learned of any events, other than the events already accounted for in this report, that would have a material impact on the financial states of the base and additional CPP as at 31 December 2018.

 

 

Ottawa, Canada

27 November 2019

Appendix A – Summary of Plan Provisions

A.1 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 occasions as a result of the following:

Part 1 of Bill C-26 – An Act to amend the Canada Pension Plan, the Canada Pension Plan Investment Board Act and the Income Tax Act (introduction of the additional CPP) which received Royal Assent on 15 December 2016.

Division 19 of Part 6 of Bill C-74 – Budget Implementation Act, 2018, No. 1 (removal of age-related reductions in survivor benefits, introduction of child-rearing and disability drop-ins for the additional CPP, introduction of the post-retirement disability benefit for the base CPP, change in base CPP death benefit to flat-rate $2,500, authorization of making of sustainability regulations for the additional CPP) which received Royal Assent on 21 June 2018.

Division 2 of Part 4 of Bill C-86 – Budget Implementation Act, 2018, No. 2 (technical amendment regarding calculation of child-rearing drop-in amount under the additional CPP) which received Royal Assent on 13 December 2018^{Footnote 8}.

Division 6 of Part 4 of Bill C-97 – Budget Implementation Act, 2019, No. 1 (application for CPP retirement pension is waived upon reaching age 70, effective 1 January 2020, as well as administrative amendments regarding overpayments of salaries and wages) which received Royal Assent on 21 June 2019.

The details of the cost impacts of the first two Bills listed above can be found respectively in the 28^th Actuarial Report supplementing the 27^th Actuarial Report on the Canada Pension Plan as at 31 December 2015, and the 29^th Actuarial Report supplementing the 27^th and 28^th Actuarial Reports on the Canada Pension Plan as at 31 December 2015. There was no actuarial report in respect of the amendments under the third Bill listed above (Bill C-86) since the cost impact on the CPP was deemed small to negligible. As for the fourth Bill listed above (Bill C-97), it is considered to be a subsequent event for the purpose of this report, since it became known to the Chief Actuary after the valuation date but before the report. date and was determined to have an effect on the financial state of the CPP.

In addition, amendments to the regulations regarding the calculation of the CPP contribution rates were proposed in 2018 to clarify the determination of full funding rates and introduce the calculation of the additional CPP minimum contribution rates. These regulations as well as proposed regulations regarding the sustainability of the additional CPP, namely the Calculation of Contribution Rates Regulations, 2018 and the Additional Canada Pension Plan Sustainability Regulations are awaiting formal consent by the provinces.

Effective January 1, 2019, an enhancement of the CPP (the additional CPP) is implemented, such that the CPP consists of two components: the base CPP and additional CPP.

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.

A.2 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 benefit is payable are not required to contribute.

A.3 Definitions

A.3.1 Base and Additional CPP

The base CPP or base Plan refers to that part of the CPP other than the part relating to the additional CPP. Prior to 1 January 2019, the CPP consisted only of the base Plan.

The additional CPP or additional Plan refers to the enhancement to the CPP introduced in An Act to Amend the Canada Pension Plan, the Canada Pension Plan Investment Board Act and the Income Tax Act. The additional CPP is implemented as of 1 January 2019. The additional CPP has two (first and second) parts, and the corresponding first and second additional contribution rates and pensionable earnings on which contributions are made will be phased in over the seven-year period 2019 to 2025, described below.

As of 1 January 2019, the CPP comprises the base and additional Plans.

A.3.2 Year’s Maximum Pensionable Earnings (YMPE) and Year’s Additional Maximum Pensionable Earnings (YAMPE)

The YMPE for a calendar year is the limit to which employment and self-employment earnings are subject to contributions and first additional contributions for purposes of the base Plan and additional Plan, respectively. 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 $57,400 in 2019.

The YAMPE for a calendar year is the limit to which employment and self-employment earnings are subject to second additional contributions above the YMPE for the purposes of the additional Plan. The YAMPE will be introduced in the year 2024. The YAMPE will first be set at 107% of the YMPE in 2024, and then at 114% of the YMPE in 2025 and thereafter. The YAMPE is thus set to increase in tandem with the YMPE after 2025. If the YAMPE so calculated is not a multiple of $100, the next lower multiple of $100 is used.

In this report, the YMPE and YAMPE in the year 2025 are projected to be $67,100 and $76,400 respectively.

A.3.3 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. The YBE is $3,500 in 2019.

A.3.4 Contributory Period and Additional Contributory Periods of the CPP

The contributory period is in respect of the base CPP and 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.

The first additional contributory period in respect of the additional CPP is the number of months from attainment of age 18 or from 1 January 2019, 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.

The second additional contributory period in respect of the additional CPP is the number of months from attainment of age 18 or from 1 January 2024, 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.

A.3.5 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.

A.4 Contribution Rate and Additional Contribution Rates of the CPP

In respect of the base CPP, from 1966 to 1986, the annual contribution rate 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. From 1997 to 2003, the combined employer-employee contribution rate for the base CPP then increased in steps to reach a rate of 9.9% by 2003, with no subsequent increases scheduled thereafter.

The first additional contribution rate of the additional CPP applies to earnings between the YBE and the YMPE. The first additional combined employer-employee contribution rate will be phased in over the 5-year period 2019 to 2023 and will be equal to 2.0% from the year 2023 onward. The first additional contribution rate during the phase-in period from 2019 to 2023 is shown in Table 15 shows the progression of the MCR over time under the best estimate assumptions of this report.

The second additional contribution rate of the additional CPP applies to earnings between the YMPE and YAMPE and will be applied starting in the year 2024. The second additional combined employer-employee contribution rate is equal to 8.0% for the year 2024 and thereafter.

Employees and employers pay equal shares of the base and additional contribution rates of the CPP, and the self-employed pay the full rates.

Table 30 shows the legislated contribution rates for the CPP.

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

For the base Plan, if a triennial CPP 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 base CPP contribution rate would then be increased in stages and a possible temporary freeze on inflation adjustments to benefits in pay would apply.

For the additional Plan, if a triennial CPP actuarial report projects that the minimum additional contribution rates deviate to a certain extent from their respective legislated additional rates and the finance ministers do not agree on how to address the deviation, then sustainability Regulations in respect of the additional Plan would provide the actions to take: changes to benefits and possibly the additional contributions rates. The proposed sustainability Regulations – the Additional Canada Pension Plan Sustainability Regulations, were pre-published in the Canada Gazette, Part I, Volume 152, Issue No. 42, October 20, 2018. The technical aspects of the methodology used to develop the Regulations are described in detail in the Technical Paper on the Additional Canada Pension Plan Regulations: Actuarial Study No. 20, published by the Office of the Chief Actuary in November 2018.

A.5 Retirement Pension

A.5.1 Eligibility Requirements

A person aged 60 or over becomes eligible for a base CPP retirement pension, provided contributions have been made during at least one calendar year. Further, an individual must apply for a retirement pension in order to receive it. However, as of 1 January 2020, the requirement to apply is waived for an eligible person if he or she is aged 70 or older and is in receipt of another benefit from the CPP, OAS program, or a provincial plan and/or had an income tax return filed in respect of the year before the year in which the waiver is granted.

Prior to 2012, a 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.

Since 1 January 2012, the work cessation test no longer applies, and individuals younger 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 only toward providing post-retirement benefits from the base and additional CPP and do not affect eligibility for other CPP benefits. Upon attaining age 70, contributions are no longer permitted under the Plan.

The eligibility requirements for the additional retirement benefit are those of the base CPP. That is, a contributor is deemed to be eligible for the additional CPP retirement benefit if they are eligible for the base CPP retirement benefit.

A.5.2 Amount of Pension

The initial amount of the monthly retirement pension payable to a contributor under the CPP is equal to the sum of his or her retirement benefits payable under the base and additional Plans.

Base CPP

The initial monthly retirement pension payable under the base Plan is based on the contributor’s entire history of pensionable earnings during the contributory period. The retirement pension under the base Plan is equal to 25% of the average of the YMPE for the year of 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 in 2019, the provision allows for 17% of the number of months with the lowest earnings (up to a maximum of about eight years) to be dropped from the calculation of the benefit. The general drop-out percentage was 15% from 1966 to 2011, 16% in 2012 and 2013, and has been 17% since 2014. As a result, the maximum number of years of low or zero earnings that may be dropped from the calculation of the retirement benefit for those contributors who take their benefit at age 65 has increased from about seven to eight years. The actual drop-out percentage that applies is based on the year of benefit take-up. The increase in the general drop-out provision increases the retirement pension, as well as the CPP disability and survivor pensions, since the determination of these benefits depends on the retirement pension.

The maximum retirement benefit payable under the base CPP at age 65 in 2019 is $13,855 per year or $1,154.58 per month.

Additional CPP

The calculation of the additional CPP retirement benefit is based on the first and second additional monthly pensionable earnings. The first additional monthly pensionable earnings are equal to the total of the highest 480 months or the total number of months, if lower, in the first additional contributory period of monthly adjusted pensionable earnings up to the YMPE divided by 480. Similarly, the second additional monthly pensionable earnings are equal to the total of the highest 480 or total number of months, if lower, in the second additional contributory period of monthly adjusted pensionable earnings between the YMPE and the YAMPE divided by 480. These calculations provide for a monthly accrual of 1/480 of the total additional retirement benefit.

The additional monthly retirement benefit is calculated as the sum of 8.33% of the first additional monthly pensionable earnings and 33.33% of the second additional monthly pensionable earnings.

The pensionable earnings used for the calculation of additional retirement benefits are adjusted to the date of retirement in the same way as for the base CPP, that is, indexing by the ratio of the MPEA to the YMPE as described above. Further, to account for the lower first additional contribution rates during the first four years of the phase-in period (from 2019 to 2022), the first additional monthly pensionable earnings are multiplied by 0.15 in 2019, 0.30 in 2020, 0.50 in 2021, and 0.75 in 2022.

Unlike the base CPP, there are no drop-out provisions for the additional Plan. However, there are “drop-in” provisions for the additional CPP to protect the additional benefits from periods of low pensionable earnings resulting from disability or child-rearing for a child less than seven years of age.

Specifically, for individuals who become disabled after 1 January 2019, an imputed income will be assigned to those disability periods of low or zero earnings for the purpose of calculating the additional CPP retirement (and survivor) benefits. The drop-in amount will be equal to 70 per cent of an individual’s average earnings in the six years prior to the onset of the disability.

The disability drop-in amount is calculated based on months of earnings after 2018 and prior to the onset of disability. If, however, there are fewer than 72 months (6 years) of such earnings, then the drop-in will be calculated based on the actual number of earnings months after 2018, prior to the onset of disability.

For parents of children under the age of seven on or after 1 January 2019, an imputed income will be assigned to child-rearing periods of low or zero earnings on or after 1 January 2019 for the purpose of calculating additional CPP benefits. The drop-in amount is equal to the parent’s average earnings during the five years prior to the birth or adoption of the child if that amount is higher than their actual earnings during the period the child was younger than age seven.

The child-rearing drop-in amount is calculated based on months of earnings after 2018 and prior to birth or adoption of a child. If, however, there are fewer than 60 such months (5 years), then the drop-in is calculated based on the actual number of earnings months, but not lower than 36. If there are less than 36 such months of earnings, the drop-in will be calculated using imputed earnings of 40% of the YMPE for the number of months missing from the minimum of 36.

Additional CPP retirement benefits will initially be low in the early years of the additional Plan due to the lower accrual rates during the phase-in period and few years of contributions. Contributions made over time to the additional CPP allow individuals to accrue partial additional benefits. Full additional retirement benefits are accrued after about 40 years of making contributions.

The projected maximum additional retirement benefits are shown in Table 31. An individual, with pensionable earnings at or above the YAMPE, who contributed to the additional Plan for at least 40 years starting in the year 2025 or later, would receive the maximum additional retirement benefit payable of $7,202 per year or $600 per month, in 2019 wage-adjusted dollars^{Footnote 9}. Table 31 accounts for the phase-in period of the additional Plan from 2019 to 2025. The maximum additional CPP retirement benefit represents an increase of 52% over the maximum base CPP retirement pension.

A.5.3 Adjustment for Early or Postponed Retirement Benefit

The CPP retirement pension is subject to an actuarial adjustment that depends on the year and contributor’s age at commencement of the pension. As the initial monthly retirement pension is the sum of the retirement benefits under the base and additional Plans, the actuarial adjustment is applied to each component’s benefit.

The retirement pension is permanently adjusted downward or upward 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. Starting in 2011, the adjustment factors were changed. For contributors who take their retirement benefit early (before age 65), the adjustment factor gradually increased to 0.6% per month over the five-year period 2012 to 2016. For those who take their benefit after age 65, the factor gradually increased to 0.7% per month over the three-year period 2011 to 2013. Table 32 shows the legislated pension adjustment factors for the CPP.

The downward pension adjustment factor of 0.6% per month, applicable for the year 2016 and thereafter, results in a pension that is reduced by 36% for pension take-up at age 60. The upward factor of 0.7% per month, applicable for 2013 and thereafter, results in a pension increased by 42% for pension take-up at age 70.

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 prepared, starting with the Actuarial Report on the Canada Pension Plan as at 31 December 2015. The Chief Actuary may also, if deems it necessary, specify the factors in any supplemental CPP actuarial report after 2015.

In accordance with the legislation, the first CPP actuarial report to specify the pension adjustment factors was the 27^th CPP Actuarial Report as at 31 December 2015, which was tabled in the House of Commons on 27 September 2016. The methodology used to calculate the factors is described in the study: “Canada Pension Plan Actuarial Adjustment Factors as specified in the 27^th Actuarial Report on the Canada Pension as at 31 December 2015 – Actuarial Study No. 18”, which was published by the OCA in April 2017.

A.5.4 Working Beneficiaries – Post-Retirement Benefit

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. The total post-retirement benefit is equal to the sum of the benefits earned during retirement under the base and additional Plans.

The post-retirement benefit is earned at a rate of 1/40 of the maximum retirement pension per year of post-retirement contributions and is adjusted for the applicable earnings level and age of the contributor.

For both the base and additional CPP, contributions paid by working beneficiaries toward accruing the post-retirement benefit do not affect eligibility for other CPP benefits, except the post-retirement disability benefit described below. Pensionable earnings and additional 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.

The maximum base CPP post-retirement benefit at age 65 in 2019 for a working beneficiary who started their retirement pension at age 64 is $346.38 per year or $28.86 per month.

The projected maximum additional CPP post-retirement benefit at age 65 in 2026 and thereafter, for a working beneficiary who started their retirement pension at age 64, is $179.90 per year or $15 per month, in 2019 wage-adjusted dollars.

A.6 Disability Pension

A.6.1 Eligibility Requirements

A person is considered disabled if he or she is 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 pension provided that contributions have been made, at the time of disablement, for at least four of the previous six calendar years, counting years included wholly or partly in the contributory period. Contributions must be on earnings that are not less than 10% of the YMPE rounded, if necessary, to the next lower multiple of $100. 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.

The eligibility requirements for the additional disability benefit are those of the base CPP. That is, a contributor is deemed to be eligible for the additional CPP disability benefit if they are eligible for the base CPP disability benefit.

A.6.2 Amount of Pension

The initial amount of the monthly disability pension payable is the sum of the disability benefits payable under the base and additional Plans.

The initial base CPP monthly disability benefit is the sum of a flat-rate portion payable ($496.36 per month in 2019) depending only on the year in which the benefit is payable and an earnings-related portion equal to 75% of the base CPP retirement pension that would be payable at the onset of disability if the contributory period ended on that date and no actuarial adjustment applied.

The initial amount of the additional CPP monthly disability benefit is strictly earnings-related and is equal to 75% of the additional retirement pension that would be payable at the onset of disability if the first and second additional contributory periods ended on that date and no actuarial adjustment applied.

The automatic conversion of the CPP disability benefit into a retirement pension at age 65 is determined by base and additional 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 CPP retirement pension, is in line with increases in prices rather than wages.

The maximum base CPP disability benefit payable in 2019 is $16,347.60 per year or $1,362.30 per month.

Additional CPP disability benefits will initially be low in the early years of the additional Plan due to the lower accrual rates during the phase-in period and few years of contributions.

The projected maximum additional CPP disability benefits, in 2019 wage-adjusted dollars, are shown in Table 33. The table accounts for the phase-in period of the additional Plan from 2019 to 2025. The maximum additional disability benefit payable is $5,402 per year or $450 per month, in 2019 wage-adjusted dollars.

A.6.3 Post-Retirement Disability Benefit (Base CPP only)

Effective 1 January 2019, disability protection is provided for base CPP retirement pension recipients under age 65. Prior to 2019, base CPP retirement beneficiaries who were deemed disabled after the start of the retirement pension could not receive the CPP disability benefit, even if they were still under age 65 and otherwise met eligibility requirements. As of 1 January 2019, a post-retirement disability benefit equal to the flat-rate amount ($496.36 per month in 2019) will be payable under the base CPP to retirement beneficiaries who are deemed disabled while under age 65. Such eligible disabled retirement beneficiaries will receive the post-retirement disability benefit in addition to their retirement pension, and the dependent children of disabled retirees will receive children’s benefits.

The post-retirement disability benefit pertains only to the base Plan. There is no additional post-retirement disability benefit payable under the additional Plan.

A.7 Survivor’s Pension

A.7.1 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’s 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 of the contributor 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.

• Prior to 2019, the surviving spouse or common-law partner must have had dependent children, been disabled, or been at least 35 years of age. As of 1 January 2019, these conditions no longer apply.

The eligibility requirements for the additional survivor’s benefit are those of the base CPP. That is, 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’s additional benefit if he/she is eligible for the base CPP survivor’s benefit.

A.7.2 Amount of Pension

The initial amount of the monthly survivor’s pension payable under the CPP is equal to the sum of the survivor’s benefits payable under the base and additional Plans.

Prior to 2019, survivors who were not disabled and did not have dependent children had their survivor’s pension reduced by 10 per cent for each year they were under the age of 45 when their spouse or common-law partner died. This reduction lasted until age 65, when the survivor’s pension was then recalculated. This meant that survivors under the age of 35 who were not disabled and did not have dependent children did not receive a survivor’s pension until age 65.

As of 1 January 2019, reductions are no longer applied to the survivor’s pension for survivors under age 45 who are neither disabled nor have dependent children. A surviving spouse and common-law partner of any CPP contributor who has made sufficient contributions will receive an unreduced survivor’s pension.

The amount of the pension changes depends on whether the survivor is younger or older than age 65 as described below. Additional survivor’s benefits regardless of age will initially be low in the early years of the additional Plan due to the lower accrual rates during the phase-in period and few years of additional contributions previously made by the deceased contributor.

A.7.2.1 New Survivor under Age 65

The initial monthly survivor’s pension payable until the surviving spouse or common-law partner attains age 65 is the sum of a base CPP flat-rate benefit and base and additional CPP earnings-related benefits. There is no additional CPP flat-rate benefit.

The base CPP flat-rate survivor’s benefit depends only on the year in which the survivor’s benefit is payable ($193.66 per month in 2019).

The earnings-related benefits payable under the base and additional CPP depend initially only on the contributor’s record of pensionable and additional pensionable earnings, respectively as at the date of death. The initial earnings-related survivor’s benefit 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 and additional contributory periods had ended at the time of death, with no actuarial adjustment in either case.

The maximum base CPP earnings-related survivor’s benefit for new survivors under age 65 is $432.97 per month in 2019.

The projected maximum additional CPP survivor’s benefits, in 2019 wage-adjusted dollars, are shown in Table 34. The table accounts for the phase-in period of the additional Plan from 2019 to 2025. The maximum additional survivor’s benefit payable for survivors younger than age 65 is $2,701 per year or $225 per month, in 2019 wage-adjusted dollars.

A.7.2.2 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 survivor’s benefit equal to 60% 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 and additional contributory periods had ended at the time of death, with no actuarial adjustment in either case.

The maximum base CPP earnings-related survivor’s benefit for new survivors aged 65 or older is $692.75 per month in 2019.

The projected additional CPP survivor’s benefits, in 2019 wage-adjusted dollars, are shown in Table 35. The table accounts for the phase-in period of the additional Plan from 2019 to 2025. The maximum additional survivor’s benefit payable for survivors aged 65 or older is $4,321 per year or $360 per month, in 2019 wage-adjusted dollars.

A.8 Death Benefit (Base CPP only)

A lump sum benefit is payable to the estate of a deceased contributor if the eligibility rules for the survivor’s benefit are met. Prior to 2019, the amount of the death benefit was equal to six times the monthly amount of the CPP retirement pension accrued or payable in the year of death, adjusted to exclude any actuarial adjustments, and subject to a maximum of ten percent of the YMPE for the year of death, prior to 1998, and $2,500 thereafter. As of 1 January 2019, the death benefit equals the flat-rate amount of $2,500. The death benefit pertains only to the base CPP.

There is no additional CPP death benefit.

A.9 Child’s Benefits (Base CPP only)

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 (the disability pension or post-retirement disability benefit) or who was dependent on a deceased contributor who satisfied the requirements for a survivor’s pension is entitled to a flat-rate monthly benefit ($250.27 in 2019). Furthermore a child may receive more than one child’s benefit simultaneously. The child’s benefits pertain only to the base CPP.

There are no additional CPP child’s benefits.

A.10 Combined Benefits

The combined benefits rules of the CPP regarding the simultaneous payment of disability and survivor’s pensions or retirement and survivor’s pensions are complex and involve calculations and comparisons of various amounts.

For combined benefits under the base CPP, if there are two flat-rate components, then the beneficiary receives the larger one. For the earnings-related components, the beneficiary receives the larger one and 60% of the smaller one. As well, the total combined earnings-related component is limited to the maximum retirement pension at age 65 for combined survivor-retirement benefits and to the maximum disability pension for combined survivor-disability benefits. In the case of combined survivor-retirement benefits where the retirement pension is taken early (before age 65), the final retirement amount is actuarially adjusted.

The combined benefits under the additional CPP follow the same rules as for the base CPP, except that there are no flat rate benefits payable, and the limits on the earnings-related amounts do not apply.

A.11 Inflation Adjustments

All monthly CPP benefits are indexed annually in accordance with inflation, as measured by the Pension Index. 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. As the Pension Index for a year is at least equal to the value of the previous year’s Pension Index, benefits are either held constant or increased from one year to the next.

A.12 Credit Splitting

Pensionable and additional pensionable earnings may be split between separated or divorced couples (legal spouses or common-law partners) for each month the couple lived together. Pensionable earnings (of the base CPP) are used to establish eligibility for CPP benefits, and both pensionable and additional pensionable earnings are used to calculate the amounts of benefits.

Contributors may obtain a credit split even if they have remarried. However, pensionable and additional 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.

A.13 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 B – Data, Assumptions, and Methodology

B.1 Introduction

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

Future cash flows for the base and additional Plans are projected over a long period of time, i.e. over more than 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 both components of the CPP.

Over the years, the cumulative difference between revenues from contributions and investment income and the expenditures of the base and additional CPP generate the respective accumulated assets. The ratio of the end-of-year assets to the following year’s expenditures (the A/E ratio) is then calculated for each component of the Plan.

For the base CPP, the A/E ratio is used to determine the steady-state contribution rate, which is the lowest contribution rate that, in the long term, would generally stabilize the A/E ratio. 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.

For the additional CPP, the A/E ratio combined with a funding ratio of at least 100% on an open-group basis are used to determine the first and second additional minimum contribution rates before the consideration of any full funding requirement for increased or new benefits. The A/E ratio is also used to determine the permanent increase in the additional minimum contribution rates to fully fund any increased or new benefits. A temporary increase in the additional minimum contribution rates to fully amortize any past costs resulting from increased benefits would be determined separately.

Although the demographic, economic, and investment assumptions have been developed using 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 states of the base and additional CPP.

B.2 Data

Table 36 lists the sources of data used for this report categorized by major assumptions. The most recent years of data are also listed.

In addition to the data sources listed above, other data and reference sources were consulted for the development of the assumptions used in this report. These other sources include the Actuarial Valuation Report on the Québec Pension Plan as at 31 December 2015, which was used to set the assumed incidence rates in respect of the new post-retirement disability benefit, and mortality data from the United Kingdom and United States, which were used for comparison purposes.

B.3 Demographic Assumptions

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 2018 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). 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 is made implicitly through the development of the number of people with earnings and the proportion of contributors as described in section B.5 of this Appendix.

B.3.1 Initial Population as at 1 July 2018

The starting point for the demographic projections is based on the most recent Statistics Canada population estimates as at 1 July 2018 for Canada and Québec, by age and sex. The estimates are based on the 2016 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.3.2 Fertility Rates

There are two definitions for the fertility rate: the total fertility rate and the cohort fertility rate. The total fertility rate corresponds to the average number of children born in a given calendar year. Specifically, it is the sum of fertility rates by age group for women aged 15 to 49. In comparison, the cohort fertility rate is the average number of children born to a woman in her lifetime, for women born in a specific year. It gives an idea of trends and variations between different generations over time.

Fertility rates are affected by many factors, including social attitudes, reproductive technologies, and economic conditions. It is assumed for this report that the most 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 age-specific fertility rates over the last 15 years.

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 initiated a decline in total fertility rates, resulting in a record low of 1.6 children per woman 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 saw their total fertility rates increase starting in the 2000s. 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 attributable to the economic downturn experienced in recent years. In 2017, the total fertility rate for Canada was 1.55^{Footnote 10}.

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 after 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 2017, the total fertility rate for Québec was 1.60^{Footnote 10}.

To determine the ultimate total fertility rate for Canada, the historical fertility rate of each age group was studied and projected independently. As a result, it is assumed that the total fertility rate from 2027 onward for Canada will be 1.62 children per woman, which is lower than the ultimate rate of 1.65 assumed for the 27^th CPP Actuarial Report. The ultimate rate corresponds to the average experience over the last 15 years, which captures the pre- and post-recession trends.

For Québec, the historical fertility rate and the difference between Canada’s and Québec’s fertility rates for each age group were analyzed. It is assumed that the difference in the rates will decrease until 2027 and remain stable thereafter. As a result, the total fertility rate from 2027 onward for Québec is assumed to be 1.65 children per woman, which is lower than the assumed ultimate rate of 1.68 in the 27^th CPP Actuarial Report.

Although the historical total fertility rates, based on age-group rates, are used to set the assumption for the future, it is nonetheless useful and informative to consider the historical progression of the cohort fertility rates. Over time, the cohort fertility rates will converge to the total fertility rate assumption as shown in Table 37. Historically, the cohort fertility rates in Canada and Québec have steadily declined for the last 50 years. For females born in 1941, who reached the end of their childbearing years (turned age 49) in 1990, the cohort rates were 2.61 and 2.28 for Canada and Québec, respectively. However, for females reaching the end of their childbearing years in 2017 (born in 1968), the Canada and Québec cohort fertility rates were 1.78 and 1.70, respectively.

Table 38 below shows the assumed fertility rate of each age group and the resulting assumed total fertility rate by calendar year.

Chart 3 shows the historical and projected total and cohort fertility rates for Canada.

Chart 3 - Historical and Projected Total and Cohort Fertility Rates for Canada^{Chart 3 footnote 1}

Description

Line chart showing the historical and projected total and cohort fertility rates for Canada, where the cohort fertility rates are based on a woman being age 30 in a given calendar year. Y axis represents the rate in number of children per women. X axis represents the year.

The Total Fertility Rate is 2.8 children per woman in 1941, increases overall to reach its highest point of 3.9 in 1959, and then decreases significantly to 1.6 by the mid-1980s. From the mid-1980s until 2017, the Total Fertility Rate has periods of growth and decline, fluctuating between 1.5 and 1.7, with a value of 1.55 in 2017. After 2017, the rate is projected to gradually increase to reach 1.62 in 2027 and remain at that level thereafter.

The cohort fertility rate is 2.8 children per woman in 1941, increases to its highest point of 3.3 in 1960, then decreases thereafter, reaching a projected value of 1.62 by 2041.

The most recent completed cohort fertility rate of 1.78 in 1998 is for those born in 1968.

Finally, in accordance with the average experience over the last 10, 20, and 30 years, the assumed ratio of male to female newborns is 1.053, which is essentially the same as for the 27^th CPP Actuarial Report.

B.3.3 Mortality

For this report, the mortality rate projections start from the year 2015 mortality rates of Statistics Canada (CLT 2014-2016 Tables). According to Statistics Canada, life expectancies at birth in 2015 without any assumed future improvements in mortality (i.e. reductions in mortality) for males and females in Canada were 79.9 and 84.0 years, respectively, compared to 80.5 and 84.3 years projected under the 27^th CPP Actuarial Report. At age 65 in 2015, life expectancies were 19.3 and 22.1 years according to Statistics Canada Tables compared to 19.7 and 22.3 years projected under the 27^th CPP Actuarial Report for males and females, respectively.

The average annual mortality improvement rates experienced in Canada over the 15-year period from 2000 to 2015 by age and sex were used as the basis for projecting annual mortality improvement rates from 2016 onward. For ages 65 and over, the annual mortality improvement rates for 2016 to 2017 were projected using the trends derived from the administrative data on Old Age Security (OAS) program beneficiaries, representing 98% of the general population. Improvement rates by age and sex for years 2016 to 2034 (2018 to 2034 for ages 65 and over) were determined by cubical interpolation between:

• the improvement rates of year 2015 (2017 for ages 65 and over), and

• the ultimate improvement rates described below in respect of the period 2035 and thereafter.

For the year 2035 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 using a combination of backward-and forward-looking approaches. The analysis of the Canadian experience over the period from 1925 to 2015, including the recent slowdown trends observed in mortality improvement rates for OAS beneficiaries, was combined with an analysis of the possible drivers of future mortality improvements. Mortality improvement rates for males at most ages are currently higher than those for females but are assumed to decrease to the same level as female rates from 2035 onward. The mortality improvement rates for Québec are assumed to be the same as for Canada from 2018 onward.

The ultimate rate for both sexes for ages 0 to 89 is set at 0.8% per year from 2035 onward for Canada and Québec. For ages above 89, the ultimate improvement rate is set to reduce from 0.5% for the age group 90-94 to 0.2% for those aged 95 and older.

Table 39 shows the initial (2016-2017), intermediate (2018-2034) and ultimate (2035+) assumed annual mortality improvement rates for Canada. The mortality improvement rates shown for 2016-2017 and 2018-2034 represent the average rates over these periods.

The resulting projected mortality rates in Table 40 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 10 deaths per thousand people in 2019 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.

Chart 4 and Chart 5 show the historical and projected life expectancies at birth and age 65, respectively since the Plan’s inception in 1966, based on each given year’s mortality rates (i.e. without future mortality improvements). Table 41 shows the 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 42 is similar to Table 41, 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 42 is considered to be more realistic than Table 41, 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 42 for younger ages.

From 2019 to 2075, Canadian life expectancy at age 65 (with assumed future mortality improvements) is projected to grow from 21.4 to 24.7 years for males and from 23.9 to 26.8 years for females, as shown in Table 42. 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 2035 and thereafter.

Chart 4 - Life Expectancies at Birth for Canada, without improvements after the year shown^{Chart 4 footnote 1}

Description

Line chart showing the historical and projected life expectancies at birth for Canada, without improvements after the year shown. Y axis represents the life expectancy in number of years. X axis represents the year.

Life expectancy at birth for males is 68.8 years in 1966, increases to 80.2 in 2016, and is projected to increase to 86.1 years in 2076.

Life expectancy at birth for females is 75.4 years in 1966, increases to 84.2 in 2016, and is projected to increase to 89 years in 2076.

Chart 5 - Life Expectancies at Age 65 for Canada, without improvements after the year shown^{Chart 5 footnote 1}

Description

Line chart showing the historical and projected life expectancies at age 65 for Canada, without improvements after the year shown. Y axis represents the life expectancy in number of years. X axis represents the year.

Life expectancy at age 65 for males is 13.6 years in 1966, increases to 19.5 in 2016, and is projected to increase to 23.9 years in 2076.

Life expectancy at age 65 for females is 16.9 years in 1966, increases to 22.2 in 2016, and is projected to increase to 26 years in 2076.

B.3.4 Net Migration

The net migration rate refers to the net effect of the number of immigrants less the number of emigrants, plus the number of returning Canadians and the net increase in the number of non-permanent residents.

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 2018, annual immigration to Canada varied between 84,000 and 320,000, annual emigration from Canada fluctuated between 40,000 and 97,000, and the annual number of returning Canadians fluctuated between 14,000 and 41,000.

Over the same period, the annual net increase in the number of non-permanent residents fluctuated between -71,000 and 166,000. Since 2014, the federal government has introduced several modifications to the Temporary Foreign Workers Program making it more difficult for employers to hire temporary foreign workers. The federal government also improved its monitoring of the Temporary Foreign Workers Program in 2018. It is expected that these changes will moderate the increase in the number of non-permanent residents.

However, in the most recent years, the largest group of non-permanent residents has been international students, accounting for almost half of non-permanent residents. It is expected that the number of foreign students will stabilize over the next three years. Given the government’s policies and the expected stabilization of the number of foreign students, the annual net increase in the number of non-permanent residents is projected to fall gradually to reach zero in 2021 and to remain at that level thereafter.

The actual 2018 net migration rate of 1.11% is assumed to decrease to 0.86% in 2019, 0.73% in 2020, and 0.62% in 2021, and to remain at that level thereafter. The ultimate net migration rate of 0.62% corresponds to the average rate experienced over the ten-year period 2009-2018, excluding the net increase in non-permanent residents during that period. The assumed short-term net migration rate is higher than the ultimate rate of 0.62%, due to starting from a higher rate in 2018, the federal government’s short-term targets, and the assumed gradual decrease to zero for the net increase in the number of non-permanent residents from 2019 through 2021. Chart 6 shows the net migration experience since 1972 and the projected rates.

Chart 6 - Net Migration Rate (Canada)

Description

Line chart showing the historical and projected net migration rate for Canada, including non-permanent residents. Y axis represents the net migration rate as a percentage of the population. X axis represents the year.

The net migration rate for Canada is 0.4% in 1972, and then is shown to fluctuate over time but increase overall, reaching its highest point of 1.1% in 2018. The net migration rate is then projected to decrease between the years 2019 to 2021 to reach a value of 0.62% and to remain at that value thereafter.

To project Québec’s population, the same migration components of immigration, emigration and returning Canadians are considered. An additional component consisting of the net interprovincial emigration for Québec is also included. It is assumed that the 2018 net migration rate of 0.91% for Québec will decrease gradually to reach an ultimate level of 0.43% in 2021, assuming a decline in the net increase of non-permanent residents to zero by that year. The ultimate net migration rate for Québec of 0.43% corresponds to the average experience over the last 10 years, excluding the net increase in non-permanent residents.

For both Canada and Québec, the distributions of immigrants, emigrants, and returning Canadians by age and sex used for the demographic projections were derived from Statistics Canada data averaged over the period 2009 to 2018.

B.3.5 Projected Population and its Characteristics

The historical and projected evolution of the Canada less Québec population age distribution since the inception of the Plan is shown in Chart 7. 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 coming decades.

Chart 7 - Age Distribution of the Population of Canada less Québec (thousands)

Description

Succession of four bar charts showing the evolution of the age distribution of the population of Canada less Québec. Y axis represents the number of individuals in thousands. X axis represents the quinquennial age groups.

The first bar chart represents the age distribution of the population in 1966. For age groups below age 20, the baby-boom generation, the population of each group is between 1.3 and 1.6 million, with the age group 5 to 9 years being the largest. For age groups above age 19, the population gradually decreases from about 1 million to almost zero for age group 90 and older.

The second bar chart represents the age distribution of the population in 2018. For age groups 50 to 54 up to 65 to 69, the baby boomers, the population of each group is between 1.5 and 2.1 million, with the age group 55 to 59 being the largest. For ages below 50, the effects of the baby bust and echo generation are seen. The population increases from 1.5 to 2 million for groups 0 to 4 up to 25 to 29, remains at 2 million for group 30 to 34, and then decreases somewhat before rising again for the baby boomers. For age groups above 69 (older than the baby boomers), the population gradually decreases from 1.2 million to about 242,000 for age group 90 and older.

The third bar chart represents the age distribution of the population in 2025. For age groups 60 to 79, the baby boomers, the population decreases from 2.1 to 1.2 million. For age groups below age 60, the effects of the baby bust and echo generation are seen. The population increases from about 1.7 to 2.2 million for groups 0 to 4 up to 30 to 34 and then decreases to 1.9 million before rising again for the baby boomers. For age groups above age 79 (older than the boomers), the population gradually decreases from about 765,000 to 317,000 for age group 90 and older.

Lastly, the fourth bar chart represents the age distribution of the population in 2050. For age groups 85 and over, the baby boomers, the population decreases from 1.2 and 1 million. The population increases from 1.8 to 2.5 million for age groups 0 to 4 up to 50 to 54, and then decreases to 1.4 million for age group 80 to 84.

The population of Canada as at 1 July 2018 is 37.1 million, while the population of Canada less Québec is 28.7 million. Table 43 and Table 44 present the projected populations of Canada and Canada less Québec as at 1 July for selected age groups and years, while Chart 8 shows the evolution of the population of Canada less Québec, split by ages groups 0 to 19, 20 to 64, and 65 and above, from 1975 to 2095. Table 45 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 for Canada less Québec is expected to increase significantly from 17.1% of the total population in 2019 to 27.6% by 2095. The number of people aged 65 and older as a proportion of the number of people aged 20 to 64 also increases over the same period, from 28.0% in 2019 to 52.1% by 2095. This proportion affects the ratio of benefits to contributions under the CPP.

Chart 8 - Population of Canada less Québec (millions)

Description

Stacked area chart showing the historical and projected population of Canada less Québec by age group. Y axis represents the number of individuals in millions. X axis represents the year.

The population aged 0 to 19 years is 6.1 million in 1975, reaches 6.3 in 2018, and is projected to increase to 9.4 million in 2095. The population aged 0 to 19 represents 36% of the total population in 1975, 22% in 2018, and 20% in 2095.

The population aged 20 to 64 is 9.2 million in 1975, reaches 17.6 in 2018, and is projected to increase to 25.5 million in 2095. The population aged 20 to 64 represents 55% of the total population in 1975, 61% in 2018, and 53% in 2095.

The population aged 65 and over is 1.5 million in 1975, reaches 4.8 in 2018, and is projected to increase to 13.3 million in 2095. The population aged 65 and over represents 9% of the total population in 1975, 17% in 2018, and 28% in 2095.

Table 46 shows the projected 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 2019 to 2095, and Chart 9 presents these figures graphically. For Canada less Québec, the number of births is projected to exceed deaths until 2041. Thereafter, all population growth is expected to come from migration.

Over the period 2019 to 2025, the population of Canada less Québec is projected to grow by about 1.0% per year. The annual growth slows to about 0.7% between the late 2030s and early 2040s and to 0.6% thereafter. The population of Canada less Québec is expected to reach 48.1 million by 2095.

Chart 9 - Projected Components of Population Growth for Canada less Québec (thousands)

Description

Line chart showing the projected components of population growth for Canada less Québec. Y axis represents the number of individuals in thousands. X axis represents the year.

Births are projected to start at approximately 303,000 in 2019 and to increase to 451,000 in 2095.

Deaths are projected to start at approximately 207,000 in 2019, to increase to a value (340,000) higher than births (337,000) in 2041, and to continue increasing to 502,000 in 2095.

Births and Migration are projected to start at approximately 563,000 in 2019, to decrease somewhat until 2021 and then increase thereafter to reach 771,000 in 2095.

B.4 Economic Assumptions

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 B.6 of this Appendix. All of these factors must be considered together and form part of an overall economic perspective.

B.4.1 Economic Perspective

The future revenues and expenditures of the CPP depend on many 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 an uncertain economic outlook for major 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 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 continued 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.4.2 Labour Market

Chart 10 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 10 - Components of the Labour Market

Description

Flow chart showing the main components of the labour market that are used to determine the number of earners and contributors by age, sex, and calendar year.

The top box is the total population. This box splits into two boxes, the first one is the population aged 15 and over and the second box is the population 0 to 14.

The box of the population aged 15 and over is then split into two boxes, the first box is the active population or labour force, which represents those who are either employed or looking for employment. The second box is the inactive population.

The active population box is split into two boxes. The first box is for the employed and the second box is for the unemployed.

The number of earners is based on the number of employed and 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.

The proportion of earners and contributors assumptions (described in this section and section B.5.1) rely on the projected active population given in this report. The projected effect of working beneficiaries is reflected in all these assumptions.

B.4.2.1 Active Population (Canada)

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 2018 clearly show a narrowing of the gap between male and female rates. Although the increase in participation rates of females aged 18 to 69 has slowed down since the mid-2000s, the increase was significant over the previous 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 (ages 15 and over) was about 78% compared to only 46% for females, which represents a gap of 32%. This gap has narrowed to 8.3% in 2018 (participation rates of 69.6% for males, 61.3% for females). 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 8.1% by 2035 (67.1% for males vs. 59.0% for females). In addition, over the next two decades, it is assumed that the participation of males and females aged 55 to 69 will continue to increase.

Table 47 to Table 49 provide projections of the active and employed populations and associated participation, employment, and unemployment rates for Canada.

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 alone would cause the overall participation rate from Table 48 to fall from 65.2% in 2019 to 59.3% in 2050, instead of 61.9% as projected under the best-estimate assumptions. 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 age groups 55 and over as a result of an expected continued trend toward longer working lives. The participation rates for those aged 55 to 59 are assumed to increase from 80.0% to 84.0% for males and from 71.7% to 76.0% for females over the period 2018 to 2050. Over the same period, the participation rates for those aged 60 to 64 are assumed to increase from 62.5% to 65.0% and from 50.9% to 54.0% for males and females, respectively, and the participation rates for those aged 65 to 69 are assumed to increase from 31.9% to 35.0% and from 21.8% to 24.0% for males and females, respectively.

Chart 11 shows the historical and projected participation rates for the three age groups 55 to 59, 60 to 64, and 65 to 69. Government policies aimed at increasing participation rates of older workers, the removal of the work cessation test to receive the CPP retirement pension prior to age 65, 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.

Chart 11 - Labour Force Participation Rates (Canada)

Description

Line chart showing the historical and projected labour force participation rates for Canada for specific age groups. Y axis represents the labour force participation rate. X axis represents the year.

The labour force participation rate of males aged 55 to 59 is 72.1% in 1995, increases to 79.7% in 2018, and is projected to increase to 84% in 2050.

The participation rate of females aged 55 to 59 is 48.3% in 1995, increases to 71.5% in 2018, and is projected to increase to 76% in 2050.

The participation rate of males aged 60 to 64 is 43.4% in 1995, increases to 62.4% in 2018, and is projected to increase to 65% in 2050.

The participation rate of females aged 60 to 64 is 23.4% in 1995, increases to 50.7% in 2018, and is projected to increase to 54% in 2050.

The participation rate of males aged 65 to 69 is 16.7% in 1995, increases to 31.5% in 2018, and is projected to increase to 35% in 2050.

The participation rate of females aged 65 to 69 is 7.3% in 1995, increases to 21.7% in 2018, and is projected to increase to 24% in 2050.

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 continue to 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 current young 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 2018 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 (ages 15 and over) due to the demographic shift.

For the purpose of projecting the participation rates, the projection period has been divided into three periods: 2019 to 2025, 2025 to 2035, and from 2035 onward. From 2019 to 2025, and from 2025 to 2035, the projected participation rates are based on the expected impact of the abovementioned factors through time for each age group and sex. From 2035 onward, the participation rates are held 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 2035.

B.4.2.2 Employment (Canada)

In Canada, the annual job creation rate (i.e. the change in the number of persons employed) has been on average about 1.6% since 1976. However, this rate has varied over the years. It is assumed that the job creation rate will be 1.1% in 2019 corresponding to the unemployment rate of 5.9%, based on the most recent experience and various economic forecasts. It is further assumed that over the short term, the job creation rate will be slightly lower than the labour force growth rate, so that the unemployment rate slowly increases from its 2019 level of 5.9% to 6.2% by 2030.

Over the long term, the job creation rate is assumed to be the same as the labour force growth of 0.5%. This results in the projected unemployment rate of 6.2%, which is in line with various economic forecasts and reflects moderate economic growth.

The assumed ultimate unemployment rate of 6.2% is the same as for the 27^th CPP Actuarial Report but is assumed to be reached by year 2030 instead of 2025.

Table 50 shows the projected number of employed persons, aged 18 to 69, in Canada.

B.4.2.3 Labour Market (Canada less Québec)

Given that the CPP covers contributors in all provinces except Québec, labour market assumptions were developed for Québec, and the results for Canada less Québec were derived. Table 51 and Table 52 show the projected active population, number of employed, and labour force participation rates for Canada less Québec.

B.4.2.4 Number of Earners (Canada less Québec)

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 2016. Table 53 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 53 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 B.7.6 of this Appendix.

B.4.3 Annual Increase in Prices (Inflation Rate)

The increase in prices (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 YMPE, YAMPE, and the nominal rates of return on investments.

Price increases, as measured by changes in the CPI, tend to fluctuate from year to year. Over the last 50 years, the trend was generally upward through the early 1980s and then downward until the introduction of the inflation-control targets in the early 1990s, at which point inflation began to stabilize. The average annual increases in the CPI over the 50, 20 and 10-year periods ending in 2018 were 3.7%, 1.9% and 1.6%, respectively.

In 2016, the Bank of Canada and the Government renewed their commitment to keep the inflation rate within a control range of 1% to 3%, with a target of 2%, until the end of 2021. The Senior Deputy Governor of the Bank of Canada indicated in November 2018 that the Bank was undergoing an extensive review of its monetary policy framework. A number of variants to replace the inflation target are being explored. The Bank is also looking at a possible dual mandate of targeting inflation as well as GDP growth or employment^{Footnote 11}. Nevertheless, given the success of the 2% inflation target, it is considered very likely that the Bank will renew its inflation target commitment or at least that it will constitute an important part of its future mandate.

In Canada, inflation was 2.3% in 2018. Price increase forecasts from various economists indicate an average increase in prices of 2.0% for the period 2019 to 2040. To reflect these forecasts and the expectation that the Bank of Canada will renew its inflation target, the price increase assumption is set at 2.0% for the year 2019 and thereafter. The assumption of 2.0% is equal to the assumption for the 27^th CPP Actuarial Report.

B.4.4 Real Wage Increases

The real wage increase can 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.

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

Historically, the nominal average wage increase has been similar to the nominal average annual employment earnings (“AAE”) increase, and therefore it is assumed that they can be used interchangeably.

The assumed increase in 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 increases in the AWE and the AAE (net of inflation) has been relatively small over the period from 1966 to 2017, that is, a difference of approximately 0.01% per year. For several years in the 1980s and 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 the year 2018 and thereafter.

In addition to the factors included in the equation above, 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 1.59% for the 55-year period ending in 2017, 1.18% for the 25-year period and 0.83% for the 15-year period ending in 2017. Long-term productivity is expected to increase as a result of labour shortages and the federal 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 1.10% 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 0.11% per year for the 55-year period ending in 2017 with a more significant decrease between 1992 and 2005 (an average decrease of 0.7% per year). Over the last 25 and 15 years periods ending in 2017 the compensation ratio has decreased on average by 0.28% and 0.06% respectively. It is assumed that there will be no change in the compensation ratio over the long term.

The earnings ratio is the ratio of total workers’ earnings to total compensation. The total workers’ earnings is defined as the sum of total wages, salary disbursements, and total self-employment earnings. Changes in the earnings ratio reflect changes in the compensation structure offered to employees. The historical decline in the earnings ratio of 0.20% per year from 1962 to 2017 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, the increase in CPP contributions resulting from the new additional Plan as of 2019 is expected to reduce the earnings ratio. As well, 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 0.05% 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 -0.34% over the 55-year period ending in 2017. There was a significant decrease in the average hours worked between 1965 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 1984 and 2017. 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. It is assumed that in the long term, the average hours worked will decline by 0.05% per year.

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 0.09% between 1962 and 2017. However, during this period, the price differential experienced significant fluctuations. It increased at an average rate of 1.2% per year between 1962 and 1976 and decreased at an average rate of 0.6% per year between 1977 and 2002. In more recent years, the decline has reversed, such that between 2002 and 2017 the price differential increased by 0.27% per year. This recent trend is partially 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 price differential will remain stable in the long term.

The result of the foregoing discussion is that the assumed real wage increase is 1.0% per year over the long term. Table 54 summarizes the historical information and the assumptions described above.

The average annual and weekly earnings are assumed to increase at the same pace, with real wage increases projected to gradually rise from 0.3% in 2019 to an ultimate value of 1.0% by 2025. This is consistent with the assumed moderate economic growth implicitly reflected in the assumption on the unemployment rate. Table 55 shows the assumptions regarding the annual increases in prices, real AAE, and real AWE.

B.4.5 Average Annual Earnings, Total Earnings and Pensionable 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 77% in 2016. This ratio is projected to increase to 87% by 2050. Table 56 shows the projected average annual earnings by age group and sex for selected years.

Total earnings are the product of average earnings and the number of earners. Table 57 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 3.5%. This nominal increase comprises an ultimate inflation rate of 2.0%, real wage growth of 1.0%, and population growth for the age group 18 to 69 of 0.5%.

Average pensionable earnings in respect of the base CPP 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 distributions of earners and earnings, which are based on individual earnings statistics. These distributions were determined using earnings statistics from 2014 to 2016 and are assumed to remain constant in the future. The average pensionable earnings by age, sex, and calendar year correspond to the average portion of individual employment earnings below the YMPE for a cohort of earners earning more than the YBE.

For the additional CPP, the same methodology as mentioned above applies but the average portion of individual employment earnings used goes up to the YAMPE. In 2019, the YMPE and YBE are respectively $57,400 and $3,500. The YAMPE is set at 107% of the YMPE in 2024 ($69,700 as projected in this report), and at 114% of the YMPE in 2025 ($76,400 as projected in this report) and thereafter, as per the CPP statute. The YMPE and the YAMPE are increased annually based on the average industrial aggregate wage in Canada as published by Statistics Canada. The projected average pensionable earnings by age and sex for selected years up to the YMPE and YAMPE are shown in Table 58 and Table 59, respectively.

The ratios of average pensionable earnings for males and females as a percentage of the YMPE and the YAMPE are slowly decreasing over time. This is due to the freezing of the YBE which 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. The ratio also reduces for females, but to a smaller extent and thus is relatively stable as the YBE effect is mostly offset by the increase in their average pensionable earnings.

B.5 Contributions

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

B.5.1 Proportion of Contributors

In order to be considered a contributor to the CPP in any given calendar year, one must have employment earnings exceeding the YBE. Accordingly, the proportion of contributors (in respect of the population) is determined by multiplying the proportion of all earners by the proportion of earners earning more than 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 distributions of earners and their earnings. The proportion of contributors is adjusted to reflect working beneficiaries. Table 60 presents the proportion of contributors by selected age groups and years for males and females.

B.5.2 Average Contributory Earnings

Average contributory earnings, which include contributory earnings of working beneficiaries, are determined for each age, sex, and year by subtracting the YBE from the average pensionable earnings shown in Table 58 and Table 59. The resulting average contributory earnings by age group and sex for selected years up to the YMPE and YAMPE are shown in Table 61 and Table 62, respectively.

B.5.3 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, including those who only work part of a year. The amount of non-refundable employer contributions increases total CPP contributions, which translates into higher underlying contributory earnings. As such, contributory earnings are adjusted only for the purpose of determining the correct amount of contributions.

The records of earnings from Service Canada, statistics on contributors from the “The CPP & OAS Stats Book 2018”, published by Employment and Social Development Canada, and information from the Canada Revenue Agency on base CPP contribution refunds were used to project the adjustment for contributory earnings up to the YMPE and YAMPE. The adjustment for earnings up to YMPE is projected to be 1.56% in 2019 and decreases to 1.50% over the projection period to account for the YBE being frozen at $3,500. The adjustment for earnings up to YAMPE is projected to be 1.50% in 2024 and decreases to 1.45% over the projection period also to account for the YBE being frozen at $3,500.

These adjustments reflect the change in the administration of overcontributions with the introduction of the additional CPP. Specifically, as of 2019, both employer and employee overcontributions will be applied first to maximizing contributors’ benefits under the base Plan. Any overcontributions remaining will then be applied toward maximizing benefits under the additional Plan. If there are still overcontributions remaining once maximizing benefits under both components of the CPP, a contribution refund will be issued to the contributor and the employer non-refundable portion would be allocated between the Canada Pension Plan Account and the Additional Canada Pension Plan Account.

Annual contributions are equal to the product of adjusted contributory earnings and the contribution rate. The contribution rates are set by law. For the base Plan, the legislated contribution has been 9.9% since 2003. For the additional Plan, the legislated first additional contribution rate is 2.0% as of 2023 (phased in starting in 2019) and the legislated second additional contribution rate is 8.0% as of 2024. Table 63 and Table 64 present the projected components of total unadjusted contributory earnings, the total adjusted contributory earnings, as well as the projected YMPE and YAMPE, for pensionable earnings up to the YMPE and YAMPE, respectively.

B.6 Investment Assumptions

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.

B.6.1 Net Assets as at 31 December 2018

The following discusses only the assets of the base CPP as at 31 December 2018, since the additional CPP starts in 2019 and thus has no assets as at 31 December 2018.

The actual value of the base CPP assets on a market-value accrual basis as at 31 December 2018 was $371,700 million. This is the sum of the CPP Account ($188 million) and the CPPIB invested assets ($368,490 million) for a total of $368,678 million before being adjusted by the amounts receivable minus amounts payable.

The CPP Account was established in respect of the base Plan 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 CRA. Benefit and operating expenditures are described in detail in sections B.7 and B.8, respectively of this appendix.

Table 65 reconciles the assets of the base CPP as at 31 December 2018.

B.6.2 Investment Strategy and Two-Pool Structure

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 30^th CPP Actuarial Report, the CPPIB investments have been grouped into three broad categories:

• Equities, consisting of public and private equities;

• Fixed income securities, consisting of nominal fixed income (marketable bonds and non-marketable bonds), credit, and cash; and

• Real assets.

The foundation of the CPPIB’s investment strategy is a two-asset portfolio called the “reference portfolio”. This portfolio sets how much risk the CPPIB is willing to take in accordance with its mandate. The reference portfolio comprises a global equity benchmark and a Canadian government nominal bonds benchmark. The higher the equity share, the higher the associated risk. Since the previous triennial actuarial valuation, the CPPIB has progressively shifted its asset allocation toward a reference portfolio consisting of 85% global equity and 15% Canadian government nominal bonds^{Footnote 12}.

Recognizing the distinct natures of the base and additional CPP, the CPPIB Board approved two different reference portfolios applicable for each component of the Plan. The reference portfolio applicable to the base CPP is maintained at 85% global equity and 15% Canadian government nominal bonds, whereas, the reference portfolio applicable to the additional CPP consists of 50% global equity and 50% Canadian government nominal bonds.

In order to invest the base and additional CPP funds according to their respective reference portfolios, the CPPIB designed a two-pool investment structure. The base CPP’s actual assets as of 31 December 2018 constitute the Core pool and are invested according to the base CPP’s investment policy. The additional CPP assets are invested in two pools: the Core pool and the Supplementary pool. The Supplementary pool solely comprises fixed income securities. The share of the additional CPP’s assets invested in each of the Core and Supplementary pools is determined such that the overall level of risk of the additional CPP is consistent with its reference portfolio. Chart 12 presents a schematic of the two-pool investment structure for the CPP invested assets.

Chart 12 - Illustrative Two-Pool Investment Structure of the CPP

Description

Flow chart showing a schematic of the two-pool investment structure for the CPP invested assets.

On the top left, for the additional CPP, two stacked boxes represent a proportion of 50 to 70% for the bottom box and a proportion of 30 to 50% for the top box. The top box points to another box representing 100% fixed income and designated as the Supplementary Pool. The bottom box is pointing to another box representing a diversified portfolio of equities, fixed income and real assets, together designated as the Core Pool.

On the bottom left, for the base CPP, one box represents a proportion of 100%. That box points to the box designated as the Core Pool.

The CPPIB diversifies its holdings and thus sources of returns, while respecting the risk level of its reference portfolios. As a result, the base and additional CPP assets are invested in more than two types of assets. The portfolios capturing that diversification are called the strategic portfolios. The CPPIB uses the strategic portfolios to express its long-term goal for allocating assets by asset classes and geographic regions. In its 2018 and 2019 Annual Reports, the CPPIB signaled its intention to increase the CPP Fund’s exposure to emerging markets^{Footnote 13}. This intention is reflected in all assumptions presented in this section.

As at 31 December 2018, the asset mix of the base CPP consisted of 56% equities, 18% fixed income securities, and 26% real assets. Table 66 further categorizes the actual assets under CPPIB management into the asset classes identified at the beginning of this section, which correspond to the strategic portfolio’s asset classes.

B.6.3 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 B.6.4 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. In addition, the assumed real rate of return at the portfolio level includes an allowance for rebalancing and diversification (discussed in section B.6.5). Investment income is also adjusted downward to recognize investment expenses (discussed in section B.6.6).

B.6.4 Real Rates of Return

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 classes in which CPP assets are invested. All real rates of return described in this section are shown before reduction for assumed investment expenses.

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. Both public market data and customized benchmarks prepared by the CPPIB were used to analyze the historical experience.

Future currency variations will impact the real rates of return over the projection period, creating gains and losses. However, as the projection period is over 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.

The future outlook is based on the assumption that, over the short-to-medium term, federal bond yields are expected to increase, as their current levels are low by historical standards. The speed of that increase, however, is uncertain. The demand for long-term sovereign bonds, in Canada and abroad, remains strong, and central banks of developed economies are moving cautiously to increase interest rates. Nevertheless, the 75-year time horizon of this report warrants a long-term approach that is expected to be generally consistent with the historical long-term averages of federal bond yields.

B.6.4.1 Fixed Income Securities

As at 31 December 2018, the CPPIB had 18% of its portfolio invested in fixed income securities, split between nominal fixed income, credit, and cash. Nominal fixed income can be further divided into 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 and provincial bonds. Starting 1 January 2019, the CPPIB will invest part of the additional CPP’s contributions in a Supplementary pool composed of fixed income securities.

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

The non-marketable bond portfolio at the end of 2018 represented 6% 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 of not more than 30 years. During the 20-year period 1999 to 2018, 68% of provincial bonds available for rollover were rolled over at or before maturity. The rollover proportion increases to 99% when considering the five-year period from 2014 to 2018, and to 100% when considering the three-year period 2016 to 2018. Using this rollover experience, it is assumed that the rollover rate will be 98% for 2019 and thereafter. The last non-marketable bond is expected to mature in 2043.

On the basis of the average short-, medium-, and long-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 2018 for provincial bonds issued by the given province. The ultimate spreads, applicable from 2029, are set at the average spreads of provincial bonds issued by a given province during the period of 2000 to 2018, excluding 2008 and 2009. Spreads during the global financial crisis (2008-2009) were abnormally high and were thus ignored in the determination of the ultimate spreads. The weighted long-term average spread for all provinces is approximately 70 basis points. The ultimate annual long-term real federal bonds yield is assumed to be 2.6%, as discussed in the following section. Therefore, an ultimate annual real yield of approximately 3.3% for provincial rollover bonds is assumed for 2029 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 (Core Pool)

As the non-marketable bond portfolio matures over the next three decades, it is assumed that the proceeds will be invested in marketable bonds and that the marketable bond portfolio will consist of federal and provincial bonds in varying proportions. The initial asset mix of the marketable bond portfolio is estimated from the CPPIB’s 31 December 2018 financial statements. In addition to Canadian federal and provincial bonds, the CPPIB’s marketable bond portfolio also includes an allocation to foreign sovereign bonds. For the purpose of this report, it was assumed that foreign sovereign bonds would be mostly from developed economies and that they could be approximated by Canadian federal bonds. Hence, the starting composition of the marketable bond portfolio is assumed to be 85% federal and 15% provincial bonds. For the previous triennial CPP actuarial report, corporate bonds were included as a part of the marketable bonds portfolio. For this report, it is assumed that corporate bond holdings of the CPPIB are part of the credit asset class.

It is assumed that the CPPIB will purchase a variety of federal and provincial bonds in proportions consistent with the CPPIB’s investment strategy. It is also assumed that maturing non-marketable bonds will be mostly reinvested in provincial bonds. It is thus assumed that the ultimate marketable bond mix applicable for 2029 and thereafter will be composed of 60% federal and 40% provincial bonds.

The real yield on long-term federal bonds as at 31 December 2018 is about 0.2% and is assumed to gradually increase to 2.6% by 2029 and remain at that level thereafter (the same ultimate value but by 2025 in the previous valuation). The real yields for federal bonds of shorter maturities, as well as for provincial bonds are based on the real yield on long-term federal bonds adjusted based on historical spreads. The initial spreads over the real yield on federal long-term bonds are based on spreads prevailing as at 31 December 2018 and reflect the current economic environment.

Since the long-term federal bond yield is assumed to increase between 2019 and 2029 and only stabilize at the end of 2029, bond returns are quite low for the first ten years of the projection. The assumed average maturity of federal and provincial bonds are estimated based on the CPPIB’s holdings as at 31 December 2018 and are assumed to remain constant throughout the projection period. The average maturity is set at 7.0 years for federal bonds and 13.5 years for provincial bonds. The assumed average ultimate real rates of return for federal and provincial bonds of various maturities are 1.9% and 2.7% respectively. 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 because corporate bonds are now considered part of the credit asset class (2.2% instead of 2.7% before investment expenses).

Supplementary Pool

The Supplementary pool is expected to be composed mainly of high-quality fixed income securities such that the mix of Core pool and Supplementary pool assets provides the desired risk profile for the additional CPP. For the purpose of this report, the composition of the Supplementary pool is assumed to be similar to the ultimate composition of the marketable bond portfolio. Therefore, the pool is assumed to be composed of 60% federal and 40% provincial bonds. However, it is assumed that the Supplementary pool will have a higher proportion of long-term bonds compared to the marketable bond portfolio. Therefore, the ultimate average maturity of the Supplementary pool’s bonds is assumed to be 11.0 years compared to 9.6 years for the Core pool marketable bond portfolio. Due to this higher allocation to long-term bonds, the ultimate real rate of return for the Supplementary pool is slightly higher at 2.3% (compared to a real rate of return of 2.2% for Core pool marketable bonds). Similar to the Core pool marketable bonds portfolio, the real rates of return of the Supplementary pool are expected to be low over the first few projection years due to the projected increase in yields.

Credit

The credit asset class includes investments in corporate bonds, private debt, and private real estate debt. At the end of 2018, the CPPIB had approximately 9% of its net assets invested in this asset class. For the purpose of this report, the expected real rate of return on credit is assumed to correspond to the return on a diversified portfolio of corporate bonds, adjusted to reflect the risk of the CPPIB’s actual holdings. Such adjustments include an assumed increased exposure to emerging markets. The returns on the diversified portfolio of corporate bonds are derived from projected corporate yields, which are themselves obtained by adding a credit spread to the projected yields of a diversified portfolio of Canadian federal bonds. It is assumed that the credit spread between a diversified portfolio of corporate bonds and federal bonds will ultimately be 1.0%. The expected real rate of return of the credit portfolio is low during the first projection years, as the increase in federal bond yields (and the corresponding low returns) is expected to counter the effect of other factors such as credit spreads and increased emerging market exposure. The ultimate real rate of return is assumed to be 2.9% from 2029 onward.

CPP Account, Additional CPP Account, and Cash

The CPP Account is established in the accounts of Canada to record the transactions of the base Plan and amounts transferred to and from the CPPIB in respect of the base Plan. 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 base Plan payments 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 Additional CPP Account is a new account established in the accounts of Canada. Similar to the CPP Account, the Additional CPP Account is a flow-through account that records the transactions of the additional Plan and amounts transferred to and from the CPPIB in respect of the additional Plan.

The CPPIB uses financial leverage as part of its investment strategy. Financial leverage in the context of portfolio management consists of borrowing money to invest in additional assets with the expectation that the borrowing cost will be less than the return on the assets purchased. As at 31 December 2018, CPPIB’s external debt and financing liability represented about 14% of its net assets. While previous actuarial reports did not explicitly recognize the leverage component of the CPPIB’s investment strategy, for the purpose of this report, it was decided that the amount of leverage increased to a level that warrants explicit recognition of it in the asset allocation. The borrowing cost related to financial leverage is assumed to correspond to the expected real rate of return on cash. The initial assumed real rate of return on cash is low, reflecting the current environment, with a smooth transition assumed from the initial to the ultimate assumption of 1.0% for 2029 and thereafter.

B.6.4.2 Equity

The CPPIB assets invested in equities are currently diversified among public and private equities and across various geographies. In the derivation of the real rates of return for these equity investments, consideration was given to the long-term equity risk premium, which includes dividends and market value fluctuations. No distinction is made between realized and unrealized capital gains. Custom equity benchmarks provided by the CPPIB were considered in the derivation of real rates of return for equities.

Public equities

Public equities comprise developed and emerging markets publicly traded equities. Consistent with the assumption that risk taken must be rewarded, equity real rates of returns are developed by adding an equity risk premium to the expected real rate of return on cash^{Footnote 14}. The historical equity risk premium over cash worldwide for the 119-year and 50-year periods ending in 2018 were 4.2% and 4.0% respectively^{Footnote 15}. It is assumed that historical equity risk premiums were higher 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 119 years. However, for developed markets, the equity risk premium is assumed to be higher in the first eight years of the projection, reflecting assumed low cash returns over the same period, before reaching an assumed ultimate rate of 3.1%. The equity risk premium for emerging market equities is expected to be 90 basis points higher than for developed market equities, reflecting the additional risk inherent with investments in emerging countries.

It is assumed that the exposure to emerging market public equities will increase. As a result, the expected return on public equities is assumed to increase over the projection period, as the equity risk premium is assumed to be greater for emerging market equities than for developed market equities. The real rate of return on public equities is assumed to be 3.9% at the start of the projection period and to reach 4.3% by 2025.

Private equities

Compared to public equities, private equities are less liquid and their management necessitates a higher degree of expertise. Private equities may also provide investors the opportunity to invest at an earlier stage in the development of a company, which translates into additional risk and greater potential returns. As a result, the return structure of private equities is different compared to public equities. Private equities are expected to generate an additional return in exchange for additional risk.

In general, private investments have grown in popularity over the last decade. This increase in demand has not necessarily been matched by an increase in supply. Valuations are high and a significant amount of capital is waiting to be allocated at attractive prices. As more and more investors around the globe compete for private placements, it is assumed that the additional return from investing in private equities compared to public equities will decrease. The real rate of return on private equities is assumed to be 5.7% at the start of the projection period and to gradually decrease to 4.9% by 2025.

B.6.4.3 Real Assets

Real assets such as real estate, infrastructure, and natural resources are considered to share some characteristics of fixed income and equities, as well as to have some unique features related to their specific nature (such as illiquidity). The expected real rate of return on real assets is thus influenced by these features. In addition, the ultimate real rate of return on real assets assumes a greater exposure to emerging markets than as at 31 December 2018. Combined with a low expected real rate of return on fixed income at the start of the projection period, the real rate of return on real assets is expected to increase steadily from its assumed initial value of 1.6% in 2019 to reach an ultimate value of 4.1% in 2029.

B.6.4.4 Summary of Real Rates of Return by Asset Type

Table 67 summarizes the assumed real rates of return by asset type throughout the projection period, before reduction for investment expenses. Compared to the previous triennial report, the rates of return by asset type are presented with no allocation for rebalancing and diversification (discussed in section B.6.5). The rebalancing and diversification allocation is presented at the portfolio level in Table 68 for the base CPP and Table 69 for the additional CPP.

It is important to recognize that rates of return for most assets are volatile. The real rates of return presented in Table 67 represent expected trends and assumed levels of returns to be obtained over a long horizon. As such, limited emphasis should be put on individual projection years.

B.6.5 Asset Allocation and Expected Portfolio Rates of Return

This report provides a projection of over 75 years. As such, a long-term asset mix assumption is required, both for the base and additional CPP. As the base 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 2022, it is expected that contributions will be insufficient to cover all expenditures, and that a portion of investment income will be required to cover expenditures. The portion of investment income required to pay expenditures will be small at the beginning but will increase over time, reaching 22.7% in 2050 and 36.1% in 2090 (see Table 13 in Section 4 of the report). Therefore, the importance of reliable investment income will grow over time for the base CPP. The additional CPP will rely even more on investment income due to the difference in its financing approach compared to the base CPP. Deviations in the additional CPP portfolio’s rate of return will greatly impact the sustainability of that plan as a result of the higher reliance of the additional Plan on investment income. Given the long horizon of this report, it is important to consider how much investment risk is appropriate for the base and additional CPP over the long term, bearing in mind how each part is affected by investment returns.

For both the base and additional Plans, the expected portfolio real rates of return include an allowance for rebalancing and diversification of the assets. This allowance takes into account the beneficial effect of periodically rebalancing a diversified portfolio, thereby selling assets that have appreciated in relative value and buying assets that have declined in relative value. In other words, the expected geometric return of a portfolio is greater than the weighted average of the expected return of its components. The size of the allowance depends on the asset mix and the risk characteristics of the individual assets.

Base CPP

It is assumed that the level of risk of the base CPP investment portfolio will decrease over time. Consistent with the CPPIB’s current reference portfolio for the base CPP, a level of risk equivalent to that of a reference portfolio of about 85% equity and 15% fixed income is assumed initially. The volatility of the initial base CPP portfolio, as measured by the one-year standard deviation of return, is estimated at 13.4% annually^{Footnote 16}. Thereafter, it is projected that the annual standard deviation of the rates of return will gradually decrease to 10.7%, equivalent to a hypothetical reference portfolio of about 70% equity and 30% fixed income. The decrease in portfolio risk is assumed to progress in three-year steps reflecting the triennial review of the CPP. Hence, the asset mix is projected to progress from its initial allocation (CPP assets as at 31 December 2018) to a portfolio constructed to match the level of risk of a hypothetical reference portfolio of 70% equity and 30% fixed income. Table 68 presents the projected asset allocation, the expected volatility of the portfolio, and the expected portfolio real rates of return before investment expenses.

Due to the three-year steps progression of the asset mix, the total portfolio real rates of return do not move in a linear fashion. The expected real rates of return tend to decrease each time the level of risk of the portfolio decrease towards its ultimate level. At the same time, expected returns on fixed income are expected to gradually increase up to their ultimate values once yields stabilize. The net effect is a general increasing trend in total portfolio real rates of return with periodic adjustments corresponding to periodic portfolio risk recalibration.

Additional CPP

The additional CPP assets are invested in both the Core and Supplementary pools. The share of the additional CPP assets invested in each pool is selected in order to match the desired level of risk of the additional CPP’s reference portfolio. To increase the total portfolio risk of the additional CPP, a higher allocation to the Core pool would be selected, and vice-versa if a lower level of risk was desired.

It is assumed that the level of risk of the additional CPP will be kept constant over the projection period at a level corresponding to the current CPPIB reference portfolio of about 50% equity and 50% fixed income. During the first few projection years, this level of risk is obtained by investing 55% of the additional CPP’s assets in the Core pool and 45% in the Supplementary pool. Because the level of risk of the Core pool’s investment returns is expected to decrease gradually, a higher share of the additional CPP’s assets is expected to be allocated to the Core pool to maintain the additional CPP’s portfolio volatility at 6.6%. As shown in Table 69, 66% of the additional CPP’s assets are assumed to be allocated to the Core pool for the year 2028 and thereafter.

B.6.6 Investment Expenses

Over the last three calendar years, CPPIB’s total investment expenses consisting of operating expenses, transaction costs, and investment management fees have averaged 0.95% of assets. The majority of those investment expenses were incurred through active management decisions. Considering how total investment expenses evolved over the last decade, it is assumed that, going forward, CPPIB investment expenses related to the Core pool will be 1.00% of the corresponding assets.

The active management objective is to generate returns in excess of those of the CPP reference portfolios, 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 0.8% for the Core pool (and thus the base CPP), which is the difference between the assumed total investment expenses of 1.0% 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 private equity and real assets. The assumed investment expenses from passive management of 0.2% represent $756 million and $1,040 million in years 2019 and 2025, respectively.

The investment expenses of the additional CPP will depend on how much of the fund is invested in the Core pool versus the Supplementary pool, and the investment expenses associated with each of these pools. The investment expenses of the Core pool were discussed above and are expected to be 0.8% and 0.2% of net assets from active and passive management, respectively. Taking into account the CPPIB’s existing infrastructures, the investment expenses of the Supplementary pool (comprising solely fixed income) are assumed to be zero both from an active and passive management point of view. Therefore, the overall investment expenses related to the additional CPP are assumed to be equal to the share of the additional CPP invested in the Core pool multiplied by the assumed investment expenses of the Core pool. Because 66% of the additional CPP assets are expected to be invested in the Core pool ultimately, the investment expenses are assumed to be 0.53% and 0.13% from active and passive management, respectively. For simplicity, this cost is assumed to be constant over the projection period (except for 2019).

For the year 2019, the additional CPP investment expenses are adjusted to reflect the implementation costs incurred by the CPPIB before 2019. Total start-up costs represent $9 million or -1.1% in terms of the adjustment to the annual rate of return.

The following section shows the overall rate of return on CPP assets net of investment expenses for the base and additional CPP.

B.6.7 Overall Rate of Return on Base and Additional CPP Assets

The best-estimate rates of return on total assets for each of the base and additional Plans are derived from the weighted average assumed rates of return on all types of assets, using the assumed asset mix proportions as weights. The best-estimate rates of return are further adjusted to incorporate an allocation for rebalancing and diversification. In addition, the best-estimate rates of return are increased to reflect additional returns due to active management and reduced to reflect all investment expenses. The ultimate net rates of return are shown in Table 70.

The resulting nominal and real rates of return for select projection years are shown in Table 71. The projected nominal returns are the sum of the assumed levels of inflation and real returns. The projected average annual real rate of return over the next 75 years is 3.95% for the base CPP and 3.38% for the additional CPP.

The 75-year (2019-2093) average annual real rate of return on investments for the base CPP is 0.03% lower compared to the previous triennial valuation. This decrease is mainly due to lower expected returns on fixed income over that period compared to the previous valuation, mitigated by a different asset mix that would otherwise produce slightly higher returns during the first ten projection years.

For the additional CPP, the 75-year (2019-2093) average annual rate of return on investments decreases by 0.17% compared to the assumption of the 28^th CPP Actuarial Report. This decrease is mainly attributed to a different fixed income composition and lower assumed initial rates of return over the first ten projection years.

B.7 Benefit Expenditures

B.7.1 Benefits Payable as at 31 December 2018 and Projecting Benefits

The number of base CPP beneficiaries in pay and average monthly benefits payable as at 31 December 2018 are shown in Table 72.

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 CPP and the QPP for beneficiaries who had contributed to both plans.

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

• benefit expenditures in the year of take-up (described later in this Appendix);

• the probability of survival from the age at benefit take-up to the attained age;

• the rules regarding combined retirement and survivor benefits and combined disability and survivor benefits, as applicable; and

• the Pension Index, which recognizes the annual inflation adjustment to benefits each 1 January following benefit emergence.

The amounts of the benefits payable during any given calendar year are then 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. The projected number of beneficiaries and amounts of benefit expenditures for the base and additional Plans are shown in various tables in the Results sections 4 and 5 of this report.

All projections of base CPP benefits start from the year 1966 instead of the beginning of the current projection period (2019). This is done for the following reasons:

• The valuation methodology can be validated for the historical period up to the valuation year (1966 to 2018) by comparing the projected values (contributions, benefits, beneficiaries, etc.) with actual experience. Based on this comparison, calibration factors are obtained which are then used for the projections of the different types of benefit. For example, the calibration factors for retirement benefit experience for those starting their pension between ages 60 and 65 are 0.97 for males and 0.96 for females.

• The projection of benefits already in pay as at the valuation date (31 December 2018) is fully integrated with the projection of benefits emerging after that date thus ensuring full consistency between past experience and the future.

Since the additional Plan is a new component of the CPP as of 1 January 2019, there are no additional benefits in pay as at the valuation date. As such, the same calibration factors developed for the base Plan benefits are assumed to apply to the additional Plan projected benefits except in the case of the additional retirement benefits, where microsimulation was used to estimate the calibration factors. As experience develops for the additional Plan, more precise calibration factors for each type of benefit will be determined separately for that CPP component.

B.7.2 Benefit Eligibility Rates

As described in Appendix A (Summary of Plan Provisions) of this report, eligibility for benefits varies according to the type of benefit. The eligibility rules for the survivor benefit are the same as for the death benefit. The eligibility rules for base CPP benefits determine eligibility for additional CPP benefits.

Benefit eligibility rates (as a percentage of Canada less Québec population) for retirement, disability, and death/survivor benefits are projected using regression formulae that were developed to closely reproduce historical eligibility rates observed from CPP records of earnings data provided by ESDC over the period 1966 to 2016. 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 earners.

The disability and survivor benefit eligibility rates developed as above must be adjusted to project the earnings-related portion of these two types of benefits. Table 73 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%.

B.7.3 Adjustments to Proportion of Contributors and Pensionable Earnings for Benefit Computation Purposes

The effect of credit splitting of 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 working beneficiaries. Table 74 presents the resulting adjusted proportion of contributors. The average pensionable earnings up to the YMPE and the YAMPE for benefit computation purposes appear in Table 75 and Table 76, respectively.

B.7.4 Average Earnings-Related Benefits

Base CPP

To determine base CPP benefits, the valuation model first calculates an average earnings-related benefit for all individuals born in a given calendar year, for each sex, and all relevant ages. This average earnings-related benefit is dependent on four main components:

• Average pensionable earnings, adjusted for benefit computation purposes, relative to the YMPE;

• Average proportion of contributors adjusted for benefit computation purposes;

• 25% of the MPEA for the attained year; and

• the number of years in the elapsed contributory period at the attained age.

The base CPP average earnings-related benefit is then further adjusted to take into account certain provisions of the CPP statute as applicable:

• Disability exclusion: the period during which an individual received a CPP disability pension is excluded from the contributory period;

• Child-rearing provision (exclusion): the period during which an individual was caring for a child younger than age 7 is excluded from the contributory period if earnings during the child-rearing period were sufficiently low;

• Post-65 drop-out: earnings of contributors over age 65, who are not yet retirement beneficiaries, may replace earnings before age 65 if those earnings are lower;

• General drop-out provision (exclusion): 17% of the lowest earnings months up to a maximum of about 8 years may be dropped from the contributory period.

Table 77 shows the resulting projected average earnings-related benefit for the base CPP as a percentage of the maximum base CPP benefit at ages 60 and 65 by sex and year of birth for various cohorts of contributors. The average base CPP earnings-related benefit for males at age 65 as a percentage of the maximum is about 10 to 15 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 (producing lower career average earnings) 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 for older cohorts of contributors but increases for younger cohorts.

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 base CPP earnings-related benefits is expected to decrease over time.

Additional CPP

For the additional CPP, the valuation model also calculates an average earnings-related benefit based on contributors’ highest earnings over forty years for all persons of a birth cohort for each calendar year, sex, and all relevant ages. This average earnings-related additional benefit is dependent on four main components:

• average additional pensionable earnings adjusted for benefits purposes relative to the YMPE;

• average proportion of contributors adjusted for benefit computation purposes;

• 8.33% of the MPEA plus 33.33% of 14% of the MPEA for the attained year; and

• the fixed contributory period of 40 years.

The additional CPP average earnings-related benefit is further adjusted to take into account certain provisions of the CPP statute as applicable:

• Disability drop-in: individuals who become disabled in 2019 or later will have imputed income assigned to those disability periods; and

• Child-rearing provision (drop-in): an imputed income may be assigned to periods of caring for children younger than age 7 on or after 1 January 2019.

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

Table 78 shows the resulting projected average additional earnings-related benefits as a percentage of the maximum additional benefit at ages 60 and 65 by sex and year of birth for various cohorts of contributors. The maximum additional benefit is the maximum benefit for both parts of the additional CPP, that is, below the YMPE, and from the YMPE up to YAMPE combined together.

The average additional earnings-related benefit for males at age 65 as a percentage of the maximum is about 3 to 5 percentage points higher than at age 60 due to the longer contributory periods, which is beneficial in the context of the additional CPP fixed forty years contributory period. For females, the difference between age 60 and 65 is less pronounced.

The additional earnings-related benefits as a percentage of the maximum are expected to increase over time for both males and females, since contributory periods are projected to increase relative to the fixed forty years. For later birth cohorts, it is projected that the gap between male and female average earnings-related benefits will stay about the same over time.

B.7.5 Retirement Pension Expenditures

Retirement expenditures result from retirement pensions paid under the base and additional CPP. The retirement pensions paid under both components of the CPP are earnings-related. The total retirement pension payable is the sum of the base and additional pension amounts.

Retirement Pension

New retirement expenditures are determined for each age 60 and older, sex, and calendar year of emergence starting from 1967. Total new retirement benefits are calculated as the product of:

• the population;

• the retirement pension eligibility rate;

• the retirement pension take-up rate;

• the actuarial adjustment factor for early or late pension take-up; and

• the average earnings-related benefit previously described.

Retirement Benefit Take-up Rates

The retirement benefit take-up rates (or more simply retirement take-up rates) by age, sex, and calendar year are determined by taking into account the assumed future work patterns of earners aged 60 and over and the corresponding CPP experience from 1967 to 2018. The assumed rates 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).

The unreduced pension age under the Canada Pension Plan is 65. 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 62.5 over the decade ending in 2018.

Chart 13 presents the evolution of the retirement take-up rates at age 60 for males and females respectively. In 2012, there was a significant increase observed in the retirement take-up rates at age 60 for the cohort reaching age 60 that year. The retirement take-up rates at age 60 in 2012 were 41% and 43% for males and females, respectively, compared to the corresponding rates of 32% and 35% in 2011. The observed increase in the retirement take-up rates at age 60 in 2012 may have resulted from two provisions of the Economic Recovery Act (stimulus) of 2009:

1. The work cessation test to receive the pension early (prior to age 65) was removed in 2012, so that starting that year, individuals no longer needed to lower their earnings to take an early CPP retirement pension.

2. Greater reductions in early retirement pensions were scheduled to be phased in over a five-year period, starting in 2012.

After 2012, the age 60 retirement take-up rates gradually decreased to below their pre-2012 levels as the higher actuarial adjustments were phased in, the effect of the removal of the work cessation test diminished and individuals stayed longer in the workforce. For cohorts reaching age 60 in 2018, the retirement take-up rates are 27.9% and 30.6% for males and females, respectively, which are the lowest rates since 1992. Take-up rates at age 60 are assumed to further decrease over the next three years such that for cohorts reaching age 60 in 2021 and thereafter, the retirement take-up rates are assumed to be 27.0% for males and 29.5% for females.

Chart 13 - Historical and Projected Retirement Pension Take-up Rates at age 60

Description

Line chart showing the historical and projected retirement pension take-up rates at age 60. Y axis represents the retirement pension take-up rate as a percentage of the eligible population. X axis represents the year.

The retirement pension take-up rate at age 60 for females is 31.9% in 1990. The rate increases up to the late 1990s and then fluctuates after until reaching its highest point of 43.4% in 2012. After 2012, the take-up rate at age 60 for females decreases to 30.6% in 2018, and then is projected to further decrease to a value of 29.5% in 2021 and remain at that value thereafter.

The retirement pension take-up rate at age 60 for males is 24.3% in 1990. The rate increases up to the late 1990s and then fluctuates after until reaching its highest point of 41.4% in 2012. After 2012, the take-up rate at age 60 for males decreases to 27.9% in 2018, and then is projected to further decrease to a value of 27% in 2021 and remain at that value thereafter.

The retirement take-up rates for ages 61 to 64 and 66 to 69 for the year 2019 and thereafter are determined using the observed averages over the last three years ending in 2018. To reflect the waiving of the requirement for an application for the retirement pension upon reaching age 70, as provided under Bill C-97 – Budget Implementation Act, 2019, No. 1^{Footnote 17}, the retirement take-up rate for age 70 is set to equal the average of the last three years of the total retirement take-up rates of ages 70 and over.

The retirement take-up rates at age 65 are derived such that the sum of the retirement rates for each cohort is 100%. The resulting rates at age 65 are determined to be 46.4% in 2026 and thereafter, for both sexes. Table 79 shows the projected retirement take-up rates by age for both males and females.

The assumed retirement take-up rates result in a projected average age at retirement pension take-up of 63.4 years. This compares to an average retirement take-up age of 62.4 years in 2012.

Projected New Retirement Pensions

Table 80 shows the projected number of new retirement beneficiaries and their projected average base and additional monthly retirement pensions by sex. New additional average retirement pensions are quite low in the early years due to the lower benefit accrual rates during the phase-in period and the few years of additional contributions. These averages are projected to grow rapidly as the number of years of contributions to the additional CPP increases.

Retirement Beneficiaries Mortality

Projections of retirement pensions in pay require applying survival probabilities to current and new retirement beneficiaries. 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 for the year 2015 and the mortality improvement assumptions for the general population in this report. The resulting projected mortality rates and life expectancies of retirement beneficiaries are shown in Table 81, Table 82, and Table 83.

B.7.6 Post-Retirement Benefit Expenditures

Post-retirement benefits are paid to retirement beneficiaries who continue to work and contribute to the Plan. Post-retirement benefits are payable under both the base and additional CPP.

Working retirement beneficiaries younger than 65 are required along with their employers to contribute, whereas contributions are voluntary once reaching age 65 (up to age 69). Employers of those working beneficiaries opting to contribute are required to also contribute. The post-retirement contributions paid in a year are applied toward providing post-retirement benefits in the following years. Post-retirement benefits are described in more details in Appendix A – Summary of Plan Provisions.

Table 84 presents the assumed share of CPP retirement beneficiaries who work and contribute to the CPP in the year of and years following pension take-up, by age and sex.

The assumption corresponding to the year of retirement pension take-up is kept constant after 2025, to reflect the phase-in of the additional CPP. In the year of retirement, contributions are first applied toward maximizing the base and additional retirement pensions, with remaining contributions then applied toward a post-retirement benefit. The contributions to the additional Plan increase over the phase-in period both due to the increase in the contribution rate and the introduction of the YAMPE over two years. This affects the proportion of working beneficiaries who contribute in the year of pension take-up. This proportion is assumed to remain constant once the phase-in is complete in 2025.

The assumption for the proportion of CPP retirement beneficiaries who are contributors after the year of retirement pension take-up is kept constant for the entire projection period.

The figures in the table reflect that not all working beneficiaries contribute to the CPP, due to the following:

• having earnings less than the YBE, and

• opting out of contributing between the ages 65 and 69.

In order to project the contributions that will result from working beneficiaries, assumptions are required with respect to their average contributory earnings (i.e., average earnings between the YBE and YAMPE on which contributions are made). For both males and females, the average contributory earnings of working beneficiaries for years after the year of retirement pension take-up are assumed to be between 20% and 35% lower than the contributory earnings of contributors who are not beneficiaries, depending on the age and sex. The resulting average annual contributory earnings of working beneficiaries up to the YMPE and YAMPE are presented respectively in Table 85 and Table 86.

Around 450,000 working beneficiaries started to contribute in 2012, generating about an extra $1.0 billion in contributions that year. The number of working beneficiaries who contribute grew to about 562,000 in 2016 with corresponding contributions representing about $1.5 billion.

The corresponding post retirement benefits started to be payable the year after contributions were made. In 2013, post-retirement benefits totaled about $63 million for contributions made in 2012. In 2017, post-retirement benefits amounted to $410 million based on contributions made in 2016 and before.

Table 87 shows the projected number of working beneficiaries with their contributions and resulting post-retirement benefits by year. Contributions and benefits are split between the base and additional CPP. Total contributions from working beneficiaries are projected to be about $1.7 billion in 2019 and $6.8 billion in 2050. Total post-retirement benefits payable are projected to be about $637 million in 2019 and $8.4 billion in 2050.

The projected number of working beneficiaries who contribute, their 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 retirement benefits as total retirement expenditures in all other tables in this report where expenditures are shown by type of benefit, unless otherwise indicated.

B.7.7 Disability Benefit Expenditures

Disability expenditures result from disability benefits paid under the base and additional CPP.

Under the base CPP, disability benefits consist of the disability pension and the post-retirement disability benefit. The base CPP disability pension consists of both a flat-rate and earnings-related benefit. The post-retirement disability benefit is equal to the flat-rate benefit.

Under the additional CPP, disability benefits consist only of the additional disability pension which is an earnings-related benefit. Eligibility for the additional disability pension follows from eligibility for the base disability pension. There is no post-retirement disability benefit payable under the additional CPP.

Disability Pension

New disability pension expenditures are determined by age and sex for each year starting in 1970 as the product of:

• the population;

• the disability eligibility rate;

• the disability incidence rate; and

• the annual amount of the benefit.

The value of the emerging earnings-related benefits by age and sex is equal to the sum of 75% of the average retirement earnings-related benefits for the base and additional Plans.

Disability Incidence Rates

Chart 14 shows the historical disability incidence rates for the CPP disability pension, and Table 88 provides the assumed ultimate disability incidence rates for the disability pension (base and additional CPP) and the assumed disability incidence rates for the post-retirement disability benefit (base CPP).

Chart 14 - Historical Disability Incidence Rates (per 1,000 eligible)

Description

Line chart showing the historical disability incidence rates (the number of new CPP disability beneficiaries per 1,000 eligible contributors). Y axis represents the rate per 1,000 eligible. X axis represents the year. The disability incidence rate for males is 2.5 new beneficiaries per 1,000 eligible contributors in 1970. The rate for males has periods of growth and decline but increases overall to reach a highest point of 6.1 in 1992, then decreases to 2.6 in the late 1990s, and is relatively stable after with a value of 2.95 in 2018.

The disability incidence rate for females is 1.2 new beneficiaries per 1,000 eligible contributors in 1970. The rate for females has periods of growth and decline but increases overall to reach a highest point of 5.2 in 1992, then decreases to 2.9 in the late 1990s, and is relatively stable after with a value of 3.65 in 2018.

It can be seen from Chart 14 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, beginning in 1994, the CPP administration initiated a range of measures designed to effectively manage the growing pressure on the disability program.

The above trends and the facts that the overall female incidence rate has been higher than the overall male incidence rate since 1996, with the female-male differential generally increasing over the period 2009 to 2015, were taken into account when setting the ultimate assumption for the aggregate disability incidence rates. The estimated rates for years 2016 to 2018, based on available data from Service Canada, were also taken into account.

Based on the above, the aggregate (all ages combined using the 2018 population for weights) incidence rates for the disability pension for 2019 and thereafter are projected to remain constant at the values in 2018 of 2.95 and 3.65 per thousand eligible males and females, respectively. These projected aggregate rates are then distributed by age in accordance with the 2018 eligible population for each sex.

Post-retirement Disability Benefit Incidence Rates

Since no CPP data were yet available as at the time of this report to develop the assumption for the incidence of disability among CPP early retirees, data from the Québec Pension Plan (QPP), which has a similar provision, have been used. Once CPP data become available, it will be used to develop this assumption for future CPP actuarial reports.

Under the QPP, there is a provision for an “additional amount for disability” payable to retirement beneficiaries younger than 65. Effective 2013, QPP retirement beneficiaries younger than 65 who are deemed disabled after the first six months of their retirement pension start date may be eligible to receive the additional amount for disability, which is added to their retirement pension. The additional amount equals the flat-rate portion of the QPP disability benefit. The additional amount ceases to be paid once an individual turns 65.

Given that the eligibility requirements for a disability benefit are similar under the CPP and QPP, and that the QPP additional amount for disability is similar to the CPP post-retirement disability benefit, the assumption for the disability incidence rates in respect of the QPP additional amount for disability were used, as given in Table 36 of the Actuarial Valuation Report on the QPP as at 31 December 2015. These incidence rates are shown in Table 88. The incidence rates are applicable to the population of in-pay retirement beneficiaries aged 61 to 64, that is, excluding new beneficiaries who emerge during the year.

Projected New Disability Benefits

Table 89 shows the projected number of new disability beneficiaries for the disability pension and post-retirement disability benefit, and Table 90 shows the projected average new disability benefits for the base disability pension, additional disability pension, and base post-retirement disability benefit by sex and year.

Disability Benefit Termination Rates

All emerging disability benefits (disability pensions and post-retirement disability benefits) are projected by age and sex for each future year until termination of disability (due to recovery, death, or attainment of age 65). The projected disability termination rates presented in Table 91 apply by age, sex, and duration of disability (i.e. the period of being in receipt of a disability benefit) on an attained calendar year basis. The average graduated experience over the 15-year period 2003 to 2017 is used to produce base year rates for 2016. The base year termination rates are then projected for 2019 and thereafter for males and females, by age of disability onset, and duration of disability using assumed recovery and mortality improvement rates.

Recovery improvement rates are assumed to trend to an ultimate level of 0% by 2023 (i.e. recovery rates are assumed to be constant after 2023), and mortality improvement rates of disability beneficiaries are assumed to trend to an ultimate level of 0.8% by the same year.

B.7.8 Survivor Pension Expenditures

Survivor expenditures result from survivor’s benefits paid under the base and additional CPP. Under both components of the CPP, the survivor’s pension changes form at age 65.

Under the base CPP, the survivor’s pension payable to individuals younger than 65 consists of a flat-rate and earnings-related benefit. At ages 65 and older, the pension payable is earnings-related. The additional survivor’s pension payable takes the same form as the base survivor’s pension, except that the additional survivor’s pension is strictly earnings-related with no flat-rate benefit payable.

New Survivor’s Pension

New survivor pension expenditures are determined by age and sex for each year starting in 1968 as the product of:

• the number of deaths in the population;

• the probability of being married or in common-law union at the time of death;

• the survivor eligibility rate;

• the husband and wife age distribution;

• the annual amount of the benefit (flat-rate and average earnings-related benefits); and

• if applicable, the appropriate factor taking into account the base CPP earnings-related benefit limits that apply to combined survivor-disability and combined survivor-retirement pensions.

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 2005 to 2017, 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 2005 to 2017, the proportions are extrapolated to 2020 and kept constant thereafter. These proportions account for benefits payable to same-sex couples. Values are shown in Table 92.

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, respectively. It is further adjusted to account for the fact that eligibility rules are more stringent for survivor benefits than for retirement benefits.

The projected number of new survivor beneficiaries by age (below 65, and 65 and older) is shown in Table 93. The projected average monthly survivor pensions of emerging (new) benefits for the base and additional CPP by age and sex are shown in Table 94.

Survivor Beneficiaries Mortality

All survivor pensions emerging by year, age, and sex of the surviving spouse or common-law partner are projected to each subsequent year using the assumed survivor mortality rates, which reflect the higher mortality of widows and widowers 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 2017 and the mortality improvement assumptions for the general population in this report. Table 95 and Table 96 show the projected mortality rates of survivor beneficiaries and the resulting projected life expectancies of survivor beneficiaries by age and sex, respectively.

B.7.9 Death Benefit Expenditures

Death benefits are flat-rate amounts that are payable only under the base CPP. There are no death benefits under the additional Plan.

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

• the number of deaths at ages 18 and over in the population;

• the survivor eligibility rate; and

• the amount of death benefit determined by the year of death:

  • As of 1 January 2019, a flat-rate payment of $2,500, regardless of the earnings history of the deceased contributor.

  • Before 2019, 50% of the average annual earnings related benefit capped at 10% of the YMPE for the year of death prior to 1998 and at $2,500 thereafter.

Table 97 shows the projected number of death benefits.

B.7.10 Children’s Benefit Expenditures

Children’s benefits are flat-rate amounts that are payable only under the base CPP. There are no children’s benefits under the additional Plan. The amount of the benefit payable to orphans and to children of disabled contributors is the same.

The number of disabled contributor’s child and orphan benefits emerging each year starting in 1970 and 1968, respectively, are determined by the projected number of children of new disability and/or survivor beneficiaries, based on the assumed fertility rates. 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.

As of 1 January 2019, eligible children of early retirees who are deemed disabled and meet disability eligibility requirements receive the children’s benefit.

Table 98 shows the projected number of new children’s benefits by type and year.

B.8 Operating Expenses

Base CPP

The operating expenses of the base CPP have historically arisen from different sources including ESDC, the CRA, Public Services and Procurement Canada, the Office of the Superintendent of Financial Institutions Canada, the Department of Finance Canada, and the CPPIB, where the majority of the operating expenses are attributable to ESDC and the CRA. For the purpose of this report, operating expenses of the CPPIB are included in the investment expenses assumptions for the base CPP. In the calendar year 2018, operating expenses for the base Plan from all sources other than the CPPIB amounted to about $636 million.

Base on recent experience from 2009 to 2018, the annual operating expenses of the base CPP (excluding the CPPIB) were on average 0.092% of total annual employment earnings. ESDC and the CRA provided preliminary estimates of their operating expenses for fiscal years 2019-2020 to 2021-2022. Based on both the average experience of the last 10 years and the preliminary estimates of ESDC and the CRA, it is assumed that the base CPP operating expenses will represent 0.090% of total annual earnings for 2019 and thereafter.

The total employment earnings basis used in the determination of the assumption and projection of operating expenses include earnings from working beneficiaries.

Table 99 shows the projected total operating expenses of the base CPP as a percentage of total earnings.

Additional CPP

The operating expenses of the additional CPP arise from the same sources as the base CPP. For the purpose of this report, operating expenses of the CPPIB are included in the investment expenses assumptions for the additional CPP.

As ESDC and the CRA are responsible for the majority of the CPP operating expenses, the short-term projections of the additional CPP operating expenses are based on preliminary estimates provided by the two organizations for fiscal years 2019-2020 to 2021-2022. Operating expenses incurred in calendar years 2017 and 2018 represent the start-up costs of the additional Plan. For the purpose of this report, it is assumed that the operating expenses for these two years will be charged to the Additional Canada Pension Plan Account in calendar year 2019, along with the expenses incurred in that year. The total amount of the operating expenses in calendar year 2019 is estimated to be $92 million.

Over the long term, it is assumed that the operating expenses of the additional CPP will be significantly lower than for the base CPP due to the use of the existing CPP infrastructure. It is projected that the additional CPP operating expenses will represent 0.01% of total annual earnings for 2024 and thereafter.

Table 100 shows the projected operating expenses of the additional CPP as a percentage of total earnings. As more information on the additional CPP operating expenses becomes available, these estimates will be revised in future actuarial reports.

Appendix C – Financing the Canada Pension Plan

C.1 Historical and Legislative Background

The retirement system in Canada has been designed as a three-tier system. First, the Old Age Security (OAS) program provides a minimum floor benefit based on age and 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 and QPP each consist of base and additional plans, which are respectively partially and fully 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 more resilient to changes in demographic, economic, and investment 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, economic, and investment 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. The Plan’s 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 (15^th) 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 projected, the effect of the early 1990s recession on the proportions of earners and average employment earnings, 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 benefits 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. Investment income on this pool of assets is projected to 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 that requires that changes to the CPP that increase benefits or add new benefits be fully funded, i.e. that their costs be paid as the benefits are earned and that any costs associated with benefits that have already been earned but not paid for must be amortized and paid for over a defined period of time consistent with common actuarial practice. This refers to paragraph 113.1(4)(e) of the Canada Pension Plan.

Both of the financing objectives (steady-state and full funding) were introduced to improve fairness across generations and improve the financial long-term sustainability of the base Plan. The move to steady-state funding eases some of the contribution burden on future generations, while 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 steady-state and any full funding contribution rates in respect of the base CPP are determined by the Chief Actuary in accordance with paragraphs 115(1.1)(c) and (e) of the Canada Pension Plan and the prescribed regulations (discussed below).

With the challenge facing younger generations of securing adequate retirement savings at a time when fewer can expect to work in jobs that will include a workplace pension plan, the federal and provincial governments agreed in 2016 to expand the CPP by creating the additional CPP.

The full funding of the additional CPP is a result of the 1997 reforms to the Plan, specifically the requirement to fully fund any increased or new benefits. In accordance with paragraph 113.1(4)(d) of the Canada Pension Plan, the additional retirement, survivor, and disability benefits provided by the additional Plan are to be financed by additional contribution rates that (i) are no lower than the lowest constant rates that can be maintained over the foreseeable future, and (ii) result in projected revenues (contributions and investment income) that are sufficient to fully pay the projected expenditures of the additional CPP over the long term.

The rates referred to in paragraph 113.1(4)(d) of the CPP statute are the first and second additional minimum contribution rates (FAMCR, SAMCR), which apply, respectively, to the first and second tier of the additional CPP. The AMCRs are determined by the Chief Actuary in accordance with paragraphs 115(1.1)(d) and (e) of the Canada Pension Plan and the prescribed regulations (discussed below). The AMCRs are calculated before and after accounting for any future increase in benefits or new benefits in accordance with the full funding requirements of paragraph 113.1(4)(e) of the CPP statute.

The regulations regarding the calculation of contribution rates for the base CPP were amended in 2018 to clarify the calculation and application of the de minimis rule (described below) and to set out the calculation of the additional minimum contribution rates for the additional CPP. These regulations are the Calculation of Contribution Rates Regulations, 2018.

C.2 Calculation of Base and Additional Minimum Contribution Rates

Base CPP

The financing objective of the base Plan is stated in the CPP statute in terms of the steady-state contribution rate and full funding rate for any increased or new benefits. The minimum contribution rate for the base CPP is the sum of the steady-state contribution rate and full funding rate as described below.

C.2.1 Steady-State Contribution Rate

The steady-state contribution rate calculation is specifically defined in the Calculation of Contribution Rates Regulations, 2018 as the lowest level contribution rate, applicable after the end of the review period, to the nearest 0.01% that results in the projected assets/expenditures (A/E) ratio of the base Plan being the same in the 10^th and 60^th years following the end of the review period. For this report, the end of the review period is 2021. Therefore, the steady-state contribution rate is applicable for 2022 and thereafter and the relevant years for the determination of the steady-state contribution rate are 2031 and 2081. The corresponding A/E for those years is determined to be 7.5, and the steady-state contribution rate, which is rounded to the nearest 0.01%, is determined to be 9.71% for the year 2022 and thereafter for this report.

The steady-state contribution rate is calculated separately from the full funding rate for any increased or new benefits.

C.2.2 Full Funding Rate of Increased or New Benefits

Subparagraph 115(1.1)(c)(ii) and paragraph 115(1.1)(f) of the CPP statute require the Chief Actuary to specify, in the report, a contribution rate in respect of any increased or new benefits for the base CPP in accordance with the requirements of paragraph 113.1(4)(e). The amendments to the Canada Pension Plan introduced under Bill C-74 (Budget Implementation Act, 2018, No. 1), which received Royal Assent on 21 June 2018, include amendments in respect of the base CPP that required the application of 113.1(4)(e). The amendments under Bill C-74 are described in Appendix A – Summary of Plan Provisions of this report and in the 29^th CPP Actuarial Report.

The amendments under Bill C-74 represent the second time that the full funding requirement was invoked for the base Plan. The first time was in respect of the 2008 amendments (enhanced eligibility for disability benefits for long-term contributors). The temporary and permanent full funding contribution rate calculations for the base CPP are defined in the Calculation of Contribution Rates Regulations, 2018.

According to the Calculation of Contribution Rates Regulations, 2018, if the full funding rate before rounding is less than 0.02%, then the full funding rate is deemed to be zero. This is referred to as the “de minimis” rule. The full funding rate in respect of the 2008 amendments was first determined in the 22^nd CPP Actuarial Report. Since the 26^th CPP Actuarial Report, the full funding rate has been determined to be below 0.02% and thus deemed to be zero in accordance with the de minimis rule. As such, the improvement in benefits from the 2008 amendments is financed entirely by the steady-state contribution rate.

The 29^th Actuarial Report supplementing the 27^th and 28^th Actuarial Reports on the Canada Pension Plan as at 31 December 2015 shows the effects of the amendments under Bill C-74 on the long-term financial states of the base and additional CPP. The effect of the amendments on the base and additional CPP were re-evaluated for this 30^th CPP Actuarial Report.

On the basis of this report, the full funding rates for the base CPP were determined as follows.

Temporary Full Funding Rate

Since amended base CPP survivor, disability, and death benefits that will come into pay after 1 January 2019 are based on contributors’ CPP participation both before and after the effective date of the proposed amendments, there is a portion of the projected increase in liabilities that relates to Plan participation prior to the effective date. The increase in liabilities for Plan participation prior to 2019 is determined as at the year following the triennial review period, or as at the effective date of the amendments if later. The triennial review period in respect of this report is 2019 to 2021. As such, this increase in liabilities is calculated as the present value as at 1 January 2022 of the projected increase in base CPP expenditures relating to Plan participation prior to 2019 and is estimated at $1.6 billion.

The net accumulated assets in respect of the past unfunded liabilities are determined at the end of year 2021 based on the:

• projected increase in expenditures relating to Plan participation prior to 2019 over the years 2019 to 2021, and

• contributions calculated using the temporary full funding rate of the previous (29^th) report over the same period.

These net accumulated assets are equal to -$93 million^{Footnote 18} as at 31 December 2021.

The temporary full funding contribution rate in respect of the increase in liabilities is determined to be 0.0281%. The temporary full funding rate is equal to the ratio of:

• the difference of the increase in liabilities and the net accumulated assets to

• the present value as at 1 January 2022 of contributory earnings over the period 2022 through 2033.

The amortization of the past unfunded liabilities was initially over the 15-year period 2019-2033 in the 29^th CPP Actuarial Report. As the valuation date of this 30^th CPP Actuarial Report is three years later than the valuation date of the 29^th Report, the amortization period is reduced by three years to the 12-year period 2022-2033. The amortization period under both reports is consistent with common actuarial practice, as provided in the legislation.

Permanent Full Funding Rate

As for past participation, the increase in liabilities for Plan participation on or after 1 January 2019 is determined as at the year following the triennial review period, or as at the effective date of the amendments if later.

As such, the increased liabilities due to the base CPP amendments in respect of participation on or after 1 January 2019 is determined as at 1 January 2022 and are estimated to be $1.9 billion, and the corresponding net accumulated assets are estimated to be $80 million as at 31 December 2021. The difference between these liabilities and assets is fully funded with a permanent contribution rate of 0.0071%.

The sum of the temporary and permanent full funding rates for the years 2022-2033 is 0.0351% (0.0281% plus 0.0071%) and 0.0071% for 2034 and thereafter. The rounded full funding rate is 0.04% for years 2022 to 2033 and 0.01% for the year 2034 and thereafter. The calculations and results are summarized in Table 101.

The Chief Actuary will review the full funding rates on a periodic basis to account for actual experience and any change in assumptions.

C.2.3 Minimum Contribution Rate

The minimum contribution rate (MCR) is the sum of the rounded steady-state contribution rate and the rounded full funding rate. For this report, the MCR is determined to be 9.75% for years 2022 to 2033 and 9.72% for 2034 and thereafter. This compares to the MCR under the 29^th CPP Actuarial Report of 9.82% for years 2022 to 2033 and 9.80% for 2034 and thereafter. The MCR will be recalculated for the next triennial actuarial report to be prepared as at 31 December 2021. It may also be recalculated at any other date to reflect the cost impact of any other proposed amendments to the CPP statute.

As the MCR determined for this 30^th CPP Actuarial Report is less than the legislated contribution rate of 9.9%, the insufficient rates provisions in subsections 113.1(11.05) to (11.15) of the CPP statute 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 2019 and thereafter.

Additional CPP

C.2.4 Additional Minimum Contribution Rates

The financing objective of the additional Plan is stated in the CPP statute in terms of the AMCRs (FAMCR and SAMCR) that must be determined before and after taking into account the full funding of any increased or new additional benefits.

The AMCRs are defined specifically in the Calculation of Contribution Rates Regulations, 2018 as the lowest level contribution rates, applicable after the end of the review period, to the nearest 0.0001 percentage points, such that the following conditions are met:

• the present value of projected additional open group obligations are at least equal to the projected additional assets and present value of projected additional contributions (open group assets);

• the projected assets/expenditures (A/E) ratio of the additional Plan is the same in the 50^th and 60^th years following the end of the review period, but no earlier than in the years 2088 and 2098, respectively; and

• the SAMCR equals the FAMCR multiplied by the ratio of the earnings replacement rate of the second tier of the additional Plan to the replacement rate of the first tier (33.33% / 8.33%, which equals 4).

In regard to the first condition above, 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.

The requirement of the first condition to use an open group approach satisfies the requirement of “sufficiency” of the AMCRs formulated in subparagraph 113.1(4)(d)(ii) of the Canada Pension Plan. Since the open group methodology is based on projections of future income and expenditures, the requirement of the additional CPP open group assets to be at least 100% of its open group actuarial obligations ensures that, at the valuation date, the projected additional contributions and investment income are sufficient to cover the projected additional expenditures over the long term.

To determine the open group assets of the additional Plan, future additional contributions (using additional minimum contribution rates) of current and future contributors are projected using the best-estimate assumptions of this report. In order to determine their present value, the projected additional contributions are discounted using the assumed nominal rate of return on the additional CPP assets. This present value is added to the invested assets of the additional Plan to obtain the total open group assets.

To determine the actuarial obligations of the additional Plan on an open group basis, future additional expenditures with respect to current and future additional CPP participants are projected using the best-estimate assumptions of this report. The open group actuarial obligations is then the present value of these projected additional expenditures discounted using the assumed nominal rate of return on additional CPP assets.

The requirement of the second condition to match the A/E ratios in the 50^th and 60^th years following the end of the review period satisfies the requirement of “stability” of the AMCRs formulated in subparagraph 113.1(4)(d)(i) of the Canada Pension Plan. The matching of the A/E ratios and thus stabilization of the ratios over the long term is aimed at ensuring the adequacy of projected contributions and investment income to cover projected expenditures at any point in time without projecting changes in the AMCRs. For this report, the stabilization years for the A/E ratio are 2088 and 2098, and the corresponding A/E ratio for those years is equal to about 25.

The current triennial review period of the CPP is 2019 to 2021, which is part of the initial phase-in period of the additional CPP. During the review period, the legislated first additional contribution rate applies: 0.3% for the year 2019, 0.6% for 2020, and 1.0% for 2021.

The FAMCR is applicable for 2022 and thereafter, and the SAMCR is applicable for 2024 and thereafter (2024 being the first year of the second tier of the additional CPP). The FAMCR and SAMCR are rounded to the nearest 0.01%, and are determined for this report to be 1.98% for 2023 and thereafter and 7.92% for 2024 and thereafter, respectively. The FAMCR for 2022 is 1.49%, which is 1.98% multiplied by a factor of 0.75 during the phase-in period of the additional Plan.

Table 102 shows that the AMCRs satisfy the first condition above. The table shows that, as at 1 January 2019, the additional CPP open group assets are projected to be 106.8% of the open group actuarial obligations. There are no invested additional CPP assets as at 1 January 2019, and the total open group assets are equal to the present value of future additional contributions of current participants and future participants of the Plan. Since there are no benefits in pay as at 1 January 2019, the open group actuarial obligations are equal to the present value of future additional benefits for current and future participants of the CPP.

The AMCRs are determined in respect of the additional Plan as it is defined as at its commencement date, 1 January 2019, and include the benefit enhancements under Bill C-74.

As the AMCRs determined for this report do not deviate materially from the legislated additional contribution rates, the default provisions of the Additional Canada Pension Plan Sustainability Regulations do not apply. Therefore, in the absence of specific action by the federal and provincial governments, the legislated first additional contribution rate will remain at 1.5% for 2022 and 2.0% for 2023 and thereafter, and the legislated second additional contribution rate will remain at 8.0% for 2024 and thereafter.

C.3 Evolution of Assets to Expenditures Ratios

An important measure of the base and additional Plans’ financial states is the ratio of assets at the end of one year to the expenditures of the next year (the A/E ratio).

Base CPP

As can be seen in Chart 15, under the legislated contribution rate of 9.9%, the A/E ratio for the base Plan is projected to remain relatively stable at a level of about 7.6 over the period 2019 to the early 2030s. Thereafter, it continues to rise overall to a value of 9.5 in 2095.

As the legislated rate of 9.9% is greater than the MCR of 9.75% for years 2022-2033 and 9.72% thereafter, the A/E ratios under the legislated rate are higher than the ratios under the MCR. The A/E ratios under the MCR for years 2022 and thereafter are shown in Chart 15 for comparison. The ratios under the MCR in years 2031 and 2081 are nearly equal, at a value of about 7.5, as indicated in the chart. This is because the years 2031 and 2081 are the target years for the steady-state contribution rate of 9.71%, under which the A/E ratios are equal for those years at a value 7.5.

The projected initial slowdown in the growth of the A/E ratio until the early 2030s under the legislated rate of 9.9% 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 base Plan to absorb the increased outflow and maintain the contribution rate at 9.9%.

Chart 15 - Assets/Expenditures Ratio – Base CPP (legislated and minimum contribution rates)

Description

Line chart showing the historical and projected base CPP’s Assets to Expenditures ratio under the legislated and minimum contribution rates. Y axis represents the assets to expenditures ratio. X axis represents the year.

The assets to expenditures ratio under the 9.9% legislated contribution rate is 2.4 in 1995, increases to 7.6 in 2018 and is projected to increase to 9.5 in 2095.

The assets to expenditures ratio under the minimum contribution rate of 9.75% for years 2022 to 2033, and 9.72% for year 2034 and thereafter is projected to be 7.6 in 2022, to increase to a maximum of 8.3 in 2054 and then decrease to 6.8 in 2095.

The assets to expenditures ratio under the minimum contribution rate equals 7.5 in years 2031 and 2081.

Additional CPP

As shown in Chart 16, under the legislated additional contribution rates of 2.0% and 8.0%, the A/E ratio of the additional CPP is projected to increase significantly during the early years of the additional Plan and remain high as assets rapidly accumulate and benefit expenditures are low. As the additional Plan matures and benefit expenditures increase, the A/E ratio decreases and stabilizes at a level of about 26 by 2075. The A/E ratio under the AMCRs, also shown in Chart 16, is projected to be slightly lower than under the legislated rates, since the AMCRs are close to the legislated rates. The target years of 2088 and 2098, which are used in the determination of the AMCRs, are marked in the chart, and the corresponding A/E ratio is 25.

Chart 16 - Assets/Expenditures Ratio – Additional CPP (legislated and additional minimum contribution rates)

Description

Line chart showing the projected additional CPP’s Assets to Expenditures ratio under the legislated and minimum additional contribution rates. Y axis represents the assets to expenditures ratio. X axis represents the year.

The assets to expenditures ratio under the legislated first and second additional contribution rates of 2.0% and 8.0% is projected to start at a value of 17.4 in 2019, increase to a maximum of 112.5 in 2025 and then decrease to 26.3 in 2099.

The assets to expenditures ratio under the first and second additional minimum contribution rates of 1.98% and 7.92% is projected to start at a value of 17.4 in 2019, increase to a maximum of 111.6 in 2025 and then decrease to 25.4 in 2099.

C.4 Open Group Balance Sheets under the Legislated Contribution Rates

The base and additional CPP balance sheets presented in this section are prepared using an open group approach and the legislated contribution rates of each component. The open group methodology is described earlier, in section C.2.4 of this Appendix.

The choice of the methodology used to produce a social security system’s balance sheet is mainly determined by the system’s financing approach. Partially funded plans like the base 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.

As discussed in section C.2.4, using an open group approach is required for the financial projections of the additional CPP in order to meet the “sufficiency” requirement of subparagraph 113.1(4)(d)(ii) of the CPP statute. This in turn ensures that, at the valuation date, the projected additional contributions and investment income under the AMCRs are sufficient to cover the projected additional expenditures over the long term.

Base CPP

The actuarial position of the base Plan as at 31 December 2018 and 31 December 2030 under the open group approach and the legislated contribution rate of 9.9% is presented in Table 103. The open group actuarial assets and obligations of the base CPP are determined similarly as for the additional CPP, as described earlier in section C.2.4, but using the base CPP projected contributions and expenditures and the expected rate of return on base CPP assets as a discount rate. To obtain the asset excess (shortfall) of the base CPP, the base Plan’s actuarial obligations are deducted from the open group assets at the valuation date.

The CPP 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. It therefore follows that if the base Plan’s financial sustainability is to be measured based on its asset excess or shortfall, it should be done on an open group basis that reflects the partially funded nature of the base 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 base Plan’s financial state confirms that the base Plan is able to meet its financial obligations over the long term^{Footnote 19}.

Although the key legislatively prescribed financial measure for evaluating the base Plan is the minimum contribution rate, specifically, its adequacy and stability over time, other indicators such as the open group balance sheet should be used in combination with the MCR to assess the sustainability of the base Plan.

Additional CPP

The prescribed regulations set out the determination of the ratio of the actuarial assets to obligations of the additional Plan on an open group basis in order to determine the AMCRs^{Footnote 20.} In this section, the open group additional CPP balance sheet is prepared under the legislated additional contribution rates.

The actuarial position of the additional Plan as at 1 January 2019 under the open group approach and additional minimum contribution rates is presented in Table 102. The figures shown in Table 102 differ from those shown in Table 104, since different contribution rates are used. The legislated additional contribution rates are used for Table 104, whereas the AMCRs are used for Table 102.

To obtain the asset excess (shortfall) of the additional Plan, the additional Plan’s actuarial obligations are deducted from the open group assets at the valuation date. As shown in Table 104, the ratio of the additional Plan’s assets to its obligations using the legislated additional contribution rates is determined for this report to be 107.8% as at 1 January 2019 and 106.4% as at 31 December 2030.

Appendix D – Detailed Reconciliations with Previous Report

D.1 Base CPP

The results presented in this report differ from those previously projected for a variety of reasons. Differences between the actual experience for 2016 through 2018 and that projected in the 27^th CPP Actuarial Report for the same period were addressed in the Reconciliation with Previous Triennial Reports – Base CPP section 6.1 of this report. Since historical results provide the starting point for the projections shown in this report, these differences have an effect on the projections. This section provides more details on the impact of the experience update and changes in the assumptions and methodology.

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 base 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 27^th 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 105 and the discussion below.

A series of amendments (as described in Appendix A) between the 27^th CPP Actuarial Report and the 30^th CPP Actuarial Report had the effect of increasing the pay-as-you-go rates and of introducing full funding rates, which are combined with the steady-state rate to obtain the minimum contribution rate (MCR) for the base CPP.

The experience update had the effect of reducing the pay-as-you-go rates in the short and medium term due to better than anticipated demographic and benefits experience compared to the 27^th CPP Actuarial Report. The impacts on the pay-as-you-go rates from the experience over the period 2016 to 2018 are shown in Table 105. In particular:

• The starting population (July 2018) was higher and younger than expected due to higher than expected migration being partially offset by a lower than expected number of births and higher than expected number of deaths. The higher and younger starting population for the projections of this 30^th CPP Actuarial Report decreases the pay-as-you-go rates over the projection period.

• Overall lower than expected benefit expenditures, which resulted from an over-projection of retirement benefits (lower retirement benefit take-up rate at age 60 compared to expected), disability benefits (lower disability incidence rate compared to expected), and survivor benefits and operating expenses outweighing an under-projection of children and death benefits leads to a 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. This partially offsets the decrease due to the demographic experience and benefit expenditures experience over the near to medium term.

Changes made to the key best-estimate assumptions since the previous triennial report were outlined in Table 1 of section 3 of this report. The effects of these changes on the pay-as-you-rates are also shown in Table 105 and are summarized below.

• The assumed total fertility rates are lower than those assumed in the previous triennial report, and as such, increase the pay-as-you-go rates in the long term.

• The initial lower mortality improvement rates assumed for this report decrease the pay-as-you-go rates in the short term, because beneficiaries are expected to initially receive their benefits over a shorter period of time.

• The assumed level of net migration is higher at the beginning of the projection period 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 benefit expenditures.

• The higher assumed labour force participation and employment rates decrease the pay-as-you-go rates, although the effect diminishes and reverses 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.

• Changes in retirement benefit-related assumptions increase the pay-as-you-go rates in the medium term, but decrease them in the long term, due to the fact that the change in the assumed benefit take up rate is more than offset by the change in the assumed distribution by level of pension.

• The changes to the disability benefit assumptions increase the pay-as-you-go rates over the projection period mainly due to a change in the age distribution of incidence rates.

Some other assumptions, which are described in Appendix B, were also changed. Overall, the changes in these other assumptions had the effect of slightly increasing the projected pay-as-you-go rates over the projection period.

Factors that lead to changes in the pay-as-you-go rates do not always have comparable effects on the MCR. 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 MCR. Investment income was 107% higher than anticipated over the period 2016 to 2018 due to the strong performance of financial markets over that period. This results in an absolute decrease of 0.16% in the MCR, as shown in Table 106.

Regarding the real rate of return assumptions, changes compared to the previous triennial report include a new set of asset classes and a different initial asset mix, which together result in a higher real rate of return over the short term. The new asset classes are introduced to better reflect the CPPIB’s investment strategy in respect of the base CPP, and the assumed relative allocation to these asset classes has an impact on the portfolio’s expected return. The real rate of return at the start of the projection period is initially lower in the first two years and then higher over the next four years, when compared with the previous triennial report, to reflect the CPPIB’s starting asset allocation. Over the long term, the ultimate level of risk of the portfolio assumed for this report is slightly lower than the one assumed under the previous triennial report, therefore the ultimate real rate of return for this report is slightly lower as well.

A reconciliation of the change in the MCR of 9.79% as presented in the 27^th CPP Actuarial Report to the MCR of 9.75% for years 2022 to 2033 and 9.72% thereafter determined for this report is provided in Table 106.

A progression of the MCR over time based on steady-state contribution rate target years of future triennial valuation reports and using the best-estimate assumptions of this report is shown in Table 15 of the Results – Base CPP section of this report. As shown in that table, the MCR is projected to remain relatively stable over time.

D.2 Additional CPP

The results presented in this report differ from those previously projected for a variety of reasons. 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 in respect of the starting environment for the additional Plan and changes in the assumptions and methodology relative to the 28^th and 29^th CPP Actuarial Reports that have significantly changed the projected results for this report are addressed in this section.

The first and second additional minimum contribution rates (FAMCR, SAMCR) are important measures of the cost of the additional CPP. One way of understanding the differences between the best-estimate projections in this report and those presented in the 28^th and 29^th CPP Actuarial Reports is to look at the effects of various factors on the AMCRs. The most significant effects are identified in the reconciliation presented in Table 107 and the discussion below.

The 28^th CPP Actuarial Report was prepared to provide cost estimates regarding the introduction of the additional CPP, and the 29^th CPP Actuarial Report was produced to measure the cost impacts of the legislated amendments introduced under Division 19 of Part 6 of Bill C-74. The amendment to the CPP under Bill C-97 was also taken into account. Overall, the amendments had the effect of increasing the AMCRs.

The experience update had the effect of reducing the AMCRs due to better than anticipated demographic experience compared to the 28^th CPP Actuarial Report. The impacts on the AMCRs from the experience over the period 2016 to 2018 are shown in Table 107. In particular:

• the starting population (July 2018) was higher and younger than expected due to higher than expected migration being partially offset by lower than expected number of births and higher than expected number of deaths. The higher and younger starting population for the projections of this Report decreases the AMCRs.

Changes made to the key best-estimate assumptions since the previous triennial report were outlined in Table 1 of section 3 of this report. The main effects of these changes on the AMCRs are also shown in Table 107 and are summarized below.

• The initial lower mortality improvement rates assumed for this report decrease the AMCRs, because beneficiaries are expected to initially receive their additional benefits over a shorter period of time.

• The higher assumed labour force participation and employment rates increase the AMCRs. The AMCRs increase instead of decreasing as for the base Plan MCR due to the different financing approaches of the two components of the CPP. The higher employed population results in eventual higher benefit expenditures, which, for the additional benefits, must be fully funded under the additional Plan.

• The change in the real wage increase assumption causes the AMCRs to decrease due to the lower increase in contributory earnings compared to the previous triennial report. The AMCRs decrease instead of increasing as for the base Plan MCR for the same reason cited in the bullet point above in respect of the assumed labour force participation and employment rates.

• Changes in retirement benefit-related assumptions decrease the AMCRs.

As well, the investment assumptions have a significant impact on the AMCRs. Regarding the real rates of return assumptions, changes compared to the 28^th CPP Actuarial Report include a new set of asset classes and a different initial asset mix to reflect the CPPIB’s investment strategy in respect of the additional CPP. The assumed relative allocation to these asset classes along with, in particular, assumed lower real rates of return for bonds result in a lower portfolio real rate of return over the projection period.

As mentioned for the base CPP, some other assumptions were also changed. Overall, the changes in these other assumptions had the effect of slightly decreasing the AMCRs.

A reconciliation of the change in the FAMCR of 1.93% and SAMCR of 7.72%, as presented in the 28^th CPP Actuarial Report, to the FAMCR of 1.98% and SAMCR of 7.92% for this report is provided in Table 107.

Appendix E – Uncertainty of Results

E.1 Introduction

This actuarial report on the Canada Pension Plan is based on the projection of its revenues and expenditures for both of its components, the base and additional CPP, over a long period of time. The information required by statute, which is presented in the Results sections 4 and 5 of this report, has been derived using best-estimate assumptions regarding future demographic, economic, and investment trends. 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 projections. The objective of this section of the report is to illustrate the sensitivity of the long-term projected financial states of the base and additional Plans to changes in the future demographic, economic, and investment outlooks.

The future revenues and expenditures, or income and outgo of the CPP, both for the base and additional Plans, depend on many demographic, economic, and investment factors, including fertility, mortality, migration, the labour force, average earnings, inflation, retirement patterns, disability incidence rates, and investment returns. On the other hand, future demographic, economic, and investment environments are affected by both domestic and global forces, such as climate change, how globalization or protectionism influence world economic growth, geopolitical situations, etc. The income will depend on how all these factors change 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 change the size and composition of the beneficiary population and the general level of benefits. Although both the base and additional CPP are affected by the aforementioned factors, the degree to which the two components of the CPP are affected differs.

For the additional CPP, there is a stronger link between contributions paid by individuals and the benefits they will receive. As a result, while some assumptions regarding factors such as fertility, migration, and labour force participation affect the cash flows and amount of assets of the additional Plan, they, in general, do not have a major impact on the first and second additional minimum contribution rates (FAMCR, SAMCR). In comparison, these assumptions could have a significant impact on the minimum contribution rate (MCR) of the base CPP. Other assumptions have a more significant impact on the AMCRs for the additional CPP, the real rate of return is such an example. This again is attributable to the different financing approaches of the base and additional CPP.

Section E.2 examines the sensitivity of the base and additional CPP to different asset allocations. Four alternative investment portfolios are described for each component of the Plan, along with the volatility of each portfolio and the resulting impact on the minimum contribution rates of the base and additional CPP. The impacts of financial market volatility on the financial states of the two components of the CPP are explored in section E.3. In that section, investment scenarios are described that result in the minimum contribution rate of the base CPP reaching its legislated rate and the additional minimum contribution rates falling outside specified ranges.

Section E.4 next presents sensitivity tests on individual long-term assumptions derived based on a combination of judgment and stochastic modeling techniques. Finally, sections E.5 and E.6 build on the individual sensitivity tests performed in section E.4 by combining various assumptions of the individual tests to create scenarios of higher and lower long-term economic growth and younger and older populations. The combination of the individual sensitivity test assumptions is not meant to necessarily create probable scenarios, but rather to show the possible impacts from different economic environments and overall compositions of the population relative to the best-estimate scenarios.

E.2 Sensitivity to Investment Policy

The CPPIB was created in 1997 with the object, as stated in the Canada Pension Plan Investment Board Act, “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”. The assets of the CPP are invested by the CPPIB through a diversified portfolio.

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 2017, the volatility (standard deviation) of Canadian equity returns (indicated by the S&P/TSX Total Return Index) was 16.4%, 16.5%, and 18.9%, respectively, as given in the most recent Canadian Institute of Actuaries’ “Report on Canadian Economic Statistics 1924 – 2017”. This compares with the volatility of returns of long-term federal bonds (10+ years) of 10.4%, 9.6%, and 8.9% and with the volatility of returns of medium-term federal bonds (5-10 years) of 7.6%, 6.7%, and 6.0% 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 being more risky than medium- or short-term bonds.

Historically, the higher volatility of equities compared to bonds has 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.

To express the desired risk target of its investment portfolio, the CPPIB uses a simple two-asset class (fixed income and equity) portfolio called the “reference portfolio”. The greater the proportion of equities in the reference portfolio, the greater the risk target. However, actual investments for the base and additional CPP are not limited to fixed income and equity. For the purpose of this report, six asset classes are considered.

Starting from 31 December 2018, the CPP assets are invested through a two-pool investment structure as described in the CPPIB’s 2018 annual report. The base CPP is invested solely in the Core pool, which initially consists of the CPP’s assets as at 31 December 2018. The additional CPP is invested in a combination of the Core and Supplementary pools. The Supplementary pool is invested solely in fixed-income securities.Conversely, lower real wages increase the MCR of the base CPP, but decrease the AMCRs of the additional Plan. Appendix B presents more information on the two-pool structure and the best-estimate assumptions regarding the assets allocation of the CPP.

In summary, the assets of the base and additional CPP are assumed to continue to be invested over the long term through a two-pool structure in a variety of assets with specific investment risk targets defined by their respective reference portfolios.

Base CPP

Table 108 shows the estimated impact that various investment portfolios would have on the assumed base CPP’s real rate of return and MCR, as well as the volatility present in each portfolio. Notwithstanding the ultimate asset mixes shown below, for each portfolio the fixed income component includes the same amount of non-marketable provincial bonds as the best-estimate portfolio. To facilitate the comparison of the different investment portfolios, the level of risk of each portfolio is presented both in terms of a hypothetical reference portfolio and the expected one-year standard deviation.

For the base CPP, the current CPPIB reference portfolio consists of 85% equity and 15% fixed income. Based on the best-estimate assumptions of this 30^th CPP Actuarial Report, such reference portfolio has an ultimate one-year standard deviation of 14.0%^{Footnote 21}. The assumed best-estimate portfolio of the base CPP has an ultimate level of risk corresponding to a hypothetical reference portfolio of 70% equity and 30% fixed income. The best-estimate portfolio produces an expected average annual real rate of return of 3.95% over the next 75 years, with an estimated one-year standard deviation of 10.7%.

Portfolio 1 is assumed to have a large allocation of assets to low-volatility asset classes such as fixed income and credit. The fixed income asset class is assumed to have a high proportion of short-term bonds with a corresponding low standard deviation of returns. As a result, Portfolio 1 is projected to have a low expected volatility (one-year standard deviation of 3.6%). This portfolio also results in a low expected return of 2.8% over the 75-year projection period and in a MCR of 10.71%. Portfolio 2 has a higher allocation to risky assets and thus presents a higher expected real rate of return. However, under Portfolio 2, like Portfolio 1, the MCR is higher than the legislated rate of 9.9%.

Portfolios 3 and 4 are considered to be more risky than the best-estimate portfolio due to their higher share of variable income securities. As a result, the expected real rates of return are higher and accompanied by greater volatility. While both portfolios are expected to produce returns that result in the MCR being below the legislated contribution rate of 9.9%, such portfolios have a greater likelihood of earning poor investment returns.

Table 109 presents the estimated likelihood of experiencing a significant investment loss during a three-year period. For each portfolio, it is assumed that the best-estimate assumptions are realized up to the beginning of 2031, after which the assets are reallocated according to the asset mix of the portfolios presented in Table 108. For the three-year period that follows (2031-2033)^{Footnote 22}, a stochastic approach is used to simulate the distribution of real rates of return, assuming that the rate of return on each underlying portfolio asset is normally distributed^{Footnote 23}. Next, the number of scenarios that result in a cumulative nominal return of less than -10% or -20% (i.e. assets at the end of the three-year period represent less than 80% to 90% of starting assets) is divided by the total number of scenarios to obtain the probability of such an event.

Under all scenarios, a -10% cumulative nominal return during the 2031 to 2033 period would increase the MCR determined from the actuarial valuation in 2033 by 0.51%, assuming that best-estimate assumptions of this report are used before 2031. Should the cumulative nominal return be -20%, the MCR would increase by 0.69%. Portfolios 1 and 2 present a near zero percent chance of significant losses over three years. However, these portfolios would result in an MCR higher than the legislated rate over the long term.

Portfolios 3 and 4 have a greater proportion of variable income securities compared to the best-estimate portfolio and thus a higher volatility. As such, these portfolios are expected to result in significant losses more often than the best-estimate portfolio. Over the period 2031 to 2033, the probability of experiencing a -10% cumulative nominal return is about double (10.5% vs 5.7%) for Portfolio 3 compared to the best-estimate portfolio. Under Portfolio 4, a -20% cumulative nominal return is more likely than a -10% cumulative nominal return under the best-estimate portfolio. Thus, the upside of investing in a risky portfolio is associated with a higher probability of poor investment returns occurring.

Additional CPP

For the additional CPP, investment income will ultimately represent about 70% of total revenues (contributions plus investment income). Based on the CPPIB’s two-pool investment structure, the additional CPP is invested in both the Core and Supplementary pools, with CPPIB’s initial asset allocation of 55% in the Core pool and 45% in the Supplementary pool. This corresponds to a hypothetical reference portfolio of about 50% equity and 50% fixed income (see Appendix B for further details on the base and additional CPP assets allocation). Based on the assumptions of this report, the best-estimate portfolio of the additional CPP is assumed to have a one-year standard deviation of 6.6%.

Since it is assumed that the level of risk of the Core pool investment portfolio will decrease over time, a higher share of the additional CPP’s assets is expected to be allocated to the Core pool to maintain the overall additional CPP’s level of risk in line with its reference portfolio. The best-estimate portfolio is assumed to be invested 66% in the Core pool and 34% in the Supplementary pool starting in 2028 (which corresponds to a hypothetical reference portfolio of 50% equity and 50% fixed income). The proportion invested in each pool throughout the projection period is such that the expected volatility of the additional CPP best-estimate portfolio remains constant.

Table 110 illustrates how different allocations to the Core and Supplementary pools affect the expected return on the additional CPP assets, the volatility (one-year standard deviation) of returns, and the first additional minimum contribution rate (FAMCR). As the second additional minimum contribution rate (SAMCR) is four times the value of the FAMCR, the table shows only the FAMCR. The asset mix of the Core and Supplementary pools is assumed to correspond to the best-estimate assumptions derived for this report. To facilitate the comparison of the different investment portfolios, the level of risk of each portfolio is presented both in terms of a hypothetical reference portfolio and the expected one-year standard deviation.

Portfolio 1A is invested solely in the Supplementary pool, and as such, a low return is expected. As a result, the FAMCR of 2.95% is significantly higher than the legislated rate of 2.0%. The expected volatility of this portfolio is low, but not much lower than portfolio 2A. Portfolio 2A is expected to produce a higher real rate of return over time while maintaining a low volatility. However, Portfolio 2A’s expected real rate of return is still not enough to maintain the FAMCR at a level close to its legislated rate.

Portfolios 3A and 4A have higher allocations to the Core pool than the best-estimate portfolio. As a result, their expected rates of return are higher and so are their volatilities. These portfolios produce lower AMCRs, but they also increase the probabilities that the additional CPP will be in a substantial deficit or surplus situation as a result of investment experience as discussed below.

Investment experience could cause the AMCRs to deviate from their legislated rates of 2.0% and 8.0% into various ranges, each with different required courses of action in the event that the provincial and federal Finance Ministers do not reach an agreement on a course of action to take (as prescribed by the Additional Canada Pension Plan Sustainability Regulations).

Given that the additional CPP assets are expected to grow rapidly over the next decades, investment experience is expected to eventually become one of the main drivers behind additional Plan surpluses or deficits. The impact of investment experience on the AMCRs will therefore become more pronounced in terms of the values of the AMCRs and the degree of variability in these values. To illustrate this, Table 111 presents the probability distribution of the FAMCR at 31 December 2048 resulting from investment experience during the immediately preceding three-year period 2046 to 2048 under the various portfolios shown in Table 110. It is assumed that best-estimate assumptions are realized before 31 December 2045 and that they remain in place for the actuarial valuation as at 31 December 2048.

As can be seen from Table 111, Portfolios 3A and 4A increase the probability relative to the best-estimate portfolio of the FAMCR falling in a “Warning” range (ranges B or D) or “Immediate Action” range (ranges A or E), as determined as at 31 December 2048. However, while the AMCRs based on portfolios 1A and 2A fall mainly in range C, the given portfolios produce long term AMCR’s above the legislated values, as shown in Table 110.

E.3 Risk of MCR Reaching Legislated Rate and AMCRs Exceeding Specified Ranges due to Investment Experience

The sensitivity of the base Plan MCR and additional Plan AMCRs to investment environments and financial market shocks can be further illustrated by developing scenarios that would result in the MCR reaching the legislated contribution rate of 9.9% and the AMCRs falling in a range that requires corrective action.

The first such scenario examines a range of short-term returns in the future which could cause the base CPP MCR to increase to its legislated value, and the AMCRs to fall into ranges that trigger default actions defined by the Additional Canada Pension Plan Sustainability Regulations.

If the actual cumulative nominal rate of return over the inter-valuation period 2019-2021 is 6.3% (10 percentage points lower than the best-estimate assumption), the MCR for the years 2025 to 2033, determined at the next actuarial valuation, would be the same as the legislated contribution rate of 9.9%. The probability of such return being realized is 30%.

If instead, the actual cumulative nominal rate of return over the inter-valuation period 2031 to 2033 is 12.8% (6.4 percentage points lower than the best-estimate assumption), this would cause the base Plan MCR to increase to its legislated level at the next actuarial valuation in 2033, assuming that all best-estimate assumptions were realized up to 2031. The probability of experiencing cumulative nominal rates of return lower than 12.8% over the period 2031 to 2033 is estimated to be 36%.

For the additional CPP, the AMCRs are allowed to deviate from their legislated contribution rates. As per the Additional Canada Pension Plan Sustainability Regulations, the FAMCR may fall between 1.7% and 2.2% without requiring immediate action from 2024 to 2038. From 2039 onward, this “No Action Required” range is reduced to between 1.8% and 2.1% and corresponds to range C of Table 111. The corresponding ranges for the SAMCR are those of the FAMCR with the boundary values multiplied by four.

It is very unlikely that the investment experience during the period 2024 to 2038 would cause the FAMCR to fall below 1.7% or rise above 2.2%. For example, annual nominal returns lower than -17.8% or higher than 24.8% during each year of the intervaluation period 2031 to 2033 would cause the FAMCR to rise above 2.2% or fall below 1.7%, respectively. The probability of such returns occurring is almost zero.

If the period of 2046 to 2048 is considered, the probability of the FAMCR falling outside the 1.8% to 2.1% range due to investment experience during that period increases to 20%, as shown in Table 111. That is because the returns needed for the FAMCR to reach 1.8% or 2.1% are less extreme. Annual nominal returns of 9.9% or higher during each year of the three-year period would result in an FAMCR of 1.8% or lower. The FAMCR could reach 2.1% in 2048 if annual nominal returns of 0.1% or lower are experienced for each of the three years, and 2.2% if annual nominal returns are lower than -3.7% for the same period.

The second scenario is a permanent change in the expected rates of return. For the base CPP, it is estimated that if the assumed real rate of return is 17 basis points lower than the best-estimate assumption (i.e. a 75-year average real rate of return of 3.78% versus the best-estimate of 3.95%), the MCR would increase to the level of the legislated rate of 9.9%.

For the additional CPP, a decrease of 3 basis points in the expected real rate of return (i.e. a 75-year average real rate of return of 3.35% versus the best-estimate of 3.38%) would increase the FAMCR and SAMCR from 1.98% and 7.92% to 2.00% and 8.00% respectively. The FAMCR would increase to between 2.10% and 2.20% should the expected real rate of return decrease by 20 to 35 basis points (i.e. a 75-year average real rate of return between 3.18% and 3.03%, respectively). If instead the expected real rate of return is increased by 33 to 53 basis points (i.e. a 75-year average real rate of return between 3.71% and 3.91%, respectively), the FAMCR would decrease to between 1.80% and 1.70%.

E.4 Individual Sensitivity Tests

The key best-estimate assumptions used for the projections in this report are described in Appendix B. Individual sensitivity tests have been performed that consist of projecting the financial states of the base and additional CPP using alternative assumptions to illustrate a reasonable range of how experience could vary from the best-estimate projections.

The tests for the fertility rate, mortality improvement rates, and real wage increase use purely deterministic models based on judgment, while the other 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. Where stochastic tests are used, 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^{Footnote 24} of returns and is projected using assumed correlations between asset classes, 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 36 years and 49 years. Each time-series equation is designed such that, in the absence of random variation, the expected value of the variable is equal to the value assumed under the best-estimate assumption.

For the 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 states of the base and additional Plans. 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 projection period (until 2095). 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 lower-cost and higher-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 estimates of the parameters. For some variables, using the variations exhibited in relatively recent or earlier historical periods may not provide a realistic representation of the potential variation for the future. The historical periods chosen for most variables are relatively homogeneous and do not include 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 or by judgment and by keeping the remaining assumptions at their best-estimate levels. Each sensitivity test was categorized as either a lower-cost scenario or a higher-cost scenario. In the lower-cost scenarios for the base and additional CPP, the alternative assumptions have the effect of reducing the base minimum contribution rate and additional minimum contribution rates. Conversely, the assumptions for the higher-cost scenarios for each component of the CPP increase the minimum rates.

It is possible that a lower-cost scenario for the base CPP may be a higher-cost scenario for the additional CPP, and vice versa. This is the case, for example, for the tests regarding the real wage increase, described below. The opposite effects for the base and additional CPP are attributable to the different financing approaches of the two components.

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

Table 112 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.

E.4.1 Fertility Rate

This test is presented only for the base CPP since there is no significant impact on the additional CPP.

The best-estimate assumption for the total fertility rate for Canada is that it will increase slightly from its 2017 level of 1.55 to an ultimate level of 1.62 in 2027. A deterministic approach based on the experience of countries somewhat similar to Canada was used to generate the lower- and higher-cost scenarios over the 75-year projection period.

It was projected that the average total fertility rate throughout the 75-year projection period will be in the range 1.32 to 1.92, which corresponds to the lowest and highest fertility rates experienced in recent years by the Group of 7 (G7) countries (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States).

The lower-cost assumption for the base CPP has the total fertility rate increasing to an ultimate level of 1.92 in 2027, which is lower than the national population replacement rate. This is similar to the recent total fertility rate of France. The total fertility rate for Canada has not been above 1.92 since 1972. Under this scenario, the population grows to a level in 2050 that is 5.5% higher than under the best-estimate assumption. In addition, a higher ultimate total fertility rate leads to a slightly younger population. Under this scenario the base Plan MCR for years 2034 and thereafter decreases to 9.43%.

The higher-cost assumption for the base CPP has the total fertility rate decreasing to an ultimate level of 1.32 in 2027. This is similar to the recent total fertility rate of Italy. Under this scenario, the population grows much more slowly, to a level in 2050 that is 5.5% lower than under the best-estimate assumption. A lower ultimate total fertility rate leads to a slightly older population. Under this scenario, the base Plan MCR for years 2034 and thereafter increases to 10.03%.

E.4.2 Mortality Rates

The calendar year life expectancies (without assumed future mortality improvements) at age 65 in 2019 are 20.0 years for males and 22.6 years for females. The best-estimate scenario provides for future mortality improvements (i.e. reductions in mortality rates), such that the cohort life expectancy at age 65 in 2019 is projected to be 21.4 years for males and 23.9 years for females (which are 1.4 years and 1.3 years higher, respectively, than the calendar year life expectancies). In 2050, the best-estimate cohort life expectancy at age 65 is projected to be 23.3 years for males and 25.6 years for females.

The best-estimate ultimate values of the mortality improvement rates are reached in 2035 and are 0.8% per year for ages below 90, 0.5% for ages 90 to 94, and 0.2% for ages 95 and above. The following two sensitivity tests represent alternatives for the assumed mortality improvement rates.

Under the lower-cost scenario, mortality is assumed to improve at a slower rate than under the best-estimate scenario, reflecting that the assumed level of mortality improvements might not be sustainable. The ultimate values of the mortality improvement rates are gradually reduced to 0% for all ages in 2035. As a result, life expectancies decrease. In 2050, the cohort life expectancy at age 65 decreases to 21.0 years for males and 23.4 years for females, or 2.3 and 2.2 years lower for males and females, respectively, compared to the best-estimate scenario. Lower life expectancies lead to the population growing to a level in 2050 that is 1.4% lower than under the best-estimate scenario. Lower mortality improvements lead to a slightly younger population.

Under the lower-cost scenario the base Plan MCR for years 2034 and thereafter decreases to 9.38% while the FAMCR and SAMCR of the additional Plan decrease to 1.80% and 7.20%, respectively.

Under the higher-cost scenario, mortality is assumed to improve at a faster pace than under the best-estimate scenario. The ultimate values of the mortality improvement rates are doubled compared to their best-estimate values and correspond to 1.6%, 1.0%, and 0.4% for the age groups below 90, 90 to 94, and 95 and above, respectively. As a result, life expectancies increase relative to the best-estimate scenario. In 2050, the cohort life expectancy at age 65 increases to 25.8 years for males and 28.0 years for females, or 2.5 and 2.4 years higher for males and females, respectively compared to the best-estimate scenario. Higher life expectancies lead to the population growing to a level in 2050 that is 1.4% higher than under the best-estimate scenario. Higher mortality improvements lead to a slightly older population.

Under the higher-cost scenario the base Plan MCR for years 2034 and thereafter increases to 10.06% while the FAMCR and SAMCR of the additional Plan increase to 2.15% and 8.60%, respectively. Table 113 presents the life expectancies that would result in 2050 from the different rates of mortality improvement.

If no future mortality improvements are assumed at all after 2015, projected life expectancies would remain at their 2015 calendar year values for all future years, which would cause the minimum contribution rates of the base and additional Plans to decrease. The MCR of the base CPP would decrease from its best-estimate value of 9.72% to 9.03% for the year 2034 and thereafter, and the FAMCR and SAMCR of the additional Plan would decrease, respectively from their best-estimates of 1.98% and 7.92% to 1.72% and 6.88%. The differences of 0.69% for the MCR and 0.26% / 1.04% for the FAMCR / SAMCR from their best estimates represent the annual costs of increasing longevity for the base and additional Plans.

E.4.3 Net Migration Rate

This test is presented only for the base CPP since there is no significant impact on the additional CPP.

Under the best-estimate assumption, the net migration rate is expected to decrease from its current (2018) level of 1.11% of the population to 0.86% in 2019, 0.73% in 2020, and reach an ultimate level of 0.62% of the population in 2021.

A stochastic approach was used to generate lower- and higher-cost scenarios over the 75 year projection period based on the net migration experience of the last 47 years (1972 to 2018) excluding the net increase in the number of non-permanent residents. It is projected that average net migration throughout the entire projection period will be in the range of 0.57% to 0.68% of the population with 80% probability. If a 15-year projection period were considered, then the average net migration would be in the range of 0.53% to 0.73% of the population.

The lower-cost assumption for the base Plan has net migration reaching a level of 0.68% of the population in 2021 and remaining at that level thereafter. This is close to the average net migration rate over the three-year period ending in 2018, excluding the net increase in non-permanent residents. Under this scenario, the population grows to a level in 2050 that is 2.2% higher than under the best-estimate assumption. This scenario results in a slightly younger population.

The higher-cost assumption for the base Plan has net migration reaching a level of 0.57% of the population in 2021 and remaining at that level thereafter. This is close to the average net migration rate experienced during the 1990s, excluding the net increase in non-permanent residents. Under this scenario, the population grows more slowly, to a level in 2050 that is 1.8% lower than under the best-estimate assumption. This scenario results in a slightly older population.

Under the base CPP lower-cost scenario (higher migration) the MCR for years 2034 and thereafter decreases to 9.63% while under the base CPP higher-cost scenario (low migration) the MCR increases to 9.80%.

E.4.4 Price Increases

Higher price increases result in lower minimum contribution rates for both the base and additional CPP. For the base Plan, although a higher rate of increase in prices produces higher base CPP expenditures, these increases in costs are outweighed by higher nominal contributory earnings and thus, higher contributions along with higher investment income from higher nominal returns. The same holds for the additional Plan.

Conversely, lower price increases results in higher minimum contribution rates for each component of the CPP, with a larger effect observed for the base Plan.

For the best-estimate projections, the annual rate of price increase is assumed to be 2.0% in 2019 and to remain at that level thereafter.

Based on the overall inflation rate experience over the last 36 years (1983 to 2018), a stochastic approach was used to generate lower- and higher-cost scenarios over the 75-year projection period. The Bank of Canada has been successful in its inflation targeting policies, implemented in the early 1990s, that have resulted 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 1.5% to 2.6% with 80% probability. Instead, if a 15-year projection period is considered, the average annual rate of price increase will be in the range 1.1% to 2.9%.

For the lower-cost scenario, the annual rate of price increase is assumed to rise to 2.6% in 2019 and remain at that level thereafter. This level of inflation is comparable to the average of the 1960s and over the last three decades. Under this scenario the base Plan MCR for years 2034 and thereafter decreases to 9.57% while the FAMCR and SAMCR of the additional CPP decrease to 1.96% and 7.84%, respectively.

For the higher-cost scenario, the annual rate of price increase is assumed to be 1.5% in 2019 and remain at that level thereafter. This level of inflation is comparable to the average of the mid-to-late 1990s. Under this scenario the base Plan MCR for years 2034 and thereafter increases to 9.86% while the FAMCR and SAMCR of the additional CPP increase to 1.99% and 7.96%, respectively.

E.4.5 Real Wage Increase

Wage increases affect the financial balance of the base and additional 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. Higher real wages have the effect of decreasing the MCR of the base CPP. However, higher real wages result in the AMCRs increasing for the additional Plan. Conversely, lower real wages increase the MCR of the base CPP, but decrease the AMCRs of the additional Plan. The reason for the opposite effects is due to the different financing approaches of the two CPP components that creates a stronger link between contributions and expenditures for the additional Plan. As there is no change in the assumed level of price increases, there is a greater relative impact on the AMCRs compared to the MCR from a change in real wages.

An ultimate real wage increase of 1.0% has been assumed for the year 2025 and thereafter for the best-estimate projections.

A deterministic approach was used to generate the lower- and higher-cost scenarios over the 75-year projection period. The historical economic cycles (recession/expansion) from 1962 to 2017 were analyzed. During those years, a strong expansionary period occurred during 1984-88 with high average real wage growth of 1.7%.This high value was used as the assumption for the real wage increases for one set of scenarios. For a low assumed value of real wage increases for another set of scenarios, the post-2008 recession experience from 2010 to 2017 was considered. The years 2010 to 2017 experienced to various degrees both positive and negative real wage increases, and reflect an appropriate measure of recent possible values. During that period, the average real wage increase was 0.3%.

For the lower-cost scenario for the base Plan and higher-cost scenario for the additional Plan, the assumed real wage increase rises to an ultimate level of 1.7% in 2025. For the higher-cost scenario for the base Plan and lower-cost scenario for the additional Plan, the assumed real wage is 0.3% in for 2019 and thereafter.

Under the base CPP lower-cost scenario (higher real wage) the MCR for years 2034 and thereafter decreases to 9.29% while under the base CPP higher-cost scenario (lower real wage) the MCR increases to 10.15%.

Under the additional CPP lower-cost scenario (lower real wage) the FAMCR and SAMCR decrease to 1.78% and 7.12%, respectively while under the additional CPP higher-cost scenario (higher real wage) the FAMCR and SAMCR increase to 2.22% and 8.88%, respectively.

E.4.6 Rate of Return on Investments

Base CPP

For the base CPP, the 75-year average annual real rate of return on investments is projected to be 3.95% under the best-estimate assumptions. Using the assumed asset mix of this report and based on assumed correlations and standard deviations of returns by asset classes, a stochastic approach was used to generate the lower- and higher-cost scenarios over the 75-year projection period. It was projected that the average annual real rate of return for the base Plan over the 75-year projection period will be in the range 2.35% to 5.55% 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 -0.24% to 7.58%.

Under the lower-cost scenario for the base Plan, the average annual real rate of return on investments is assumed to be 1.60% higher than under the best-estimate assumptions, averaging 5.55% over the next 75 years. Under this scenario the base Plan MCR for years 2034 and thereafter decreases to 8.28%.

For the higher-cost scenario, the average annual real rate of return on investments is assumed to be 1.60% lower than under the best-estimate assumptions, averaging 2.35% over the next 75 years. Under this scenario the base Plan MCR for years 2034 and thereafter increases to 11.16%.

Furthermore, a decrease of 1% in the assumed nominal average 75-year rate of return would result in the base Plan MCR increasing to 10.62%, which is 9% higher than under the best-estimate assumptions. An increase of 1% in the assumed nominal average 75-year rate of return would result in the base Plan MCR decreasing to 8.82%, which is 9% lower than under the best-estimate assumptions.

Additional CPP

The additional CPP has a different assumed investment portfolio, and thus the range of investment outcomes is different. With 80% probability, the average annual real rate of return during the 75-year projection period is projected to be in the range of 2.48% to 4.28%, compared to the best-estimate of 3.38%. This range (180 basis points) is narrower compared to the base CPP (320 basis points), reflecting the different risk profile of the two CPP components. If a 15-year projection period is considered, the average annual real rate of return will be in the range of 0.56% to 4.84% for the additional CPP.

Under the lower-cost scenario for the additional Plan, the average annual real rate of return on investments is assumed to be 90 basis points higher than under the best-estimate assumptions for the projection period, averaging 4.28% over the next 75 years. Under this scenario the FAMCR and SAMCR of the additional CPP decrease to 1.53% and 6.12%, respectively.

For the higher-cost scenario, the annual real rate of return on investments is assumed to be 90 basis points lower than under the best-estimate assumptions for the projection period, averaging 2.48% over the next 75 years. Under this scenario the FAMCR and SAMCR of the additional CPP increase to 2.60% and 10.40%, respectively.

Furthermore, a decrease of 1% in the assumed nominal average 75-year rate of return would result in the FAMCR and SAMCR increasing to 2.69% and 10.76% respectively, which is 36% higher than under the best-estimate assumptions. An increase of 1% in the assumed nominal average 75-year rate of return would result in the FAMCR and SAMRC decreasing to 1.49% and 5.96% respectively, which is 25% lower than under the best-estimate assumptions. Given that the additional CPP relies more heavily on investment earnings as a source of revenues than the base CPP, the AMCRs are more sensitive to changes in the rate of return assumption than the MCR.

E.4.7 Disability Incidence Rates

These sensitivity tests regarding the assumed disability incidence rates are presented only for the base CPP since there is no significant impact on the additional CPP.

In addition, sensitivity tests for the assumed disability incidence rates were performed in respect of the disability pension only, since there are no experience data yet regarding the new base CPP post-retirement disability benefit. As experience data develop over time regarding the post-retirement disability benefit, corresponding sensitivity tests will be considered for future actuarial reports.

The best-estimate projections for the disability pension assume that disability incidence rates will remain at their values in 2018. The assumed aggregate rate of incidence for the disability pension for the year 2019 and thereafter is 2.95 new disability beneficiaries per year among 1,000 eligible workers for males and 3.65 per thousand for females, on average.

Based on the overall disability incidence rate experience of the last 49 years (1970 to 2018), a stochastic approach was used to generate lower- and higher-cost scenarios over the 75-year projection period for the Plan. It was projected that the average annual disability incidence rates for males over the 75-year projection period will be in the range 2.10 to 3.75 per 1,000 eligible workers with 80% probability. For females, the range of disability incidence rates is 2.80 to 4.50 per 1,000 eligible workers.

For the lower-cost scenario for the base Plan, disability incidence rates are assumed to be constant from 2019 onward at values of 2.10 per thousand for males and 2.80 per thousand for females. Other than since 2011 for male incidence rates, neither male nor female incidence rates have been below 3.0 since the early 1970s (on a year 2018 eligible population-adjusted basis for comparison purposes). Under this scenario the base Plan MCR for years 2034 and thereafter decreases to 9.52%.

For the higher-cost scenario for the base Plan, disability incidence rates are assumed to be constant from 2019 onward at values of 3.75 per thousand for males and 4.50 per thousand for females. The rates are lower than the high levels experienced in the early 1970s to mid-1990s for males and in the early 1980s to mid-1990s for females (on a year 2018 eligible population-adjusted basis for comparison purposes). Under this scenario the base Plan MCR for years 2034 and thereafter increases to 9.91%.

E.4.8 Results

Base CPP

Under each scenario, the contribution rate was projected to follow the current legislated rate of 9.9% through 2021, and a new minimum contribution rate (MCR) for the base Plan was determined for 2022 and thereafter. Table 114 summarizes the base Plan MCR and pay-as-you-go rates under each of the scenarios.

As shown in Table 114, under the alternative long-term assumptions, the valuation results for the base CPP vary to a greater extent for some assumptions compared to others. The assumed alternative assumptions for mortality improvement rates result in a wide range of the MCR. If mortality improvement rates under a higher-cost scenario are assumed to improve to double their best-estimate ultimate values by 2035, then the MCR for the year 2034 and thereafter would increase to 10.06%. If instead mortality improvement rates under a lower-cost scenario are assumed to reduce to an ultimate value of 0% in 2035, the MCR would decrease to 9.38%.

Under the alternative economic assumptions, the real wage increase leads to a wider range in the resulting MCR compared to price increases. If an ultimate real wage increase of 1.7% is assumed for 2025 and thereafter, the MCR would decrease to 9.29%. However, if an ultimate real wage increase of 0.3% is assumed for 2019 and thereafter, the MCR would increase to 10.15%.

Of all the alternative assumptions tested, the real rate of return on investments showed the greatest effect on the MCR. Real rates of return can fluctuate greatly from year to year and can have a significant impact on the base Plan MCR. If an average annual real rate of return over the next 75 years is assumed to be 5.55%, then the MCR decreases to 8.28%. However, if the average annual real rate of return over the next 75 years is assumed to be 2.35%, the MCR increases to 11.16%.

Unlike the MCR, the pay-as-you-go rates are not affected by the assumed rates of returns on investments. For all other assumptions, the MCR and pay-as-you-go rates do tend to move in the same direction.

Table 115 shows 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 current legislated contribution rate of 9.9% for the base CPP continues to apply for the year 2019 and thereafter.

Additional CPP

As for the base Plan, under each scenario, the contribution rates for the additional Plan were projected to follow the current schedule of legislated rates through 2021, and new first and second additional minimum contribution rates (FAMCR, SAMCR) were determined for 2022 and thereafter, and 2024 and thereafter, respectively. Table 116 summarizes the additional Plan AMCRs under each of the scenarios.

As shown in Table 116, and similar to the base CPP, under alternative long-term assumptions, the valuation results for the additional CPP vary to a greater extent for some assumptions compared to others. Like for the base CPP, the assumed alternative mortality improvement rates result in a wide range of the minimum rates for the additional Plan. If mortality improvement rates under a higher-cost scenario are assumed to improve to double their best-estimate ultimate values by 2035, then the FAMCR for the year 2023 and thereafter and SAMCR for the year 2024 and thereafter would increase to 2.15% and 8.60%, respectively. If instead mortality improvement rates under a lower-cost scenario are assumed to reduce to an ultimate value of 0% in 2035, the FAMCR and SAMCR would decrease to 1.80% and 7.20%, respectively.

Under the alternative economic assumptions, the real wage increase results in a wider range of the AMCRs compared to price increases. Further, the impact on the AMCRs is in the opposite direction to that on the base MCR. If an ultimate real wage increase of 0.3% is assumed for 2019 and thereafter, the FAMCR and SAMCR would decrease to 1.78% and 7.12%, respectively. If instead an ultimate real wage increase of 1.7% is assumed for 2025 and thereafter, the FAMCR and SAMCR would increase to 2.22% and 8.88%, respectively.

The alternative assumptions for the real rate of return on investments showed the greatest impact on the AMCRs of all the alternative assumptions tested. The additional CPP relies to a greater extent on investment income compared to the base CPP, and as such, the AMCRs are quite sensitive to changes in future rates of return. If an average annual real rate of return of 4.28% is assumed for the 75-year projection period, the FAMCR decreases to 1.53% and the SAMCR to 6.12%. On the other hand, if an average annual real rate of return of 2.48% is assumed over the period, the FAMCR increases to 2.60% and the SAMCR to 10.40%.

Table 117 shows 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 legislated first additional contribution rate of 2.0% from 2023 onward and the legislated second additional contribution rate of 8.0% from 2024 onward apply for the additional CPP.

It should be noted that for both the base and additional Plans, once the lower- and higher-cost assumptions reach their ultimate values, they are held constant for the rest of the 75-year projection period and the components of the CPP are assumed to remain in their current forms. This may not be realistic. As new demographic and economic trends in society emerge, it may be necessary to update the base and additional CPP in order to reflect a new demographic or economic reality with the objective of maintaining affordability and intergenerational equity.

E.5 Higher and Lower Economic Growth

The current local and global economic environments pose a series of challenges for Canada to sustain consistent economic growth. Persistent low interest rates, slow productivity growth, as well as demographic pressures from an aging population could adversely affect the Canadian economy. While under the best-estimate scenario, moderate and sustainable economic growth is assumed, different scenarios of higher and lower economic growth were considered. These alternative economic growth scenarios comprise combinations of individual assumptions according to two cases. For the first case, alternative changes pertaining only to the labour market are considered. The second case builds on the first with alternative assumptions for the real wage increase also considered.

In respect of the 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.

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 increase from its 2018 level of 5.8% to an ultimate rate of 6.2% by 2030. Furthermore, the participation rates for all age groups are expected to increase due to the attractive employment opportunities resulting from 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 18 to 69 for Canada is expected to increase from 75.9% in 2018 to 79.2% in 2035.

For cohorts reaching age 60 in 2021 and thereafter, the retirement benefit take-up rates at age 60 are assumed to be 27.0% and 29.5% in 2021 and thereafter for males and females, respectively, and the take-up rates at age 65 are assumed to be 46.4% in 2021 and thereafter for both males and females. These rates result in a projected average age at retirement pension take-up of 63.2 years in 2040.

The best-estimate assumption for the real-wage increase is that it reaches an ultimate level of 1.0% by the year 2025. The ultimate real-wage increase assumption together with the price increase assumption of 2.0% leads to an ultimate nominal-wage increase of 3.0% for 2025 and thereafter.

A deterministic model (instead of a stochastic model) was used to generate the higher and lower economic growth scenarios for these assumptions, since a stochastic model would not accurately reflect the assumed future trends in labour force participation, unemployment, and real wage increases. The labour shortages 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 higher and lower economic growth assumptions for the participation rates, unemployment and retirement pension take-up rates, and real wage increases.

E.5.1 Higher Economic Growth

Under the higher economic growth scenario, for the labour market, the job creation rate is robust resulting in a lower unemployment level, higher labour force participation rates, and later retirement pension take-up due to the availability of employment and unwillingness to incur early retirement penalties. In addition to the assumed labour market changes, the real-wage increase is assumed to be higher than the best estimate.

For this higher economic growth scenario, the job creation rate is assumed to increase at a faster pace than under the best-estimate scenario, resulting in an unemployment rate of 4.2% in 2030 and thereafter. In addition, the assumed ultimate participation rates in 2035 are set to increase to higher levels than the best estimates. Furthermore, the assumed ultimate gap between male and female participation rates in 2035 for those aged 18 to 69 is set equal to 3.8% as opposed to 7.3% under the best-estimate scenario. This results in an overall participation rate of 84.6% for those aged 18 to 69 in 2035.

The lower unemployment rate and higher participation rate are assumed to encourage individuals to ask for their CPP retirement pension at a later age. Therefore, by 2038, retirement pension take-up rates at age 60 are assumed to gradually decrease to levels that are 20 percentage points lower than the best estimates, i.e. to 7.0% and 9.5% for males and females, respectively. This results in an increase in the projected average age at retirement pension take-up, from 63.2 years to 64.2 years in 2040. The proportions of working beneficiaries were adjusted to reflect the shift in retirement pension take-up to later ages.

Finally, for the second case where in addition to the assumed changes in the labour market, the real wage increase is also changed, it is assumed to be 1.7% as opposed to 1.0% under the best-estimate scenario. Under this second case, the higher economic growth scenario results in total employment earnings in 2035 being 15% higher compared to the best estimate.

E.5.2 Lower Economic Growth

Under the lower economic growth scenario, for the labour market, the job creation rate increases at a slower pace, resulting in a higher unemployment level and lower labour force participation rates. Insufficient employment opportunities are likely to cause individuals to ask for their CPP retirement pension at an earlier age regardless of the early retirement reduction. In addition to the assumed labour market changes, the real wage increase is assumed to be lower than the best estimate.

For this lower economic growth scenario, the job creation rate is assumed to increase at a slower pace than the best estimate, resulting in an unemployment rate of 8.2% in 2030 and thereafter. In addition, male and female participation rates are assumed to remain constant at their 2018 levels. This results in an overall participation rate of 76.2% for those aged 18 to 69 in 2035.

The higher unemployment rate and lower participation rate are assumed to encourage individuals to ask for their CPP retirement pension at an earlier age. Therefore, retirement pension take-up rates at age 60 are assumed to gradually increase to levels in 2035 that are 20 percentage points higher than the best estimates, i.e. to 47.0% and 49.5% for males and females, respectively. This results in a decrease in the projected average age at retirement pension take-up from 63.2 years to 62.3 years in 2040. The proportions of working beneficiaries were adjusted to reflect the shift in retirement pension take-up to earlier ages.

Finally, for the second case where in addition to the assumed changes in the labour market, the real wage increase assumption is also changed, it is assumed to be 0.3% compared to 1.0% under the best-estimate scenario. Under this second case, the lower economic growth scenario results in total employment earnings in 2035 being 13% lower compared to the best estimate.

E.5.3 Results

Table 118 presents a summary of the assumptions used in the sensitivity analysis of economic growth and the resulting minimum contribution rates under the first case where only labour market changes are assumed and the second case where, in addition, real-wage increase changes are also assumed.

Under the first case, where only changes to the labour market assumptions are considered, the base Plan MCR is 9.16% under the higher economic growth scenario and 10.19% under the lower economic growth scenario compared to the best-estimate scenario. For the additional Plan, the AMCRs likewise decrease under assumed higher economic growth and increase under lower economic growth compared to their best estimates but the impacts are less pronounced. The FAMCR and SAMCR are 1.95% and 7.80%, respectively under the higher economic growth scenario, and 1.99% and 7.96%, respectively under the lower economic growth scenario.

Under the second case, where changes to the assumed real-wage increase are also considered, the base Plan MCR is 8.80% under the higher economic growth scenario and 10.67% under the lower economic growth scenario. The impact on the additional Plan AMCRs is opposite to that for the base Plan MCR in this case. Under the higher economic growth scenario, the FAMCR and SAMCR increase respectively to 2.21% and 8.84%, while under the lower economic growth scenario, the FAMCR and SAMCR decrease respectively to 1.80% and 7.20%. The AMCRs move in the opposite direction compared to the base Plan MCR due to the differing effects of the real wage increase assumption on the base and additional Plans, which is attributable to their different financing approaches.

E.6 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 lower- and higher-cost assumptions of the base CPP regarding fertility, mortality, and migration rates, as well as the labour force participation rates pertaining to the higher and lower economic growth scenarios described in the preceding section.

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 base and additional Plans.

E.6.1 Younger Population

Under the younger population scenario, it is assumed that the ultimate total fertility rate is 1.92 per woman for both Canada and Québec. Mortality improvement rates are assumed to increase at a much slower pace than under the best-estimate scenario. The result is that life expectancies at age 65 decrease from their projected best estimates by 2.3 and 2.4 years for males and females, respectively, by 2050. Finally, net migration to Canada is assumed to reach a level of 0.68% of the population in the year 2021.

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) for Canada less Québec in 2050. This is 9% lower than under the best-estimate scenario where the ratio reaches a level of 0.44 (or 2.3 workers per retiree) in 2050. Under this younger population scenario, the population grows more rapidly, to a level in 2050 that is 7.7% higher compared to the best-estimate scenario.

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

E.6.2 Older Population

Under the older population scenario, it is assumed that the ultimate total fertility rate is 1.32 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 2.5 and 2.4 years for males and females, respectively, by 2050. Finally, net migration to Canada is assumed to fall to a level of 0.57% of the population in the year 2021.

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 0.48 (or 2.1 workers per retiree) for Canada less Québec in 2050. This is 9% higher than under the best-estimate scenario where the dependency ratio reaches a level of 0.44 (or 2.3 workers per retiree) in 2050. Under this older population scenario, the population grows more slowly, to a level in 2050 that is 4.7% lower compared to the best-estimate scenario.

It is assumed that, under an older demographic scenario, labour shortages would be more severe. For this purpose, it is assumed that labour force participation rates would be higher, especially at the older ages.

E.6.3 Results

Table 119 presents a summary of the assumptions used in this sensitivity analysis and the resulting minimum contribution rates. The base Plan MCR is 9.30% under the younger population scenario and 9.99% under the older population scenario. The additional Plan AMCRs move in the same direction as the base Plan MCR. Under the younger population scenario, and FAMCR and SAMCR decrease respectively to 1.81% and 7.24%, while under the older population scenario, the FAMCR and SAMCR increase respectively to 2.10% and 8.40%.

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 for years up to 2011.

The Canada Life Tables (CLT) created by Statistics Canada have been used for the historical mortality data for years 2011 to 2016.

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:

Shayne Barrow, ACIA, ASA
Yu Cheng, ASA
Alice Chiu, ACIA, ASA
Maxime Delisle, FCIA, FSA, CERA
Myriam Demers, ACIA, ASA
Bojan Dimitrijevic
Patrick Dontigny, ASA
Christine Dunnigan FCIA, FSA
Alain Guimond
Sari Harrel, FCIA, FSA
Tina Adjowa Magloé Francis, ACIA, ASA
Kelly Moore
Louis-Marie Pommainville, FCIA, FSA
Thierry Truong, FCIA, FSA