Canada Pension Plan Actuarial Report and its Independent ...

Office of the Chief Actuary Bureau de l’actuaire en chef

1

Canada Pension Plan Actuarial

Report and its Independent

Peer Review Process

Presentation to the Public Service

Pension Advisory Committee

18 May 2005


2

• Purpose of the CPP Actuarial Report

• Demographic and Economic Assumptions

• Steady-State Funding

• Peer Review Process and Strengthening the Accountability

Presentation


3

Purpose of the CPP Actuarial Report

• Inform on the current and projected

financial status of the Canada Pension

Plan

• Calculate the steady-state contribution

rate


4

Consultations on Assumptions

• CPP and QPP seminars were organized to

get opinions from a wide range of experts

in the fields of demography, economics

and investments.

• Federal and provincial officials attended

these seminars.


5

Demographic Assumptions

• Fertility

(Number of births)

• Migration

• Mortality

(Life expectancy)

Sources: Statistics Canada (population census and historical data),

U.N. 2002 population projections, CPP seminars

300,000 200,000 100,000 0 100,000 200,000 300,000

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

75

80

85

90

95

100

Age Profile of Canada's Population, 1951 & 2001

1946-1965 in 2001

Female Male

2001

1951


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1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1941 1951 1961 1971 1981 1991 2001 2011 2021 2031 2041

Fertility Rate

1952-1976: 3.1

1977-2001: 1.6

Assumption CPP Report

1.60 in 2016+

(Children per woman)

Panel’s views: reasonable


7

Net Migration Rate

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1955 1965 1975 1985 1995 2005 2015 2025

Assumption CPP report:

0.50% 2004 to 2015

0.54% 2020 +

Avg 1979-2003: 0.49%

Avg 1989-2003: 0.58%



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Life expectancy at 65 Difference

Increase in Life Expectancies

More contributors are expected to reach the retirement age of 65.

Retirement beneficiaries are expected to receive their benefit for a longer period.

12

13

14

15

16

17

18

19

20

21

22

23

1951 1961 1971 1981 1991 2001 2011 2021 2031 2041 2051

0

1

2

3

4

5

6

7

8

9

10

11

Difference

Male

Female

Panel’s views: reasonable but they would

have chosen higher life expectancies.


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Population 65+

0

2

4

6

8

10

12

1966 1976 1986 1996 2000 2010 2020 2030 2040 2050 0%

5%

10%

15%

20%

25%

Number % of population

Increase of 168%

From 2000 to 2050

(In millions) (% of population)


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Working Age and Total Population (Canada)

(in millions)

0

5

10

15

20

25

30

35

40

45

1980 1990 2000 2010 2020 2030 2040 2050

Total 20-64

Annual increases:

Total 20-64 D 1980-2000 +1.1% +1.4%

D 2000-2020 +0.8% +0.8%

D 2020-2040 +0.5% +0.1%

After 2025, almost all projected population increase will come from migration.


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Projected number of years needed to go from 12% to 24%

of 65 and over as a % the total population

1960 1970 1980 1990 2000 2010 2020 2030 2040

30 years

40 years

25 years

60 years

65 years

65 years

Global Aging


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Economic Assumptions

• Participation rates

• Employment increase (Job creation rate)

• Unemployment rate

• Inflation rate

• Increase of average employment earnings

• Interest rate and rate of return by asset class

Sources: Historical trends, Recent experience, PEAP from U of T.,

Department of Finance estimates, Conference Board,

Report on Canadian Economic Statistics by CIA, CPPIB,

Watson Wyatt Economic Expectations Survey, CPP seminars


13

Participation Rates 15-69 (Canada)

0.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

1976 1986 1996 2006 2016 2026 2036 2046

Male Female

.

Assumption CPP Report: 73.4% in 2030

20

03



14

0%

2%

4%

6%

8%

10%

12%

14%

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021

Annual Increase in Consumer Price Index

Average 71-80: 8.0%

Average 81-90

5.9 %

Average 91-00

2.0 %

Assumption CPP Report

2.0% in 2004-2008 increasing to

2.7% in 2015 +

Average 61-70

2.7 %


have chosen a lower inflation rate.


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Annual Increase in Real Wages

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2004 2006 2008 2010 2012 2014 2016 2018

CPP Report

Conference Board U of T

Assumption CPP Report:

1.2% (2012+)

Avg 1979-2003: 0.0%

Avg 1954-2003: 1.2%


have chosen higher real wages.


16

Increase of Real Total Earnings

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2003-2015 2015-2025 2025-2050

Workers Wages

1.7% 1.5% 1.5%

0.8%

1.2% 1.2%

0.9%

0.3% 0.3%


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Working Age Population (ages 20-60)

(indexed 2000=100)

40

50

60

70

80

90

100

110

120

130

Source: UN World Population Prospects

Japan

Spain

Italy

Germany

UK

France

Canada

US

100


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Asset Mix and Real Rate of Return

• Expected asset mix of CPP Investment Board by 2006

65% Variable Income Securities

35% Fixed Income Securities

• Expected asset mix by 2025

55% Variable Income Securities

45% Fixed Income Securities

Average Real Rate of Return: 4.1% (2011+)


have chosen higher real rate of return.


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• Increase the contribution rate by 65% over 6 years

(1997-2003) and keep the same rate thereafter

• Moderate the future growth of benefits by 10% on a

long-term basis (in 2050).

• Creation of the CPP Investment Board (www.cppib.ca)

Effect of the 1998

Amendments

CPP Steady-State Funding


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Asset/Expenditure Ratio

9.9% Legislated contribution rate

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2005 2015 2025 2035 2045 2055 2065 2075

9.8% Steady-state rate

In 2020, CPP/QPP assets are projected

to be equal to 17% of the GDP.

(Ratio)



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• The current legislated contribution rate is 9.9%.

• The steady-state contribution rate is 9.8%.

• If the legislated contribution rate is higher than

the steady-state rate, the funding status of the

plan will increase over time.

• The higher this rate is set above the steady-

state rate, the faster the plan will become more

funded.



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• If the steady-state rate is higher than the legislated contribution rate AND if finance ministers cannot reach agreement on a solution, then:

– Contribution rate increased by ½ of excess over three years, subject to maximum increase of 0.2% per year

– Benefits frozen

– At end of three years, next review performed to determine financial status of Plan.



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Strengthening the Accountability

• Federal and provincial governments took

meaningful steps to strengthen the

transparency and accountability of actuarial

reporting. They endorsed :

– an increase in the frequency of actuarial reporting from

every five years to every three years.

– regular consultations by the Chief Actuary with experts

on assumptions to be used in actuarial reports;

– regular peer reviews of future actuarial reports on the

CPP.


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2005 Peer Review

–Auditor General and Selection Process

of Independent Panel

–Overseeing of the Peer Review by GAD

–Terms of Reference

Peer Review Process


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• The panel found that each of the major

assumptions is reasonable.

• In their view,

– five of the nine major assumptions are near the

centre of the reasonable range, and

– four assumptions are lower or higher within

the range than what they would have chosen.

Peer Review Report


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• The independent peer review report confirms:

– actuarial work complies with the relevant professional

standards of practice;

– Statutory requirements are met;

– chief actuary had access to the data required;

– data are sufficient and reliable;

– assumptions are, in the aggregate, reasonable;

– the report fairly communicates the result;

• and resulted in twelve recommendations. April 2005

Peer Review Report

Canada Pension Plan Actuarial Report and its Independent ...

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