Office of the Chief Actuary Bureau de l’actuaire en chef 1 The Canadian Approach to finance retirement: A diversified approach based on fairness, solidarity and responsibility Presentation to the Financial Management Institute of Canada, Ottawa 23 November 2005
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Presentation to the Financial Management Institute of Canada, Ottawa
The Canadian Approach to finance retirement: A diversified approach based on fairness, solidarity and responsibility. Presentation to the Financial Management Institute of Canada, Ottawa. 23 November 2005. Presentation. Mandate of the Office of the Chief Actuary Canadian Aging - PowerPoint PPT Presentation
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Office of the Chief Actuary Bureau de l’actuaire en chef 1
The Canadian Approach to finance retirement: A
diversified approach based on fairness, solidarity and
responsibility
Presentation to the Financial Management Institute of Canada, Ottawa
23 November 2005
Office of the Chief Actuary Bureau de l’actuaire en chef 2
• Mandate of the Office of the Chief Actuary
• Canadian Aging
• Canadian Income Retirement System
• Financing the Old Age Security and Canada Pension Plan
• Framework of an Efficient Retirement System
Presentation
Office of the Chief Actuary Bureau de l’actuaire en chef 3
OSFI is the primary regulator in Canada of federal financial institutions and pension plans.
• It protects policyholders, depositors, and pension plan members against any undue loss.
• It provides services and actuarial advice to the Government of Canada through the Office of the Chief Actuary.
Mission of OSFI – Mandate of OCA
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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
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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
05
101520253035404550556065707580859095100
Age Profile of Canada's Population, 1951 & 2001
1946-1965 in 2001
Female Male
2001
1951
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– The CPP is a key pillar of Canada’s retirement income system that is worth saving.
– The CPP must be affordable and sustainable for future generations. This requires fuller funding.
– CPP must be invested in the best interest of plan members, and maintain a proper balance between returns and investment risk.
– Available on the CPP website at http://www.cpp-rpc.ca/princips/principe.html
(Agreed on October 1996)
Principles to guide the federal-provincial decisions on the CPP :
How do we position for the aging of the Canadian population?
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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 to diversify the CPP reserve fund and increase investment returns (www.cppib.ca)
Effect of the 1998 Amendments
How do we position for the aging of the Canadian population? : CPP Steady-State Funding
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• The steady-state contribution rate is the lowest rate that can be charged that is sufficient to sustain the plan without further increase.
• It is also the lowest rate that can be maintained over the foreseeable future and that will result in a Assets/expenditures ratio generally constant over a long period of time.
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)
CPP Steady-State Funding
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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.
CPP Steady-State Funding
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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.
CPP Steady-State Funding
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Risk/Return of Asset Classes
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CPP Diversified InvestmentsAssumed Mix for 2005-2020
• 65% Equities (Variable Income) 25% Canadian Equity 30% Foreign Equity 10% Real Estate &
Infrastructure
• 35% Fixed Income 34.5% Bonds 0.5% Cash
Assumed Mix for 2025+
• 55% Variable Income 15% Canadian Equity 30% Foreign Equity 10% Real Estate &
Infrastructure
• 45% Fixed Income 44.5% Bonds 0.5% Cash
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• CPP Assets invested solely in long-term federal bonds will lead to a steady-state rate of 10.5%.
• Our expected investment policy of 65% variable income securities and 35% fixed income securities leads to a steady-state rate of 9.8%.
CPP Diversified Investments
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Framework of an Efficient Retirement System
• Diversification of sources of retirement income
• Reasonable economic cost of public pensions (% of GDP)