presentation to the financial management institute of canada, ottawa

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


• 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


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


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


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


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)


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%


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


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 1980-2000 +1.1% +1.4% 2000-2020 +0.8% +0.8%2020-2040 +0.5% +0.1%

Annual increases: Total 20-64 1980-2000 +1.1% +1.4% 2000-2020 +0.8% +0.8%2020-2040 +0.5% +0.1%

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

2003


Canadian Aging

0

2

4

6

8

10

12

1966 1976 1986 1996 2000 2010 2020 2030 2040 20500%

5%

10%

15%

20%

25%

Number % of population

Increase of 150%From 2005 to 2050Increase of 150%

From 2005 to 2050

(in millions) (% of population)Population 65 and over


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1966 1976 1986 1996 2000 2010 2020 2030 2040 2050

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Number % of population

Increase of 250%between 2005 and 2050

Increase of 250%between 2005 and 2050

(in millions) (% of population)Population 80 and over

Canadian Aging


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


Future Labour Shortage, likely or not?Ratio of 60-64 over 20-24

Canada United States

2003

25%

50%

75%

100%

125%

150%

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Source for US : United Nations Projections, 2003

For every 6 who leave, 10 enter

More people leaving than entering after 2015


Working Age Population (ages 20-60) (indexed 2000=100)

405060708090

100110120130

2000

2005E

2010E

2015E

2020E

2025E

2030E

2035E

2040E

2045E

2050E

Source: UN World Population Prospects

Japan

Spain

Italy

Germany

UKFrance

Canada

US

100


Canadian retirement system with mixed funding approaches is well recognized in the world for its capacity to adapt rapidly to changing conditions.

- Full funding (RPP/RRSP)

- Partial funding (CPP/QPP)

- Pay-as-you-go funding (OAS/GIS)123

Canadian Retirement Security

The Canadian retirement system could be viewed as about 40% to 45% funded.


Public Pension Replacement Rates

0%

20%

40%

60%

80%

100%

120%

20,000 40,000 60,000 80,000Pre-retirement earnings ($)

Two-Earner Couple

One-Earner Couple

Single

% of Earnings replaced by OAS, GIS and CPP in 2004

30% 40%

38% < $20,000 67% < $40,000 85% < $60,000 94% < $80,000


Income Replacement Rate of Public Pension Plans (Canada and United States, 2002)

Salary as Multiple of Average Wage

Rep

lace

men

t R

ate

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

0.5 1 1.5 2 2.5

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

CPP

OAS

GIS

US Social Security: OASDI


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1990 2000 2010 2020 2030 2040 2050 2060 20700.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Between 2010 and 2030, the ratio of expenditures to GDP increases from 2.4% to 3.2%, driven

largely by the retirement of the babyboomers.

2004

$28 billion in 2004; $37 billion in 2010; $110 billion in 2030

Evolution of Old Age Security Expenditures in % of GDP

How do we position for the aging of the Canadian population?


Total Government Financial Balances

Balancing the budget and putting the debt-to-GDP ratio on a downward track are good ways to ensure that OAS can be financed on a sustainable basis.


Source: OCDE Economic Forecasts, No. 74 (December 2003); Department of Finance’s Calculations

-10

-8

-6

-4

-2

0

2

4

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Canada G-7% of GDP


– 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 :



• 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


• 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


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)



• 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.



• 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.



Risk/Return of Asset Classes


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


• 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


Framework of an Efficient Retirement System

• Diversification of sources of retirement income

• Reasonable economic cost of public pensions (% of GDP)

• Diversification of funding approaches

• Maintenance of standard of living at

retirement

• Reduction of income inequalities

• Reduction of poverty among seniors

presentation to the financial management institute of canada, ottawa

Documents

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