October 2007
Canadian Experience
in
Public Pension Fund Management
and Operations
Asia-Pacific Finance and
Development Center Conference
Content
1
Canada’s retirement income system (RIS)
2
Challenges facing the Canada Pension Plan
3
1997 reforms
4
Achieving sustainability
Canada’s Retirement Income System
Old Age
Security (OAS)
–Guaranteed minimum income for seniors, regardless
of employment history; publicly funded through taxes
Canada
Pension Plan (CPP)
–Public plan, partially funded, defined benefits and
mandatory contributions based on employment
Tax
Deferred Private Savings and other savings
–Mixture of mandatory and optional savings, funded by
individuals and employers
3
The Public Pillars
(2007 figures)
Old Age Security
C$ 5,950
Guaranteed Income
Supplement
C$ 7,513
Maximum reduced for other
income
CPP
C$10,365
Based on maximum
contributions and age 65
retirement
4
Canada’s Retirement Income System
Tax-assisted
private savings
43%
Total: $87
billion for 2004
Old Age Security
32%
Canada
Pension Plan
25%
5
Proportion of pre-retirement earnings replaced
by public pensions in 2006
160%
Two-income couples
One-Income couples
140%
Single
120%
100%
70 per cent
replacement
80%
60%
40%
20%
0%
15,000
30,000
60,000
Pre-retirement earnings (C$)
90,000
6
The Canada Pension Plan (CPP)
• Provides all workers in Canada with a taxable
basic earnings-related retirement pension
indexed to prices
– Benefit replaces earnings up to 25% of average
industrial wage
– Also provides modest survivor, disability and death
benefits
• Financed by:
– Mandatory employer/employee contributions on
earnings up to average wage
– Investment earnings (in the future)
7
Content
1
2
The CPP and the retirement income system (RIS)
Challenges facing the Canada Pension Plan
3
1997 reforms
4
Achieving sustainability
The CPP: From 1966 to1995
• Pay-as-you go system with a small reserve
– Reserve invested solely in non-marketable
government bonds at below market interest
rates
• Contribution rates remain modest despite
benefit enrichments and rising cost
pressures
• Future generations to pay far more –
contribution rates scheduled to nearly
double to 10.1 per cent (2016)
9
Post 1995: Financial Instability
• 1995 Actuarial Report projects
– depletion of small asset reserve by 2015
– inability to pay promised benefits at the
projected 10.1% contribution rate thereafter
– with costs expected to continue to rise the
contribution rate would be need to be raised to
over 14 per cent by 2030.
• Actuarial report prepared by plan actuary
and required under CPP legislation
10
Main problem facing the Plan:
RISING COSTS
• Shifting demographics, notably a declining ratio of
contributors to beneficiaries;
• Slower earnings growth;
• Successive benefit enhancements since inception; and
• Escalating disability benefit expenditures in the previous
decade due to looser administration and eligibility
requirements.
11
Content
1
The CPP and the retirement income system (RIS)
2
Challenges facing the CPP prior to reforms
3
1997 CPP reforms
4
Success and observations
Public Consultations
• Sought Canadian’s views on solutions.
• Broad public consensus emerged that:
– CPP should remain a public defined benefit pension plan;
– Contribution rates over 14 per cent unacceptable – current
contributors should pay a “fairer” share of Plan costs;
– Pre-funding desirable but assets must be invested at arm’s
length from government;
– Benefit reductions for those already receiving a pension
should be avoided.
13
The Reform Package
•
Three-pronged approach to restoring
financial sustainability
–
Significantly, and quickly, increased contribution
rates to a level sustainable over the long term
(i.e., 9.9 per cent from 2003 onward)
–
Adoption of a new investment policy with assets
invested in marketable securities at arm’s length
from governments
–
Changes to benefits and their administration to
slow expenditure growth.
14
Move Towards Partial Pre-Funding
•
Contribution rate to cover the actuarially fair
cost of new entitlements plus a share of the
unfunded burden that had built up.
•
CPP would build up significant asset pool equal to about 5 years of benefits or about 25
per cent of Plan liabilities.
•
Investment earnings on Plan assets would
help to pay future benefits that otherwise
would be financed by higher contributions.
15
New Investment Policy
•
CPP Investment Board (CPPIB) established to manage
assets
–
–
•
Assets invested in a diversified portfolio of securities
(instead of only bonds) to get higher returns
–
–
•
Independent from the federal and provincial governments
Governed by a qualified board of directors.
New fund expected to generate higher real return
Subject to similar investment rules as other pension funds.
CPPIB to provide quarterly financial statements and
annual reports on performance of the investments.
16
Investment Board Structure: Balances
Independence and Accountability
• Independence:
– clear mandate to invest
in sole interest of plan
members
– independent directors
– full discretion to set its
own management
structure, and
operating & investment
policies
•Accountability:
Board must keep Parliament
and public well informed:
– transparent investment
policies, standards,
procedures
– detailed annual report,
tabled in Parliament
– bi-annual meetings in
participating provinces
17
Benefits and Administration
• No changes to benefits already in payment.
• Key measures taken to slow the growth of
expenditures:
– New formula for calculating the retirement benefit;
– Administration and eligibility for disability benefits tightened;
– Death benefit reduced and frozen at C$2,500;
• By 2030, projected expenditures reduced by almost
10%.
18
Strengthening Governance
• Strengthened stewardship through more
frequent actuarial reporting and financial
reviews by governments
• Legislative requirement that future
benefit improvements or new benefits
be fully pre-funded
• Default provisions set out in law
• On-going efforts
19
Content
1
The CPP and the retirement income system (RIS)
2
Challenges facing the CPP prior to reforms
3
1997 CPP reforms
4
Achieving Sustainability
CPP Today
• Financial sustainability restored:
– 9.9 % contribution rate has been in place for a
decade and Plan is projected to be sustainable at
this rate for at least the next 75 years
• CPPIB recognized as a model
internationally of transparent, arm’s
length and professional management of
public pension funds
– Assets totalled C$120.5 billion as at June 2007
21
Growing and Diversified Portfolio of Assets
Investment Asset Mix
( in billions of C$)
5,591
4.6%
4,107
3.4%
2,149
1.8%
30,115
25%
30,678
25.5%
47,880
39.7%
Canadian Equities
Real Estate
Foreign Equities
Inflation Indexed Bonds
Nominal Fixed Income
Infrastructure
22
Tough changes made possible by. . .
1) The time was right for reform
–
General economic and financial context buttressed
reform resolve.
2) Public consultations framed an
acceptable/balanced package.
3) Concrete measures built confidence that the Plan
would be fixed for good
–
–
New investment policy was key
Measures to strengthen Plan governance/ accountability.
4) Federal-provincial decision-making held
agreement together.
23