Reforms have made Canada Pension Plan more sustainable
By Al Beeber - Lethbridge Herald on April 1, 2022.
LETHBRIDGE HERALDabeeber@lethbridgeherald.com
Long gone is the era when Canadians worried if the Canada Pension Plan would be empty by the time they retired.
Now, says Jeffrey Hodgson of CPP Investments, the most recent report by the independent Office of the Chief Actuary shows the Canada Pension Plan is expected to meet its obligations for at least the next 75 years.
One of the actuary’s roles is to do a three-year checkup plan on the pension to make sure it’s sustainable, Hodgson told the Southern Alberta Council on Public Affairs.
“In 1995, they went to those 10 governments, the nine provinces and the federal government, with some very bad news. And they said demographics are shifting” and the existing model at existing rates aren’t sustainable, he said.
The chief actuary said if nothing changes, by 2015 the fund source supporting the pension plan would be depleted so benefits will have to be significantly slashed or contributions raised, he said.
In what he called a “heartening example of co-operation,” governments got together to try to agree on a solution to the problem.
“And they initiated the CPP reforms,” the key point Hodgson said, being the creation of the Canada Pension Plan Investment Board, also known as CPP Investments.
“The decision was made that excess contributions at that point would begin flowing into CPP investments to invest at market rates so these higher returns that would be generated by the investments would help to sustain the plan,” said Hodgson, a former business editor for The Canadian Press.
“And it worked,” he said.
The 75-year sustainability estimate is “a very heartrending development.”
Hodgson gave SACPA an in-depth look at the history of CPP and its future.
CPP Investments was created, Hodgson said, to help provide a foundation upon which Canadians build financial security in retirement.
In January 1966 when the CPP was created by the federal government and nine provinces (Quebec chose to run its own pension plan) it was estimated it would take the contributions of 6.5 retirees to support one retiree. In 1969, birth control was legalized and in the 1970s and ’80s there were lower birth rates and longer life expectancy. These changed the dynamics, Hodgson said, with fewer people being born and people living longer.
CPP Investments was formed in 1998, a year after the CPP Reform Agreement was made.
Considered a gold standard globally for pensions, CPP has grown from $47.7 billion in assets in 2001 to $550.4 billion. By 2050, the plan is expected to have about $3 trillion in assets, Hodgson said.
CPP Investments, he said, has an independent board of directors and decisions are made by investment professionals. Its work is subject to annual audits, public meetings and a triennial review of CPP.
Thirty per cent of assets are in private equities and 28 per cent in public equities, SACPA was told.
In the past 10 years CPP Investments has seen a net nominal return of 11.6 per cent, Hodgson said. The five-year net nominal return is 11.7 per cent.
The Q3 fiscal performance for 2022 of Base CPP is expected to show $13 billion in net income generated for the fund which equates to a 2.4 per cent net nominal return.
CPP Investments has three mandates, SACPA was told:
1) Assist the pension plan to meet obligations;
2) Manage CPP contributions in the best interests of contributors and beneficiaries;
3) Invest to achieve a maximum rate of return without undue risk of loss having regard to the factors that may affect CPP funding.
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