The Chief Actuary for the Office of the Superintendent of Financial Services (OSFI), Mr. Jean-Claude Menard, in a speech delivered yesterday as part of the federal government’s HRSDC Knowledge Talks series, reported that the Canada Pension Plan (CPP) is on a sound financial footing.
The CPP is funded on a “steady-state” basis. The aim of CPP funding is to have stable contribution rates, while achieving positive cash flow and providing an acceptable level of prefunding for future obligations. The current combined employer/employee contribution rate of 9.9% of pensionable earnings has been in place since 2003. The intent of the federal government is to maintain this contribution rate.
Mr. Menard stated that stable long-term contribution rates are desirable:
- to reinforce the link between contributions and benefits
- to distribute costs more equitably between generations
- to promote fiscal discipline and proper governance
- to enhance public confidence in the CPP regime.
Not long ago the CPP was in a precarious financial condition due to a combination of factors, including the passive investment of the CPP assets, a greater proportion of CPP pensioners relative to contributors and an unrealistically low level of contributions. The combined employer/employee contribution rate had been pegged at 3.6% from inception of the CPP in 1966 to 1986. Contribution rates were gradually raised each year until 2003.
According to Mr. Menard, on the basis of demographic and economic assumptions, the 9.9% contribution rate will provide stable funding for the foreseeable future. It is projected that in 15 years’ time, the CPP’s assets will equal about 25% of liabilities. Further, the ratio of the CPP’s assets at the end of the year to projected payments in the next year, the “asset/expenditure ratio,” is currently about 4.7 and is projected to rise to about 5.5 in 10 years’ time. The net cash flow of the CPP is positive and is projected to continue to be positive for the next 10 years.
The manner in which the CPP is funded is in stark contrast to the funding of private pension plans. While CPP contribution rates are designed to be stable and long-term, the mandated short-term solvency funding model for private pension plans produces an unnecessarily high level of volatility, as the pension industry and pension plan sponsors have experienced recently.
As has been noted in the recent reports by Expert Commissions in Ontario, Nova Scotia and British Columbia/Alberta, public confidence needs to be restored in the private sector pension industry. The pension regulatory regimes across Canada, including the underlying funding rules, are long overdue for an overhaul. The recent temporary measures to ease solvency funding requirements, while salutary, are not sufficient.