C P P F i n a n c i n g a n d t h I m e p a c - - PowerPoint PPT Presentation

Bureau du surintendant des institutions financières Bureau de l’actuaire en chef Office of the Superintendent

• f Financial Institutions

Office of the Chief Actuary

C P P F i n a n c i n g a n d t h e I m p a c t

• f

a L a r g e r F u n d

Presentation to the 2nd National Pension Conference of the Canadian Labour Congress, Winnipeg

18 October 2004

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Presentation

• Mandate of the Office of the Chief Actuary
• Canadian Aging
• Global Aging
• CPP Financing
• Future challenges

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Mission of OSFI – Mandate of OCA

OSFI is the primary regulator in Canada of federal financial institutions and pension plans.

• protects policyholders, depositors, and pension plan

members against any undue loss.

• provides services and actuarial advice to the

Government of Canada through the Office of the Chief Actuary.

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Retirement Retirement Income Security Income Security

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)

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

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Population of Canada

5 10 15 20 25 30 35 40 45

Total 20-64 ∆ 1960-1980 +1.5% +2.1% ∆ 1980-2000 +1.1% +1.4% ∆ 2000-2020 +0.8% +0.7% ∆ 2020-2040 +0.5% +0.1% ∆ 2040-2060 +0.2% +0.2% Total 20-64 ∆ 1960-1980 +1.5% +2.1% ∆ 1980-2000 +1.1% +1.4% ∆ 2000-2020 +0.8% +0.7% ∆ 2020-2040 +0.5% +0.1% ∆ 2040-2060 +0.2% +0.2%

(in millions)

Total 20-64

1966 1976 1986 1996 2006 2016 2026 2036 2046 2056 2066

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

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Increase of 275% for 80+ Increase of 275% for 80+

Canadian Aging

(Population 65+)

1966 1976 1986 1996 2000 2010 2020 2030 2040 2050 0% 5% 10% 15% 20% 25%

Increase of 150% for 65+ Increase of 150% for 65+

10,000,000 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000

Number % population

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Yes, but…

It requires eliminating all mortality risks before 80.

Mortality rate

• In Canada and U.S., the leading causes of death are

circulatory diseases (40% of deaths), cancer (20% of deaths) and accidents (9% of deaths).

• How long can we live? Is there a maximum life span?
• Can we reach 100 years old?
• From 1900 back 130,000 years, life expectancy remained

approximately at the same level.

• It has increased by three decades since 1900 from 49 to 79.
• Analysts argue that further progress will come

more slowly because we are approaching lower limits to death rates and we have already won the easier medical battles.

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Probability of surviving

10 20 30 40 50 60 70 80 90 100 10 20 30 40 50 60 70 80 90 100 110 Age 1921 F 1996 F 2050 F

« 70% of females would die between 77 and 96 » Globe and Mail, March 2002

e0=58 e0=81 e0=88

%

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25% 50% 75% 100% 125% 150%

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Canada US

Source: UN Population Projections Jan 2003

Ratio of 60-64 over 20-24 For every 6 who leave, 10 enter

Future Labour Shortage

(More people leaving than entering)

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Global Aging

Projected number of years needed to go from 12% to 24%

• f 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

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

40 50 60 70 80 90 100 110 120 130

2000 2005E 2010E 2015E 2020E 2025E 2030E 2035E 2040E 2045E 2050E

Source: UN World Population Prospects

Japan Spain Italy Germany UK France Canada US

100

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Current Financial Situation of the Aged

Poverty among the aged Retirees and non- retirees revenue Inequalities between retirees Males/Females Difference High Performance Medium Performance Low Performance

Source: 2001 OECD study

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How do we position for the aging

• f the Canadian population?

Total Government Financial Balances

4 Canada G-7

percent of GDP

Source: OECD Economic Outlook, No. 74 (December 2003); Department of Finance calculations

• 10

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

2

• 2
• 4
• 6
• 8

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.

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

Guiding Principles of Federal- Provincial decisions on the CPP

• The CPP is a key pillar that is worth saving.
• The solutions must be fair across generations and between

men and women.

• 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.

• Any further benefit improvements must be fully funded.
• Available at www.cpp-rpc.ca/princips/principe.html

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

Report on the Canada Pension Plan Consultations June 1996

Federal/Provincial/Territorial CPP Consultations Secretariat

• In Winnipeg, sixteen submissions

were presented during the consultation representing a wide range of views.

• “We can afford the plan and we must

protect it”, said the Canadian Labour Congress.

• Agreement on 14th February 1997

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CPP Steady-State Financing

Effect of the 1998 Amendments

• Increase Contributions by 70% over 6 Years

(1997-2003)

• Decrease Benefits by 10% on a long-term basis

(in 2050)

• Creation of the Canada Pension Plan

Investment Board (www.cppib.ca)

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CPP Steady-State Financing

• 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
• ver the foreseeable future and that will result in a

asset/expenditure ratio generally constant over a long period of time.

• Regulation requires that the A/E ratio should be

equal in the 13th and 63rd year after the valuation date.

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CPP Steady-State Financing

Evolution of the Asset/Expenditure Ratio

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065

Steady-state A/E ratio: 4.5 in 2013 and 2063

9.9% (legislated) 9.8% (steady-state)

In 2020, CPP assets are projected to be equal to 15% of the GDP.

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CPP Steady-State Financing

• 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.

• SS rate under 18th CPP Report at 31 Dec 2000: 9.8%
• Current legislated rate from 2003: 9.9%

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CPP Steady-State Financing

• If the steady-state rate is higher than the

legislated contribution rate AND if finance ministers cannot reach agreement on 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.

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• Will there be a financial market meltdown as

Will there be a financial market meltdown as a result of demographic changes? a result of demographic changes?

• Baby boomers will continue to be in their prime saving years

throughout this decade. As more and more people save for their own retirement, world equities markets will boom.

(Global Pension Time Bomb, Griffin, 1997)

• A rising trend around the globe toward pre-funding retirement

benefits is a factor driving up total investment in equities.

• Although demand for domestic equities will be static, holding of

international equities from pension funds are expected to rise.

(Global Aging – Capital Market Implications Culhane, 2001)

Global Aging and Financial Markets – Hard Landings Ahead?

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The Outlook for Capital Markets Becomes Less Certain as Baby Boomers Retire

Source: UN World Population Prospects

0.0 10.0 20.0 30.0 40.0 50.0%

1950 1975 2000E 2025E 2050E U.S Primesavers U.S. Dissavers US

0.0 10.0 20.0 30.0 40.0 50.0%

1950 1975 2000E 2025E 2050E Canada Primesavers Canada Dissavers

0.0 10.0 20.0 30.0 40.0 50.0%

1 9 5 1 9 7 5 2 E 2 2 5 E 2 5 E Japan Primesavers Japan Dissavers

(Prime savers 40-59 and dissavers 60+, as % of total population)

Canada Japan

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Global Aging and Financial Markets – Hard Landings Ahead?

• The question remains open to what extent the expected

demand after 2020 will counter the downward pressure on pension assets from aging population in developed countries.

• Total assets in private-sector DB plans would peak in 2024 with

consequent negative effects on U.S. equity values.

(Schieber/Shoven,1994)

• Baby boomers will dampen stock prices. (Abel, Wharton School,1999)
• After 2010, the number of people (of US, UK, Japan and Netherlands) who

retire will increase dramatically and net cash flow into the systems will start to decrease. It is likely that pension funds in the future will hold fewer equities and more fixed income products in their portfolios.

(Demographics and Funded Pension System, Mantel, Merrill Lynch, 2000)

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

14 2 4 6 8 10 12 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Younger Countries World Canada

Ratio of population 20 to 64 Over 65 +

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Future challenges Future challenges

• The Canadian retirement system is in good shape

considering that pension assets would roughly equal 40% to 45% of the liabilities.

• The aging is expected to be more severe in Canada

than in United States, our main commercial partner.

• Contrary to the other industrialized countries, Canada

should not undergo a decline of its working population thanks in particular to future immigration.

• However, the expected aging of the Canadian

working labour force and the resulting labour shortage that could occur will represent one of the biggest challenges in the coming years.