Canada Pension Plan
Encyclopedia
The Canada Pension Plan is a contributory, earnings-related social insurance
program. It forms one of the two major components of Canada
's public retirement
income system, the other component being Old Age Security
(OAS). Other parts of Canada's retirement system are private pensions, either employer-sponsored or from tax-deferred individual savings (known in Canada as a Registered Retirement Savings Plan
).
The CPP program mandates all employed Canadians who are 18 years of age and over to contribute a prescribed portion of their earnings income to a nationally administered pension plan. The plan is administered by Human Resources and Social Development Canada on behalf of employees in all provinces and territories
except Quebec, which operates an equivalent plan, the Quebec Pension Plan. Changes to the CPP require the approval of at least 2/3 of Canadian provinces representing at least 2/3 of the country's population. In addition, under section 94A of the Canadian Constitution, pensions are a provincial responsibility, so any province may establish a plan anytime.
The CPP is funded on a "steady-state" basis, with its current contribution rate set so that it will remain constant for the next 75 years, by accumulating a reserve fund sufficient to stabilize the asset/expenditure and funding ratios over time. Such a system is a hybrid between a fully funded one and a "pay-as-you-go" plan. In other words, assets held in the CPP fund are by themselves insufficient to pay for all future benefits accrued to date but sufficient to prevent contributions from rising any further. While a sustainable path for this particular plan, given the indefinite existence of a government, it is not typical of other public or private sector pension plans. A study published in April 2007 by the CPP's chief actuary
showed that this type of funding method is "robust and appropriate" given reasonable assumptions about future conditions. The chief actuary submits a report to Parliament
every three years on the financial status of the plan.
In June of 2011 the Canada Pension Plan Investment Board had $153.2 billion in assets under management.
At its inception, the prescribed CPP contribution rate was 1.8% of an employee's gross income up to an annual maximum. Over time, the contribution rate was increased slowly. However, by the 1990s, it was concluded that the "pay-as-you-go" structure would lead to excessively high contribution rates within 20 years or so, due to Canada's changing demographics
, increased life expectancy
of Canadians, a changing economy
, benefit improvements and increased usage of disability benefits (all as referenced in the Chief Actuary's study of April 2007, noted above). The same study reports that the reserve fund was expected to run out by 2015. This impending pension crisis
sparked an extensive review by the federal and provincial governments in 1996. As a part of the major review process, the federal government actively conducted consultations with the Canadian public to solicit suggestions, recommendations, and proposals on how the CPP could be restructured to achieve sustainability once again. As a direct result of this public consultation process and internal review of the CPP, the following key changes were proposed and jointly approved by the Federal and provincial governments in 1997:
Historical contribution rates and contributory earnings can be found in Table A of this document.
When the contributor reaches the normal retirement age of 65 (a reduced pension is available from age 60), the CPP provides regular pension benefit payments to the contributor, calculated as 25% of the average contributory maximum over the entire working life of a contributor (not just the last 5 years). There are provisions that enable the lower-earnings years in a contributor's contributory period to be dropped out due to disability, child rearing, or other reasons. http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/retire.shtml CPP benefit payments are taxable
as ordinary income. The CPP also provides disability pensions to eligible workers who become disabled in a severe and prolonged fashion, and survivor benefits to survivors of workers who die before they begin receiving retirement benefits. If an application for disability pension is denied, an appeal can be made for reconsideration, and then to the Canada Pension Plan / Old Age Security Review Tribunals
or Pension Appeals Boards (POA).
Paul Martin
, the CPP Investment Board
(CPPIB) was created in 1997 as an organization independent of the government to monitor and invest the funds held by the CPP. In turn, the CPP Investment Board created the CPP Reserve Fund. The CPP Investment Board is a crown corporation created by an Act of Parliament. It reports quarterly on its performance, has a professional management team to oversee the operation of various aspects of the CPP reserve fund and also to plan changes in direction, and a board of directors that is accountable to but independent from the federal government.
has been raised for the CPPIB, with civil society
groups like ACT for the Earth and InterPares expressing concerns about the investment policies of the CPP Investment Board, alleging potential conflicts of interest or asking for the adoption of ethical investment policies. These groups have criticized the CPP's investments in arms manufacturers, mining companies, tobacco companies, big oil, and companies that engage in criminal activities. The CPPIB subsequently published its policy on responsible investing. ACT for the Earth countered this with its own report, which argues that the CPPIB uses its proxy shares in a wide array of companies "to vote against peace, ecology, and human rights at numerous corporate shareholder meetings," in direct violation of its own responsible investing policies.
and Western Europe. In addition, the CPPIB has been broadening the scope of its investments to include emerging markets, although Mr. Denison would not pinpoint a specific country or area. “Canada as a single market cannot accommodate the future growth of our organization,” said Mr. Denison.
In recent years, the CPPIB has also changed direction in its investment philosophy. It evolved from investing exclusively in non-marketable government bonds to passive index-fund strategies and, more recently, to active investment strategies.
-adjusted) needed to help sustain the CPP , a rate set at 4.1% by 2020 in the CPP actuary's report, grading down from 5.0% in 2005. As indicated in its Financial Highlights for the fiscal year ended March 31, 2007 (document consulted on Aug. 3, 2007), the CPP reserve fund averaged 13.6% return in the past 4 years, well in excess of Canadian inflation rates.
The CPP reserve fund is aiming to achieve the following growth targets (in assets):
The strategies used to achieve these targets are:
¹Assets are as at the period end date (March 31).
²Commencing in fiscal 2007, the rate of return reflects the performance of the CPP Fund which excludes the short-term cash required to pay current benefits.
³Increased fund value due to worker and employer CPP contributions not needed to pay current benefits. The negative investment return amounted to $303 million CAD.
, had first invested $1.9 billion in Skype
in September 2009. In May 2011 CPP sold its stake in Skype to Microsoft
for $8.5 billion.
Social insurance
Social insurance is any government-sponsored program with the following four characteristics:* the benefits, eligibility requirements and other aspects of the program are defined by statute;...
program. It forms one of the two major components of Canada
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
's public retirement
Retirement
Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to...
income system, the other component being Old Age Security
Old Age Security
The Old Age Security pension is a taxable monthly social security payment available to most Canadians 65 years of age or older. As of July, 2011, the basic amount is C$533.70 per month. At tax time, recipients with 2010 incomes over C$67,668 must pay back a portion of their Old Age Security at a...
(OAS). Other parts of Canada's retirement system are private pensions, either employer-sponsored or from tax-deferred individual savings (known in Canada as a Registered Retirement Savings Plan
Registered Retirement Savings Plan
A Registered Retirement Savings Plan or RRSP is a type of Canadian account for holding savings and investment assets. Introduced in 1957, the RRSP's purpose is to promote savings for retirement by employees. It must comply with a variety of restrictions stipulated in the Canadian Income Tax Act...
).
The CPP program mandates all employed Canadians who are 18 years of age and over to contribute a prescribed portion of their earnings income to a nationally administered pension plan. The plan is administered by Human Resources and Social Development Canada on behalf of employees in all provinces and territories
Provinces and territories of Canada
The provinces and territories of Canada combine to make up the world's second-largest country by area. There are ten provinces and three territories...
except Quebec, which operates an equivalent plan, the Quebec Pension Plan. Changes to the CPP require the approval of at least 2/3 of Canadian provinces representing at least 2/3 of the country's population. In addition, under section 94A of the Canadian Constitution, pensions are a provincial responsibility, so any province may establish a plan anytime.
The CPP is funded on a "steady-state" basis, with its current contribution rate set so that it will remain constant for the next 75 years, by accumulating a reserve fund sufficient to stabilize the asset/expenditure and funding ratios over time. Such a system is a hybrid between a fully funded one and a "pay-as-you-go" plan. In other words, assets held in the CPP fund are by themselves insufficient to pay for all future benefits accrued to date but sufficient to prevent contributions from rising any further. While a sustainable path for this particular plan, given the indefinite existence of a government, it is not typical of other public or private sector pension plans. A study published in April 2007 by the CPP's chief actuary
Actuary
An actuary is a business professional who deals with the financial impact of risk and uncertainty. Actuaries provide expert assessments of financial security systems, with a focus on their complexity, their mathematics, and their mechanisms ....
showed that this type of funding method is "robust and appropriate" given reasonable assumptions about future conditions. The chief actuary submits a report to Parliament
Parliament of Canada
The Parliament of Canada is the federal legislative branch of Canada, seated at Parliament Hill in the national capital, Ottawa. Formally, the body consists of the Canadian monarch—represented by her governor general—the Senate, and the House of Commons, each element having its own officers and...
every three years on the financial status of the plan.
In June of 2011 the Canada Pension Plan Investment Board had $153.2 billion in assets under management.
History
The Liberal government of Prime Minister Lester B. Pearson in 1966 first established the Canadian Pension Plan. Contribution rates were first set at 1.8% of an employee's gross income per year with a maximum contribution limit. By the mid-1990s though this low contribution rate increase was not sufficient to keep up with Canada’s aging population. As a result the total CPP contribution rates for both employee and employer together were raised to an annual rate of 9.9 per cent by 2003.At its inception, the prescribed CPP contribution rate was 1.8% of an employee's gross income up to an annual maximum. Over time, the contribution rate was increased slowly. However, by the 1990s, it was concluded that the "pay-as-you-go" structure would lead to excessively high contribution rates within 20 years or so, due to Canada's changing demographics
Demographics
Demographics are the most recent statistical characteristics of a population. These types of data are used widely in sociology , public policy, and marketing. Commonly examined demographics include gender, race, age, disabilities, mobility, home ownership, employment status, and even location...
, increased life expectancy
Life expectancy
Life expectancy is the expected number of years of life remaining at a given age. It is denoted by ex, which means the average number of subsequent years of life for someone now aged x, according to a particular mortality experience...
of Canadians, a changing economy
Economy of Canada
Canada has the tenth largest economy in the world , is one of the world's wealthiest nations, and is a member of the Organization for Economic Co-operation and Development and Group of Eight . As with other developed nations, the Canadian economy is dominated by the service industry, which employs...
, benefit improvements and increased usage of disability benefits (all as referenced in the Chief Actuary's study of April 2007, noted above). The same study reports that the reserve fund was expected to run out by 2015. This impending pension crisis
Pensions crisis
The pensions crisis is a predicted difficulty in paying for corporate, state and federal pensions in the U.S. and Europe, due to a difference between pension obligations and the resources set aside to fund them. Shifting demographics are causing a lower ratio of workers per retiree, while retirees...
sparked an extensive review by the federal and provincial governments in 1996. As a part of the major review process, the federal government actively conducted consultations with the Canadian public to solicit suggestions, recommendations, and proposals on how the CPP could be restructured to achieve sustainability once again. As a direct result of this public consultation process and internal review of the CPP, the following key changes were proposed and jointly approved by the Federal and provincial governments in 1997:
- Increase total CPP annual contribution rates (employer/employee combined) from 6% of pensionable earnings in 1997 to 9.9% by 2003.
- Continuously seek out ways to reduce CPP administration and operating costs.
- Move towards a hybrid structure to take advantage of investment earnings on accumulated assets. Instead of a "pay-as-you-go" structure, the CPP is expected to be 20% funded by 2014, such funding ratio to constantly increase thereafter towards 30% by 2075 (that is, the CPP Reserve Fund will equal 30% of the "liabilities" - or accrued pension obligations).
- Create the CPP Investment Board (CPPIB).
- Review the CPP and CPPIB every 3 years.
Contributions and benefits
In 2011, the prescribed contribution rate is 4.95% of a salaried worker's gross employment income between $3,500 and $48,300, up to a maximum contribution of $2,217.60 http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/clcltng/cpp-rpc/cnt-chrt-pf-eng.html. The employer matches the employee contribution, effectively doubling the contributions of the employee. If a worker is self-employed, he/she must pay both halves of the contribution. The rate of 4.95% has been in effect since 2003.Historical contribution rates and contributory earnings can be found in Table A of this document.
When the contributor reaches the normal retirement age of 65 (a reduced pension is available from age 60), the CPP provides regular pension benefit payments to the contributor, calculated as 25% of the average contributory maximum over the entire working life of a contributor (not just the last 5 years). There are provisions that enable the lower-earnings years in a contributor's contributory period to be dropped out due to disability, child rearing, or other reasons. http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/retire.shtml CPP benefit payments are taxable
Taxation in Canada
The level of Taxation in Canada is average among Organisation for Economic Co-operation and Development countries.-Administration:...
as ordinary income. The CPP also provides disability pensions to eligible workers who become disabled in a severe and prolonged fashion, and survivor benefits to survivors of workers who die before they begin receiving retirement benefits. If an application for disability pension is denied, an appeal can be made for reconsideration, and then to the Canada Pension Plan / Old Age Security Review Tribunals
Canada Pension Plan / Old Age Security Review Tribunals
Canada Pension Plan / Old Age Security Review Tribunals are independent and mandated to hear of decisions made by Human Resources and Skills Development Canada on benefits under the Canada Pension Plan and Old Age Security Act. ....
or Pension Appeals Boards (POA).
CPP Investment Board
Under the direction of then Finance MinisterMinister of Finance (Canada)
The Minister of Finance is the Minister of the Crown in the Canadian Cabinet who is responsible each year for presenting the federal government's budget...
Paul Martin
Paul Martin
Paul Edgar Philippe Martin, PC , also known as Paul Martin, Jr. is a Canadian politician who was the 21st Prime Minister of Canada, as well as leader of the Liberal Party of Canada....
, the CPP Investment Board
CPP Investment Board
Under the direction of the then Canadian Finance Minister Paul Martin, the CPP Investment Board was created in 1997 as an organization independent of the government to monitor and invest the funds held by the Canada Pension Plan . In turn, the CPP Investment Board created the CPP Reserve Fund. The...
(CPPIB) was created in 1997 as an organization independent of the government to monitor and invest the funds held by the CPP. In turn, the CPP Investment Board created the CPP Reserve Fund. The CPP Investment Board is a crown corporation created by an Act of Parliament. It reports quarterly on its performance, has a professional management team to oversee the operation of various aspects of the CPP reserve fund and also to plan changes in direction, and a board of directors that is accountable to but independent from the federal government.
Socially responsible investing
The growing issue of socially responsible investingSocially responsible investing
Socially responsible investing , also known as sustainable, socially conscious, or ethical investing, describes an investment strategy which seeks to consider both financial return and social good....
has been raised for the CPPIB, with civil society
Civil society
Civil society is composed of the totality of many voluntary social relationships, civic and social organizations, and institutions that form the basis of a functioning society, as distinct from the force-backed structures of a state , the commercial institutions of the market, and private criminal...
groups like ACT for the Earth and InterPares expressing concerns about the investment policies of the CPP Investment Board, alleging potential conflicts of interest or asking for the adoption of ethical investment policies. These groups have criticized the CPP's investments in arms manufacturers, mining companies, tobacco companies, big oil, and companies that engage in criminal activities. The CPPIB subsequently published its policy on responsible investing. ACT for the Earth countered this with its own report, which argues that the CPPIB uses its proxy shares in a wide array of companies "to vote against peace, ecology, and human rights at numerous corporate shareholder meetings," in direct violation of its own responsible investing policies.
Future and direction
David Denison is the current Chief Executive Officer of the CPPIB. An article in the May 18, 2006 Globe and Mail reported that the CPPIB plans to increase the fund's foreign investments. According to the 2007 Annual Report, about 45% of the fund's assets are now invested in securities domiciled outside Canada, largely in the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
and Western Europe. In addition, the CPPIB has been broadening the scope of its investments to include emerging markets, although Mr. Denison would not pinpoint a specific country or area. “Canada as a single market cannot accommodate the future growth of our organization,” said Mr. Denison.
In recent years, the CPPIB has also changed direction in its investment philosophy. It evolved from investing exclusively in non-marketable government bonds to passive index-fund strategies and, more recently, to active investment strategies.
Growth and strategy
The CPP reserve fund receives its funds from the CPP and invests them like a typical large fund manager would. The CPP reserve fund seeks to achieve at least the projected return (inflationInflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
-adjusted) needed to help sustain the CPP , a rate set at 4.1% by 2020 in the CPP actuary's report, grading down from 5.0% in 2005. As indicated in its Financial Highlights for the fiscal year ended March 31, 2007 (document consulted on Aug. 3, 2007), the CPP reserve fund averaged 13.6% return in the past 4 years, well in excess of Canadian inflation rates.
The CPP reserve fund is aiming to achieve the following growth targets (in assets):
- $147 billion by 2010.
- $200 billion by 2015.
- $592 billion by 2030.
- $1.55 trillion by 2050.
The strategies used to achieve these targets are:
- Diversification. In 1997, the CPP fund was 100% invested in federal government bonds, but it has since diversified not only by asset class, but also internationally.
- Employing basic asset allocation theories. With diversification of investments as one of their objectives, the current asset mix is now as follows. :
-
Public Equity => 51.8% -
Fixed Income => 25.6% -
Private equity => 10.9% -
Inflation Sensitive Assets => 11.7%
-
- Using equity firms to assist in achieving targets for each asset class. The CPP reserve fund allocates certain amounts to various pre-qualified equityStockThe capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
firms to be managed and used towards reaching the growth targets. For example, the CPP Investment Board hires private equity firms to help it invest in private companies, fund managers to help it invest in public equities, bond managers to assist in investing in bondsBond (finance)In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
(within Canada and foreign bonds), and so forth.
Performance
The total growth of the CPP Reserve Fund is derived from the CPP contributions of working Canadians, and the return on investment of the contributions. The portion of CPP Reserve Fund growth due to CPP contributions varies from year to year, but have shown a slight decrease in the past 3 years. The historical growth with the investment performance is tabulated as follows:| Date | Net Asset Value (CAD)¹ | Rate of Return (annual)² |
| Mar 2003 | $55.6 Billion | -1.1% |
| Mar 2004 | $70.5 Billion | +10.3% |
| Mar 2005 | $81.3 Billion | +8.5% |
| Mar 2006 | $98.0 Billion | +15.5% |
| Mar 2007 | $116.6 Billion | +12.9% |
| Mar 2008³ | $122.7 Billion | -0.29% |
| Mar 2009 | $105.5 Billion | -18.6% |
| Mar 2010 | $127.6 Billion | +20.9% |
| Mar 2011 (Projected) | $140.1 Billion | 9.8% |
¹Assets are as at the period end date (March 31).
²Commencing in fiscal 2007, the rate of return reflects the performance of the CPP Fund which excludes the short-term cash required to pay current benefits.
³Increased fund value due to worker and employer CPP contributions not needed to pay current benefits. The negative investment return amounted to $303 million CAD.
Investments
The CPP Investment Board is responsible for managing about $150 billion in investment assets for the Canada Pension Plan.Investments in Skype
CPP, together with its partner Silver LakeSilver Lake
-Cities and towns:*Silver Lake, Los Angeles, California*Silver Lake, San Bernardino County, California, a ghost town*Helendale, California, also known as Silver Lakes*Plasse, California, formerly known as Silver Lake, in Amador County, California...
, had first invested $1.9 billion in Skype
Skype
Skype is a software application that allows users to make voice and video calls and chat over the Internet. Calls to other users within the Skype service are free, while calls to both traditional landline telephones and mobile phones can be made for a fee using a debit-based user account system...
in September 2009. In May 2011 CPP sold its stake in Skype to Microsoft
Microsoft
Microsoft Corporation is an American public multinational corporation headquartered in Redmond, Washington, USA that develops, manufactures, licenses, and supports a wide range of products and services predominantly related to computing through its various product divisions...
for $8.5 billion.