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Presentation to the Financial Management Institute of Canada, Ottawa

The Canadian Approach to finance retirement: A diversified approach based on fairness, solidarity and responsibility. Presentation to the Financial Management Institute of Canada, Ottawa. 23 November 2005. Presentation. Mandate of the Office of the Chief Actuary Canadian Aging

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Presentation to the Financial Management Institute of Canada, Ottawa

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  1. The Canadian Approach to finance retirement: A diversified approach based on fairness, solidarity and responsibility Presentation to the Financial Management Institute of Canada, Ottawa 23 November 2005

  2. Presentation • Mandate of the Office of the Chief Actuary • Canadian Aging • Canadian Income Retirement System • Financing the Old Age Security and Canada Pension Plan • Framework of an Efficient Retirement System

  3. Mission of OSFI – Mandate of OCA OSFI is the primary regulator in Canada of federal financial institutions and pension plans. • It protects policyholders, depositors, and pension plan members against any undue loss. • It provides services and actuarial advice to the Government of Canada through the Office of the Chief Actuary.

  4. Purpose of the CPP Actuarial Report • Inform on the current and projected financial status of the Canada Pension Plan • Calculate the steady-state contribution rate

  5. Demographic Assumptions Age Profile of Canada's Population, 1951 & 2001 100 Female 95 Male 90 85 80 75 70 65 60 55 50 1946-1965 in 2001 45 2001 40 35 1951 30 25 20 15 10 5 0 300,000 200,000 100,000 0 100,000 200,000 300,000 • Fertility (Number of births) • Migration • Mortality (Life expectancy) Sources: Statistics Canada (population census and historical data), U.N. 2002 population projections, CPP seminars

  6. Fertility Rate 1952-1976: 3.1 1977-2001: 1.6 (Children per woman) Assumption CPP Report 1.60 in 2016+

  7. Net Migration Rate 1.4% Avg 1979-2003: 0.49% Avg 1989-2003: 0.58% 1.2% 1.0% Assumption CPP report: 0.50% 2004 to 2015 0.54% 2020 + 0.8% 0.6% 0.4% 0.2% 0.0% 1955 1965 1975 1985 1995 2005 2015 2025

  8. Increase in Life Expectancies Life expectancy at 65 Difference More contributors are expected to reach the retirement age of 65. Retirement beneficiaries are expected to receive their benefit for a longer period.

  9. Working Ageand Total Population(Canada) 45 40 35 Total 20-64 30 25 20 Annual increases: Total 20-64 D 1980-2000 +1.1% +1.4% D 2000-2020 +0.8% +0.8% D 2020-2040 +0.5% +0.1% 15 10 5 0 1980 1990 2000 2010 2020 2030 2040 2050 (in millions) 2003 After 2025, almost all projected population increase will come from migration.

  10. Canadian Aging Population 65 and over (in millions) (% of population) 12 25% Increase of 150% From 2005 to 2050 10 20% 8 15% 6 10% 4 5% 2 0 0% 1966 1976 1986 1996 2000 2010 2020 2030 2040 2050 Number % of population

  11. Canadian Aging Population 80 and over (% of population) (in millions) 4.0 10% 9% 3.5 Increase of 250% between 2005 and 2050 8% 3.0 7% 2.5 6% 2.0 5% 4% 1.5 3% 1.0 2% 0.5 1% 0.0 0% 1966 1976 1986 1996 2000 2010 2020 2030 2040 2050 Number % of population

  12. Projected number of years needed to go from 12% to 24% of 65 and over as a % the total population 25 years 30 years 40 years 60 years 65 years 65 years Global Aging 1960 1970 1980 1990 2000 2010 2020 2030 2040

  13. Future Labour Shortage, likely or not? For every 6 who leave, 10 enter Ratio of 60-64 over 20-24 2003 More people leaving than entering after 2015 150% 125% 100% 75% 50% 25% 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Canada United States Source for US: United Nations Projections, 2003

  14. Working Age Population (ages 20-60) (indexed 2000=100) 130 US 120 110 Canada 100 100 90 France UK 80 70 Germany 60 Japan 50 Spain 40 Italy 2000 2005E 2010E 2015E 2020E 2025E 2030E 2035E 2040E 2045E 2050E Source: UN World Population Prospects

  15. Canadian Retirement Security The Canadian retirement system could be viewed as about 40% to 45% funded. 123 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)

  16. Public Pension Replacement Rates Two-Earner Couple One-Earner Couple Single % of Earnings replaced by OAS, GIS and CPP in 2004 120% 100% 80% 60% 40% 30% 40% 20% 0% 20,000 40,000 60,000 80,000 Pre-retirement earnings ($) 38% < $20,000 67% < $40,000 85% < $60,000 94% < $80,000

  17. Income Replacement Rate of Public Pension Plans (Canada and United States, 2002) GIS US Social Security: OASDI Replacement Rate OAS CPP Salary as Multiple of Average Wage

  18. How do we position for the aging of the Canadian population? 3.5% 3.5% 3.0% 3.0% 2.5% 2.5% 2.0% 2.0% 1.5% 1.5% 1.0% 1.0% 0.5% 0.5% $28 billion in 2004; $37 billion in 2010; $110 billion in 2030 Between 2010 and 2030, the ratio of expenditures to GDP increases from 2.4% to 3.2%, driven largely by the retirement of the babyboomers. 0.0% 0.0% 1990 2000 2010 2020 2030 2040 2050 2060 2070 Evolution of Old Age Security Expenditures in % of GDP 2004

  19. How do we position for the aging of the Canadian population? 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. Total Government Financial Balances % of GDP Canada G-7 4 2 0 -2 -4 -6 -8 -10 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: OCDE Economic Forecasts, No. 74 (December 2003); Department of Finance’s Calculations

  20. How do we position for the aging of the Canadian population? • The CPP is a key pillar of Canada’s retirement income system that is worth saving. • The 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. • Available on the CPP website at http://www.cpp-rpc.ca/princips/principe.html Principles to guide the federal-provincial decisions on the CPP : (Agreed on October 1996)

  21. Effect of the 1998 Amendments How do we position for the aging of the Canadian population? : CPP Steady-State Funding • Increase the contribution rate by 65% over 6 years (1997-2003) and keep the same rate thereafter • Moderate the future growth of benefits by 10% on a long-term basis (in 2050). • Creation of the CPP Investment Board to diversify the CPP reserve fund and increase investment returns (www.cppib.ca)

  22. CPP Steady-State Funding • 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 over the foreseeable future and that will result in a Assets/expenditures ratio generally constant over a long period of time.

  23. CPP Steady-State Funding (Ratio) 8.0 7.0 9.9% Legislated contribution rate 9.8% Steady-state rate 6.0 5.0 4.0 In 2020, CPP/QPP assets are projected to be equal to 17% of the GDP. 3.0 2.0 1.0 0.0 2005 2015 2025 2035 2045 2055 2065 2075 Asset/Expenditure Ratio

  24. CPP Steady-State Funding • The current legislated contribution rate is 9.9%. • The steady-state contribution rate is 9.8%. • 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.

  25. CPP Steady-State Funding • If the steady-state rate is higher than the legislated contribution rate AND if finance ministers cannot reach agreement on a 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.

  26. Risk/Return of Asset Classes

  27. CPP Diversified Investments Assumed Mix for 2005-2020 65% Equities (Variable Income) 25% Canadian Equity 30% Foreign Equity 10% Real Estate & Infrastructure 35% Fixed Income 34.5% Bonds 0.5% Cash Assumed Mix for 2025+ 55% Variable Income 15% Canadian Equity 30% Foreign Equity 10% Real Estate & Infrastructure 45% Fixed Income 44.5% Bonds 0.5% Cash

  28. CPP Diversified Investments • CPP Assets invested solely in long-term federal bonds will lead to a steady-state rate of 10.5%. • Our expected investment policy of 65% variable income securities and 35% fixed income securities leads to a steady-state rate of 9.8%.

  29. Framework of an Efficient Retirement System • Diversification of sources of retirement income • Diversification of funding approaches • Reasonable economic cost of public pensions (% of GDP) • Reduction of poverty among seniors • Reduction of income inequalities • Maintenance of standard of living at retirement

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