Evidence of meeting #55 for Finance in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was enhancement.
A video is available from Parliament.
Director, Canadian Pension Plan, Old Age Security, Office of the Chief Actuary, Office of the Superintendent of Financial Institutions
The financing is from general revenue, so we prepare the projections of OAS benefits. Of course, there are no revenues, no contributions, in OAS. We project future benefits every three years.
Conservative
Ron Liepert Conservative Calgary Signal Hill, AB
So you just do an estimate of what they have to pay out, effectively.
Director, Canadian Pension Plan, Old Age Security, Office of the Chief Actuary, Office of the Superintendent of Financial Institutions
Yes.
Conservative
Ron Liepert Conservative Calgary Signal Hill, AB
Have you done any comparative estimates? It would seem to me that if you increase CPP payout benefits, it should decrease OAS benefits, because you only qualify for OAS if your income isn't high. Is that fair enough?
Director, Canadian Pension Plan, Old Age Security, Office of the Chief Actuary, Office of the Superintendent of Financial Institutions
You are right about this. Our next OAS report is due by the end of spring in 2017, and in that report we will need to recognize the impacts of the enhancement.
Conservative
Ron Liepert Conservative Calgary Signal Hill, AB
That means it's going to relieve pressure on the budget that has to be paid out under OAS.
I want to talk a little bit about your comments on the enhanced portion being far more sensitive to the market. If I heard you correctly, you said that the current system is financed 70% contributions, 30% rate on return, and it's flipped around on the enhanced part. Is that correct?
Director, Canadian Pension Plan, Old Age Security, Office of the Chief Actuary, Office of the Superintendent of Financial Institutions
Correct.
Conservative
Ron Liepert Conservative Calgary Signal Hill, AB
So that's putting a lot of pressure on the investment of that fund.
Director, Canadian Pension Plan, Old Age Security, Office of the Chief Actuary, Office of the Superintendent of Financial Institutions
Yes. This is why in the 28th actuarial report we have assumed a different real rate of return than under the base CPP. Because the contribution rates are so sensitive to the rates of return, you want to have more stable returns and maybe a less volatile portfolio. But CPPIB at this point has not implemented any decisions about what they intend to do as an investment policy. They said they are still studying that. We believe that because of the sensitivity—and I think CPPIB is agreeing with this—the monies invested in CPP 2 should be under a portfolio that's less volatile, which will give more stable returns.
Conservative
Ron Liepert Conservative Calgary Signal Hill, AB
Will they be investing this money in two separate accounts, then?
Director, Canadian Pension Plan, Old Age Security, Office of the Chief Actuary, Office of the Superintendent of Financial Institutions
Yes. The current CPP monies will be invested as they are currently by the CPPIB. There will be a separate account set up by the CPPIB for the monies related to the CPP enhancement.
Conservative
Director, Canadian Pension Plan, Old Age Security, Office of the Chief Actuary, Office of the Superintendent of Financial Institutions
The latest actuarial report, the 27th, shows the legislated rate as 9.9%, but our latest actuarial valuation on that base plan, which is the 27th report, said the minimum rate you could charge to sustain the plan over the long term was 9.79%.
Conservative
Ron Liepert Conservative Calgary Signal Hill, AB
So the contributions and the rate of return are effectively paying out the benefits. Is that fair?
Director, Canadian Pension Plan, Old Age Security, Office of the Chief Actuary, Office of the Superintendent of Financial Institutions
Yes.
Conservative
Ron Liepert Conservative Calgary Signal Hill, AB
What is in the enhanced program that would give the government the confidence that when you flip it from 30% to 70%, to 70% to 30%, somehow it's going to be sustainable?
Director, Canadian Pension Plan, Old Age Security, Office of the Chief Actuary, Office of the Superintendent of Financial Institutions
Right now, based on our report and the assumptions we have made, we have come up with minimum contribution rates for the enhanced at 1.93% and 7.72%, and the legislated rates are at 2% and 8%. The rates that I calculate say this is the minimum required to financially sustain the enhanced plan and are lower than what is legislated.
Conservative
Ron Liepert Conservative Calgary Signal Hill, AB
Maybe I don't understand it properly, but I'm having trouble understanding how, if the current plan is breaking even at a 70%-30% contribution, we can feel confident that the enhanced plan is going to actually break even at a flipped-around number of a 70%-30%.
Director, Canadian Pension Plan, Old Age Security, Office of the Chief Actuary, Office of the Superintendent of Financial Institutions
As I said, the contribution rates to the enhancement will be much more sensitive to the investment results.
Conservative
Ron Liepert Conservative Calgary Signal Hill, AB
I would assume then that if the 70%-30% that exists today would be changed in the enhanced plan to, say, 50%-50%, that would mean the contribution rate would have to be even higher. Is that correct?
Director, Canadian Pension Plan, Old Age Security, Office of the Chief Actuary, Office of the Superintendent of Financial Institutions
I'm not too sure where....
Conservative
Ron Liepert Conservative Calgary Signal Hill, AB
In order to make this plan sustainable, but you would only rely on the rate of return at 50% of the plan, instead of 70%, as you suggested, that would mean the actual contributions would have to go up.
Director, Canadian Pension Plan, Old Age Security, Office of the Chief Actuary, Office of the Superintendent of Financial Institutions
The financing objective of the plan is to fully fund the projected future expenditures. When you are in a world where you have to fully fund your benefits, the expectation, and what happens, is that 70% of your revenues will come from investment. To have a 50%-50% would mean that you're not respecting the full funding principle. You'll be somewhere partially funded.
Liberal
Conservative
Ron Liepert Conservative Calgary Signal Hill, AB
I need one quick supplementary.
What I'm getting at is that if you did not rely so much on rate of return to fund your enhanced plan, the only other option would be to have higher contributions.
