1. 2008 Annual Meeting ● Assemblée annuelle 2008 Québec
Canadian
Institute of
Actuaries
L’Institut canadien
des
actuaires
Actuarial Report on the Canada Pension Plan as at 31 December 2006 and its Peer Review Process
2008 Annual Meeting ● Assemblée annuelle 2008
Québec

2. Presentation Purpose of the CPP Actuarial Report
Demographic and Economic Assumptions
CPP, a Partially Funded Pension Plan
Reconciliation and Uncertainty of Results
Strengthening the Accountability and Peer Review

3. Purpose of the CPP Actuarial Report
Tabled by the Minister of Finance on 29 October 2007
Inform on the current and projected future financial status of the Canada Pension Plan
Calculate the minimum contribution rate
The Office of the Chief Actuary is required by law to produce an actuarial report on the Canada Pension Plan every three years. The report is one of the key items considered by federal and provincial finance ministers when reviewing and making recommendations on the CPP. The projections included in this report cover a long period of time- 75 years- and require assumptions on demographic factors such as fertility, migration and mortality, and economic factors including labour force participation, unemployment and investment returns.

4. Consultations on Assumptions
CPP and QPP seminars were organized to get opinions from a wide range of experts in the fields of demography, economics and investments.
Federal and provincial officials attended these seminars.

5. Presentation Purpose of the CPP Actuarial Report
Demographic and Economic Assumptions
CPP, a Partially Funded Pension Plan
Reconciliation and Uncertainty of Results
Strengthening the Accountability and Peer Review

6. Demographic Assumptions
Fertility (Number of births)
Migration
Mortality (Life expectancy)
Disability Rates
Retirement Rates
2006
1956 }
Benefit Assumptions
The demographic projections start with the Canada and Québec populations on 1 July 2006, to which are applied fertility, migration and mortality assumptions.
I will discuss our best-estimate assumptions relating to each component in turn.
Additional info:
We project the populations of both Canada and Québec, and then subtract the population of Québec from that of Canada to derive the CPP population.
If we look at the historical age profile of Canada compared with the projected profile, we see the impact primarily of the baby boomers on the distribution aged mid-30s to 60s in 2006.
Sources: Statistics Canada, U.N. population projections, CPP/QPP Seminars, Human Mortality Database, SSA 2006 U.S. Trustees Report, World Population Reference Bureau, HRSDC

7. Panel’s view: reasonable
Fertility Rate
( Children per woman)
4.2
4.2
4.0
CPP#23
4.0
: 2.82
3.8
CPP#21
3.8
3.6
3.6
3.4
3.4
3.2
3.2
3.0
3.0
2.8
2.8
2.6
2.6
2.4
2.4
: 1.60
23rd CPP Report :
1.60 for 2010+
2.2
2.2
2.0
For Canada, the total fertility rate (average number of children born to a woman in her lifetime) has decreased significantly from an average level of 2.8 children per woman between the mid 50s and late-70s to an average level of 1.6 over the last 25 years.
The total fertility rate has decreased and the average age of motherhood has increased over time.
For this report, a fertility rate of 1.60 was assumed for Canada for 2010 and thereafter. The ultimate assumption of 1.60 is the same as the previous report but is reached six years earlier. The ultimate assumption for Quebec of 1.57 is slightly higher than the previous report due to recent trends. These assumed rates reflect historical trends in fertility by age group over the last 30 years.
Additional info:
Total fertility rate was 1.54 for Canada and 1.51 for Québec in CPP#21 : = 1.60; = 1.55
The assumed rates are higher than the 2004 rates because of continuing trends in women having their first child at later ages due to increased labour force participation, marrying later, and prolonged periods of study in the education system, and to reflect the trends of rates decreasing for younger age groups but increasing more for older age groups.
2.0
1.8
1.8
1.6
1.6
1.4
1.4
1951
1961
1971
1981
1991
2001
2011
2021
2031
2041
2051
Calendar Year
Panel’s view: reasonable

8. Panel’s view: reasonable
Net Migration Rate
23rd CPP Report Assumption:
0.50% for 2007 to 2015
0.54% for 2020+
(same assumption as for CPP21)
Last 50: 0.50%
Last 30: 0.50%
Last 10: 0.56%
The net migration was 0.56% of the Canadian population per year on average over the last 10 years (about 175,000).
The net migration rate is assumed to be 0.50% of the population from 2007 to 2015 (about 170,000). This is the average rate experienced over the last 30 years and corresponds to the same assumption used in the previous report.
Then, from 2015 to 2020, the rate is slowly increased to reach 0.54% to reflect the expected labour shortage.
From 2020 onward, the rate is maintained at 0.54%.
It is the same assumption as in the previous report.
Additional info:
Immigration and emigration are influenced by many factors – demographic, economic, social and political.
For Québec, it was assumed the province would experience net emigration to the rest of Canada of 8,155 in 2006 , decreasing to 5,000 for 2015 and thereafter. Together this results in an average ultimate net migration rate for Québec of 0.4%.
Panel’s view: reasonable

9. Increase in Life Expectancy at 65*
*Life expectancies shown are without assumed future mortality improvements.
Life expectancy at 65
More predictable
Difference
+1.1 years
+1.4 years
More contributors are expected to reach the retirement age of 65.
Retirement beneficiaries are expected to receive their benefit for a longer period.
Panel’s view: reasonable

10. Aging of the Canadian Population
(in millions)
Population 65 and over
Increase of 151%
From 2006 to 2050
Increase of 249% for 80+

11. Working Age Population (ages 20-59) (indexed 2005=100)US
Canada UK
100
France
Spain
Germany
Italy
Japan
Source: United Nations Population Division, World Population Prospects: The 2006 Revision

12. } Economic Assumptions Participation rates
Employment increase (Job creation rate)
Unemployment rate
Inflation rate
Increase of average employment earnings
Interest rate and rate of return by asset class
# of earners
Sources: Historical Trends, Recent Experience, PEAP (U of T), Conference Board,
Department of Finance, CIA Report on Canadian Economic Statistics, Watson Wyatt Economic Expectations Survey, Canada Revenue Agency, Bank of Canada, CPP/QPP Seminars, CPPIB

13. Panel’s view: reasonable
Gap between male and female participation rates will continue to decrease but at a slower pace
Participation Rates of (Canada)
79.3% in 2006
78.3% in 2030
9.0%
8.2%
70.1% in 2030
70.3% in 2006
CPP21
Males in 2030 = 78.3%
Females in 2030 = 68.5%
Projection
The increase in participation rates for those aged 15 to 69, especially for females can be seen on the following graph. The participation rate for males has remained the same at about 79% from 2000 to 2006 , and the rate for females has increased from 67% to 70% over the same period. Further, the gap between male and female rates has narrowed, from about 32% in 1976 to 10% by 2006.
It is assumed that this gap will continue to narrow slowly as female rates generally increase faster than male rates, eventually reaching about 8% by It is quite possible that the gap could narrow more than expected.
Additional info:
By 2030, participation rates for those aged 15 to 69 are projected to be 78% for males and 70% for females. As a whole, the rate will be 74%. This represents a slight increase compared to the 73% in the previous report, which reflects recent higher gains in female participation rates.
It’s anticipated that older workers will feel pressure to remain in the labour force due to the labour shortage.
Panel’s view: reasonable

14. Job Creation Rate (15+, Canada)
2% in 2006
Avg. 0.6% for
Avg. 0.3% for 2018+
Employment growth, or the job creation rate, has varied much historically, as can be seen here.
Over the period from 1976 to 2006, the average job creation rate was 1.8%. The job creation rate is projected based on recent experience and various economic forecasts.
In 2007, the rate is about 1.0%, and then gradually decreases, averaging about 0.6% over the next 10 years, and then reaching a level of 0.3% by Starting from 2007, the job creation rates match the growth in the labour force and as a result the unemployment rate remains flat at 6.3%.
Projection

15. Annual Increase in Consumer Price Index
Average 76-85
8.1 %
Average 66-75
5.6 %
Average 86-95
3.4 %
CPP 23rd Report :
2.0% from 2007 to 2011 increasing to 2.5% in 2016+
Average 96-05
2.0 %
Price increases, as measured by changes in the Consumer Price Index, tend to fluctuate from year to year. Based on the renewed commitment of the Bank of Canada and the Government to keep inflation between 1% and 3% until 2011, a rate of price increase of 2.0% has been assumed for years 2007 to Beginning in 2011, the rate is uniformly increased until it reaches an ultimate rate of 2.5% in 2016.
The ultimate assumption of 2.5% is somewhat lower than the assumption of 2.7% of the previous report.
Additional info:
The five main reasons for this choice of an ultimate assumption of 2.5% are:
The policy of the Bank of Canada may be viewed as being short-term when compared to the 75-year projection of the CPP.
The expected upward pressure on real wages due to the labour shortage may create upward pressure on prices.
There is uncertainty about energy costs.
In Canadian history, the longest consecutive periods with an inflation rate around 2% are the 1900’s, 1920’s, mid-1950s to mid-1960s and 1992 to 2006.
An economic study by the Institute for Research on Public Policy (2001) showed that the optimum inflation rate that would minimize unemployment is about 3%.
CPP21: 2.7% in 2015+
Panel’s view: is within, but towards the high side of, the reasonable range.

16. Annual Increase in Real Wages
Avg : 0.2%
Avg : 1.1%
Assumption CPP 23rd Report:
1.3% (2015+)
In the past, the annual real increase in earnings has fluctuated significantly from year to year. Over the last 50 years the real increase in earnings has averaged 1.1%, and over the last 25 years it has averaged 0.2%.
We assume a gradual increase from 0.2% in 2007 to an ultimate level of 1.3% for 2015 onward. This assumption reflects that growing labour shortages are assumed to cause increases in real wages as a means to attract and retain qualified workers.
Our assumption is lower (more prudent) than the forecasts of both the Conference Board and U of T.
However, our ultimate assumption of 1.3% is slightly higher than in the previous report.
Additional info:
The real increase in average annual earnings for 2006 was 0.9%.
CPP21: 1.2% in 2012+
Panel’s view: reasonable but somewhat low within the range of expert opinion.

17. Real Increase of Total Employment Earnings (18-69, Canada less Québec)
1.9%
1.6%
1.6%
0.9%
1.3%
1.3%
The increase in real total earnings is composed of the increase in real wages and the increase in earners.
Ultimately, real total earnings is expected to grow by 1.6% (1.3% from the real increase in earnings and 0.3% from the increase in number of earners), or 4.1% including inflation.
The projected real increase is ultimately slightly higher than in the previous actuarial report.
Additional info:
These figures are for the CPP population (Canada less Québec, 18-69).
Ultimately we have a total real increase of 1.6% or 4.1% including inflation. This compares to a real increase of 1.5% or 4.2% nominal increase under the previous report.
1.0%
0.3%
0.3%
1.5%
1.5%
CPP21
1.6%
CPP21
CPI
Nominal
Real
2.2
3.8
1.6
2.7
4.2
1.5
Tot Earnings
CPP23
CPI
Nominal
Real
2.1
4.0
1.9
2.5
4.1
1.6
Tot Earnings

18. Evolution of CPP Asset Mix
CPP reference portfolio consists of 65% equity and 35% debt
Evolution of CPP Asset Mix
Fixed Income
Equity
Inflation-Sensitive
2007
28%
65% 7%
2010
30%
60%
10%
2015
2020
35%
55%
2025
40%
50%

19. Real Rate of Return by Asset Class
( ) CPP23 (2025+) CPP21 (2033+)
Rate Mix Rate Mix
Canadian Equities: (3.5%) % % % %
Foreign Equities: (3.5%) 5.1% % % %
RE & Infrastructure: (2.9%) % % % %
Marketable Bonds: (2.7%) % % % %
Cash: % % % %
Total Real Return % %
For Canadian equities, our assumption is set at 5.1%, compared to 4.6% in the previous report. The average real rate of return of the S&P/TSX over the last 35 years is 6.2%.
For Foreign equities, our assumption is set at 5.1%, compared to 5.0% in the previous report. The average real rate of return over last 35 years of the S&P 500 is 6.9%
For the Real estate & Infrastructure asset class, our assumption of 3.95% falls between the returns of GOC bonds and equity.
The assumption on marketable bonds is 3.2% as explained in previous slide.
Cash is equal to the average real rate of return of federal 91-day T-Bills over the last 60 years.
The long-term real rate of return stands at 4.2%, which is somewhat higher than under the previous actuarial report. However for the first ten years of the projection, the average real return is lower at 3.8% to reflect the assumed gradual increase in the equity risk premium from 1.2% in 2007 to 2.3% in 2015.
Additional info:
Over the last 50 years, the historical average is 5.8% for the S&P/TSX and 6.8% for the S&P 500.
Average Real Rate of Return ( ): 3.8%
Panel’s views: is within, but towards the low side of, the reasonable range.

20. Presentation Purpose of the CPP Actuarial Report
Demographic and Economic Assumptions
CPP, a Partially Funded Pension Plan
Reconciliation and Uncertainty of Results
Strengthening the Accountability and Peer Review

21. CPP, a Partially Funded Pension Plan
Steady-state funding: replaces the original pay-as-you-go financing to build a reserve of assets equivalent over time to about five and a half years of benefit expenditures or about 25% of Plan liabilities.
Incremental full funding: requires that changes to the CPP that increase benefits or add new benefits be fully funded (eg: increase in eligibility for disability benefits for long-term contributors).
The major reform package of the CPP agreed to by the federal and provincial governments in 1997 included significant changes to the Plan’s financing and funding provisions.
Steady-state funding introduced fuller funding to the existing pay-as-you-go financing in order to build a reserve of assets equivalent over time to about five and a half years of benefit expenditures or about 25 per cent of Plan liabilities. Investment earnings on this pool of assets would help stabilize the contribution rate and ensure the financial sustainability of the Plan. In addition, this pool of assets would help pay benefits when the large cohort of baby boomers retires.
Incremental full funding requires that changes to the CPP that increase or add new benefits be fully funded, i.e. that their costs be paid as the benefit is earned and any costs associated with benefits that are paid but have not been earned be amortized and paid for over a defined period of time consistent with common actuarial practice.
Both of these funding principles were introduced to improve fairness and equity across generations. The move to steady-state funding eases some of the contribution burden on future generations while under full funding, each generation that receives benefit enrichments is more likely to pay for it in full so that its costs are not passed on to future generations.

22. CPP, a Partially Funded Pension Plan
Sources of Income
CPP follows the 70:30 Rule (Contributions : Investment Earnings).
When the A/E ratio reaches approximately 5.5, 30% of revenues will come from investment earnings.
Sources of income of fully-funded pension plans are the opposite (the 30:70 Rule).
How annual benefits are paid
From 2007 to 2019, contributions exceed benefits.
Once the A/E ratio reaches about 5.5, annual contributions will equal approximately 90% of annual benefits paid.
In 2030, 27% of investment earnings is required to pay benefits.

23. CPP, a Partially Funded Pension Plan
Evolution of the Asset/Expenditure Ratio
9.9% Legislated rate
9.82% minimum contribution rate
The Asset/Expenditure ratio is an important measure of the Plan’s funding status – it is the ratio of assets at the end of one year to the expenditures of the next year.
The growth rate of the ratio slows between 2015 and 2035 due to the retirement of the baby boom generation, which will increase the cash outflows of the Plan.
The graph of the A/E ratio calculated using the minimum rate is below the one calculated using the legislated rate, as shown in this graph.
Additional info:
Under the legislated rate, this ratio is projected to increase quickly over the next decade reaching five (5.5) in Thereafter, it slowly increases to over six (6) after 2048.
The minimum contribution rate of 9.82% consists of two components:
The steady‑state contribution rate of 9.80% is the lowest level contribution rate applicable after the end of the review period, that results in the asset/expenditure ratio being the same in the 10th and 60th year following the end of the review period. The end of the review period is 2009, so the steady-state rate is applicable for 2007 and thereafter; the relevant years for determining the steady-state rate are 2019 and The steady-state rate produces an A/E ratio value of 5.4 in 2019 and 2069.
The full funding rate for Bill C-36 which increases eligibility to disability benefits for long term contributors is 0.02%
SS A/E ratios: 5.4 in 2019 and 2069

24. Presentation Purpose of the CPP Actuarial Report
Demographic and Economic Assumptions
CPP, a Partially Funded Pension Plan
Reconciliation and Uncertainty of Results
Strengthening the Accountability and Peer Review

25. Reconciliation of the Minimum Contribution Rate
Higher projected life expectancies have more than offset better-than-anticipated experience
Reconciliation of the Minimum Contribution Rate
Minimum
Rate
Actuarial Report as at 31 December 2003
9.77
Better investment experience (2004 to 2006)
(0.09)
Higher participation and job creation rates (2004 to 2006)
(0.04)
Contribution rate with no change in assumptions
9.64
Higher projected life expectancies
0.16
More people asking their retirement benefit at age 60
0.05
Others (including Bill C-36)
(0.03)
Report as at 31 December 2006
9.82
The minimum contribution rate of 9.82% is slightly higher than the 9.77% of the previous actuarial report. Better than anticipated economic experience, especially regarding investment performance over the period 2004 to 2006 has put a downward pressure on the minimum contribution rate to 9.64%. However a more costly demographic outlook, due to the continuing increases in life expectancy, combined with higher than anticipated early retirement benefit uptake has put upward pressure on the contribution rate.
Additional info:
Retirement assumptions increase the minimum contribution rate by 0.05 due to higher than anticipated early retirement benefit uptake. For males, the rate at age 60 is assumed to increase from its 2006 level of 37% to 40% for years 2009 and thereafter. For females, this rate is assumed to increase from 43.5% in 2006 to 45% in 2009 and thereafter. In the previous report, rates were assumed to be 32% and 38% for males and females respectively, a difference of about 7 to 8%. At the same time, the proportion of contributors aged 60 to 64 has been reduced from 51% to 42% for males, reflecting the trend that more and more CPP retirement beneficiaries are working and not contributing. For females, there is still an increase from 33% to 35% because of projected higher participation rates. (Source: year 2025, Tables 40 and 58)
When the proportion of active population and contributors for males are compared, there is a reduction from 6% (and 57% to 51% in CPP21) to 15% (57% to 42% in CPP23) between the two reports. For females, the reduction is from 5% (38% to 33% in CPP21) to 8% (43% to 35% in CPP23).
60-64 Male participation rates: same at 57%; Female participation rates: from 38% to 43% (Source: Year 2030, Tables 34 and 52);
Others: Bill C-36 increases the minimum contribution rate by 0.02 to fully fund the increase in disability benefits. Other assumptions reduce the minimum rate by The combination of these factors reduces the minimum contribution rate by 0.03.

26. Uncertainty of Results
Younger and Older populations  9.1% and 10.7%.
Equity shock -10% in both 2009 and 2010  9.82% to 9.98%. Assets reduced by $28 billion by end of 2010.
Individual tests show that minimum rate could vary significantly from best-estimate if other than best-estimate assumptions are realized over projection period. Examples are :
Higher Life Expectancies at 65  9.82% to 10.2%
Males 25 vs. 22 years in 2050 (currently 19)
Female 28 vs. 24 years in 2050 (currently 22)
Higher retirement benefit uptake at age 60  9.82% to 10.0%
Males from 40% to 60%
Females from 45% to 65%
All information presented here appears in the Executive Summary of the report.
For the first set of sensitivity tests, two demographically based scenarios were developed that portray a generally younger and older population. The economic outlook under both demographic alternatives was also adjusted to reflect the anticipated effects of a modified demographic environment on the main economic variables that affect the Plan. The younger and older population scenarios produced minimum contribution rates of 9.1% and 10.7%, respectively.
The second set of sensitivity tests focus on the impact that equity market shocks could have on the financial sustainability of the Plan. A nominal equity return of -10% in 2009 and 2010 would reduce the assets of the CPP by $28 billion by the end of 2010, which is comparable to nine months of contributions paid to the Plan in As well, the minimum contribution rate would increase by 0.16% to 9.98%, almost 10%.
The final set of sensitivity tests focus on varying the key assumptions individually. These tests show that the minimum contribution rate could deviate significantly from its best-estimate of 9.82% if other than best estimate assumptions were to be realized. For example, if life expectancies at age 65 were to increase by three more years than the best-estimate of this report by 2050, then the minimum contribution rate would increase to 10.2%. Furthermore, if early retirement were to increase at age 60 by another 20 basis points, then the minimum contribution rate would increase to 10%.

27. Presentation Purpose of the CPP Actuarial Report
Demographic and Economic Assumptions
CPP, a Partially Funded Pension Plan
Reconciliation and Uncertainty of results
Strengthening the Accountability and Peer Review

28. Strengthening the Accountability in 1997
Federal and provincial governments took meaningful steps to strengthen the transparency and accountability of actuarial reporting. They endorsed plans:
to review the CPP every three years, instead of every five years as before. Therefore, frequency of actuarial reporting was increased to three years with a further requirement to produce the report within one year of the valuation date.
to consult regularly with experts on assumptions to be used in actuarial reports;
to establish regular peer reviews of future actuarial reports on the CPP.
to supply actuarial information to Canadians in a timely manner.
The federal and provincial governments, as co-stewards of the CPP, took meaningful steps to strengthen the transparency and accountability of actuarial reporting on the CPP. Namely, the Ministers of Finance endorsed plans to increase the frequency of actuarial reporting from every five years to every three years, to consult regularly with experts on assumptions to be used in actuarial reports and to establish regular peer reviews of actuarial reports on the CPP.

29. CPP has been peer reviewed four times since 1998
Role of the Auditor General and Selection Process
Three press releases (14 May 2007, 6 September 2007, 21 April 2008)
Overseeing of the Peer Review by GAD
Selecting the Canadian actuaries
Providing an opinion of the review (28 April 2008)
In 1999, federal and provincial finance ministers took steps to strengthen the transparency and accountability of actuarial reporting on the CPP. They endorsed regular peer reviews of such reports and consultations by the Chief Actuary with experts on the assumptions to be used in actuarial reports.
Selection Process of the Current Panel for Peer Review
In the past, the panel was selected by OSFI. However, due to a heightened sensitivity to the need for independence in this process, we felt that the selection of the panel should be independent of OSFI. As suggested by the Auditor General, we entered into an agreement with the United Kingdom Government Actuary’s Department (GAD) to select the independent Canadian actuaries to perform the peer review and to provide an opinion on the work done by the reviewers upon completion of the review.
Terms of Reference
The independent panel has three months to perform the peer review. Their report should contain opinions on the following five questions:
Is the professional experience adequate for carrying out the work required?
Has the work complied with professional standards of practice?
Did the Chief Actuary have access to the information required?
Were the actuarial methods and assumptions used reasonable?
Does the actuarial report fairly communicate the results?

30. 23rd Actuarial Report on the Canada Pension Plan as at 31 December 2006 and its Peer Review Process
Presentation to the Canadian Institute of Actuaries Annual Meeting, Quebec City
Thank you
20 June 2008