Federal and provincial governments decided in 2016 to expand the Canada Pension Plan (CPP) to provide enhanced future benefits for workers. The increased contributions and associated benefits are referred to as additional CPP, whereas the historic contributions and associated benefits are referred to as the base CPP. In coming decades, this means that CPP benefits in retirement could replace approximately one-third of a person’s income compared to the current level of approximately one-quarter, up to a certain limit.
CPP Investments received the first additional CPP contribution amounts in January 2019. As a result, there are now two accounts – one for the base CPP and another for the additional CPP contributions. Both accounts have the full advantage of CPP Investments’ global network, expertise, investment strategies and risk governance framework. Our strategy is to build a single, resilient CPP Fund with a view to the strong performance of, and fairness between, both accounts.
Additional CPP and base CPP rely on the importance of investment income in the program’s total revenues over time.
The additional CPP is required to be a “fully funded” pension plan. As such, assets are targeted to equal or exceed the present value of benefits. This includes payments to retirees as well as benefits that contributors have earned to date. When fully mature, investment income is expected to represent about 70% of the additional CPP’s total revenues (investment income plus contributions).
As a result, a fully funded plan is directly sensitive to:
- any changes in the assumed rate of return on investments; and
- any difference in the returns achieved, compared to those expected.
The base CPP is a “partially funded” plan. To maintain a stable contribution rate, the Chief Actuary estimates that income earned from investments will represent about 40% of the base CPP’s total revenues when it is in its mature state.
The base CPP is sensitive to demographic factors like life expectancy, birth rate and immigration rates. It can also be affected by economic changes, including the level of employment and rate of real (i.e., after inflation) wage growth.
Most important, a partially funded plan is less sensitive to investment returns than a fully funded plan.
For both the base CPP and the additional CPP, contributions are set such that current investments plus future contributions are expected to fully pay for all benefits today and in the future. At the same time, we seek to maintain a stable contribution rate for current and future contributors.
The 30th Actuarial Report on the Canada Pension Plan – based on the status of the Fund as at Dec. 31, 2018 – details return-on-investment assumptions over the 75-year period from 2018:
- the base CPP account will earn an average annual net real rate of return of 3.95%; and
- the more conservatively invested additional CPP account will earn an average annual net real rate of return of 3.38%.
Both assumed rates of return are over and above the rate of Canadian consumer price inflation, after all investment costs.