October 2007

Canadian Experience in

Public Pension Fund Management and Operations

Asia-Pacific Finance and Development Center Conference

Content

Canada’s retirement income system (RIS) 11

1997 reforms 1997 reforms 33

Challenges facing the Canada Pension Plan 22

Achieving sustainability Achieving sustainability 44

3

Canada’s Retirement Income System

Old Age Security (OAS)–Guaranteed minimum income for seniors, regardless of employment history; publicly funded through taxes

Canada Pension Plan (CPP)–Public plan, partially funded, defined benefits and mandatory contributions based on employment

Tax Deferred Private Savings and other savings–Mixture of mandatory and optional savings, funded by individuals and employers

4

The Public Pillars(2007 figures)

Old Age Security

Guaranteed IncomeSupplement

CPP

C$ 5,950

C$ 7,513Maximum reduced for other

income

C$10,365 Based on maximum

contributions and age 65 retirement

5

Canada’s Retirement Income System

Tax-assisted private savings

43%

Old Age Security32%

Canada Pension Plan

25%

Total: $87 billion for 2004

6

Proportion of pre-retirement earnings replaced by public pensions in 2006

0%

20%

40%

60%

80%

100%

120%

140%

160%

15,000 30,000 60,000 90,000

Pre-retirement earnings (C$)

replacement70 per cent

Two-income couples

One-Income couples

Single

7

The Canada Pension Plan (CPP)

• Provides all workers in Canada with a taxable basic earnings-related retirement pension indexed to prices – Benefit replaces earnings up to 25% of average

industrial wage– Also provides modest survivor, disability and death

benefits

• Financed by:– Mandatory employer/employee contributions on

earnings up to average wage – Investment earnings (in the future)

Content

The CPP and the retirement income system (RIS) 11

1997 reforms 1997 reforms 33

Challenges facing the Canada Pension Plan22

Achieving sustainability Achieving sustainability 44

9

The CPP: From 1966 to1995

• Pay-as-you go system with a small reserve– Reserve invested solely in non-marketable

government bonds at below market interest rates

• Contribution rates remain modest despite benefit enrichments and rising cost pressures

• Future generations to pay far more – contribution rates scheduled to nearly double to 10.1 per cent (2016)

10

Post 1995: Financial Instability

• 1995 Actuarial Report projects – depletion of small asset reserve by 2015 – inability to pay promised benefits at the

projected 10.1% contribution rate thereafter – with costs expected to continue to rise the

contribution rate would be need to be raised to over 14 per cent by 2030.

• Actuarial report prepared by plan actuary and required under CPP legislation

11

Main problem facing the Plan: RISING COSTS

• Shifting demographics, notably a declining ratio of contributors to beneficiaries;

• Slower earnings growth;

• Successive benefit enhancements since inception; and

• Escalating disability benefit expenditures in the previous decade due to looser administration and eligibility requirements.

Content

The CPP and the retirement income system (RIS) 11

1997 CPP reforms 1997 CPP reforms 33

Challenges facing the CPP prior to reforms 22

Success and observations Success and observations 44

13

Public Consultations

• Sought Canadian’s views on solutions.

• Broad public consensus emerged that: – CPP should remain a public defined benefit pension plan;

– Contribution rates over 14 per cent unacceptable – current contributors should pay a “fairer” share of Plan costs;

– Pre-funding desirable but assets must be invested at arm’s length from government;

– Benefit reductions for those already receiving a pension should be avoided.

14

The Reform Package• Three-pronged approach to restoring

financial sustainability– Significantly, and quickly, increased contribution

rates to a level sustainable over the long term (i.e., 9.9 per cent from 2003 onward)

– Adoption of a new investment policy with assets invested in marketable securities at arm’s length from governments

– Changes to benefits and their administration to slow expenditure growth.

15

Move Towards Partial Pre-Funding

• Contribution rate to cover the actuarially fair cost of new entitlements plus a share of the unfunded burden that had built up.

• CPP would build up significant asset pool - equal to about 5 years of benefits or about 25 per cent of Plan liabilities.

• Investment earnings on Plan assets would help to pay future benefits that otherwise would be financed by higher contributions.

16

New Investment Policy• CPP Investment Board (CPPIB) established to manage

assets – Independent from the federal and provincial governments – Governed by a qualified board of directors.

• Assets invested in a diversified portfolio of securities (instead of only bonds) to get higher returns

– New fund expected to generate higher real return– Subject to similar investment rules as other pension funds.

• CPPIB to provide quarterly financial statements and annual reports on performance of the investments.

17

Investment Board Structure: Balances Independence and Accountability

• Independence:

– clear mandate to invest in sole interest of plan members

– independent directors– full discretion to set its

own management structure, and operating & investment policies

•Accountability:Board must keep Parliament and public well informed:

– transparent investment policies, standards, procedures

– detailed annual report, tabled in Parliament

– bi-annual meetings in participating provinces

18

Benefits and Administration

• No changes to benefits already in payment.

• Key measures taken to slow the growth of expenditures:– New formula for calculating the retirement benefit; – Administration and eligibility for disability benefits tightened;– Death benefit reduced and frozen at C$2,500;

• By 2030, projected expenditures reduced by almost 10%.

19

Strengthening Governance

• Strengthened stewardship through more frequent actuarial reporting and financial reviews by governments

• Legislative requirement that future benefit improvements or new benefits be fully pre-funded

• Default provisions set out in law• On-going efforts

Content

The CPP and the retirement income system (RIS) 11

1997 CPP reforms 1997 CPP reforms 33

Challenges facing the CPP prior to reforms 22

Achieving Sustainability Achieving Sustainability 44

21

CPP Today• Financial sustainability restored:

– 9.9 % contribution rate has been in place for a decade and Plan is projected to be sustainable at this rate for at least the next 75 years

• CPPIB recognized as a model internationally of transparent, arm’s length and professional management of public pension funds – Assets totalled C$120.5 billion as at June 2007

22

Growing and Diversified Portfolio of Assets

30,67825.5%

5,5914.6%

4,1073.4%

2,1491.8%

30,11525%

47,88039.7%

Canadian Equities Foreign Equities Nominal Fixed Income

Real Estate Inflation Indexed Bonds Infrastructure

Investment Asset Mix Investment Asset Mix ( in billions of C$)( in billions of C$)

23

Tough changes made possible by. . .

1) The time was right for reform– General economic and financial context buttressed

reform resolve.

2) Public consultations framed an acceptable/balanced package.

3) Concrete measures built confidence that the Plan would be fixed for good

– New investment policy was key– Measures to strengthen Plan governance/ accountability.

4) Federal-provincial decision-making held agreement together.