The Canada Pension Plan, on new terrain

Around this time a year ago, we argued that provincial and federal governments in 2016 chose to transform rather than merely expand the Canada Pension Plan. With the publication of the financial sustainability regulations for the enhanced CPP benefit, the nature of that transformation has become clearer.

The sustainability regulations dictate what happens if a funding shortfall develops in the plan, whether because of investment losses, poor market returns, or any other reason. Right now, in the existing (“base”) CPP, benefit levels and contribution rates adjust equally (and automatically) if finance ministers are unable to agree on how to respond to a deficit. By freezing indexation and raising contribution rates, the CPP’s insufficient rates mechanism spreads the pain between pensioners, workers, and employers.

The financial sustainability mechanism in the enhanced CPP is very different. It contemplates reductions in benefits in the first instance; only secondarily, if the shortfall is sufficiently large, do contributions rise. Moreover, immediate reductions in indexing and future benefit accruals occur in response to a “triggering event” caused by a funding shortfall. The practical effect is to place more of the burden of adjustment on workers and pensioners, and to insulate employers from contribution increases. In the words of the Office of the Chief Actuary, “the initial actions are always focused on benefit adjustments of current and future beneficiaries,” with the explicit goal of preserving contribution rates. This shift in priorities is particularly troubling, because the fully-funded enhanced CPP benefit is far more sensitive to investment returns than the base CPP (about four times as sensitive).

The notion that CPP retirement benefits would be scaled back when markets drop – and rise when investment returns create a surplus in the fund – likely diverges from many Canadians’ expectation of a stable and predictable CPP retirement pension. It also conflicts with the the Government of Canada’s own characterization of the CPP as a defined-benefit plan which “provides a secure, predictable benefit, which means that Canadians can worry less about outliving their savings, or having their savings impacted by significant market downturns.” While the Canada Pension Plan was never a pure DB-type plan, the additional benefit looks far more like a contingent, target benefit than the CPP’s originators probably ever imagined or intended.

During the 1996 debate over reforming the funding structure of the CPP, several groups, including the Canadian Labour Congress, opposed the move away from pay-as-you-go funding toward a more fully-funded CPP. In more recent times, minority voices have also challenged the requirement for fully funding any expansion of the CPP. This question, settled in the 1990s, may yet again be debated in the future.

Below are recommendations made to the government’s consultation on the CPP financial sustainability regulations.

1. The current consultation process with respect to important regulatory changes to the Canada Pension Plan is inadequate.

In designing the arcane financial sustainability provisions of the enhanced benefit, the CPP’s stewards have taken momentous decisions regarding the enhanced CPP, and potentially, the plan as a whole. The funding outcomes of these recent decisions regarding the financial sustainability provisions, contrary to the stated objectives of a “secure and predictable benefit” can in fact cause cuts in benefits and increases in contributions that are not predictable, with direct impacts on workers, employers and beneficiaries.

In technical discussions in 2017, the Department of Finance and the Office of the Chief Actuary consulted the actuarial profession on different options for an automatic adjustment mechanism. As part of the process of ensuring provincial finance ministers were prepared to agree to the proposed financial sustainability provisions, provincial governments were also consulted in the development and refinement of the regulations.

Absent in this “backroom” process has been any prior and meaningful consultation with Canadians, generally about the priorities reflected in the financial sustainability provisions. While the workings are complex and technical, the adjustment mechanism embodies quintessentially normative and value-laden decisions. These decisions were made without asking contributors and beneficiaries for their views, and instead resulted from discussions between government and actuaries. The current 30-day public consultation, begun in October and concluding in November 2018, comes at the conclusion of a long process of consultation and regulatory development restricted to the actuarial community and provincial governments. The restricted and late-stage nature of this public consultation is woefully inadequate, given the magnitude of the decisions reflected in the proposed financial sustainability regulations. It is doubtful many Parliamentarians are even aware of what is being proposed here, much less members of the public.

Between 2009 and 2017, a genuinely national public debate occurred in Canada over whether to expand the CPP, involving dozens of civil society organizations, business associations, unions and labour organizations, anti-poverty organizations, student groups and seniors networks, academics, actuaries and pension industry professionals. From the standpoint of democratic participation, and the broader public policy debate that should have accompanied the significant innovation, which characterizes the additional CPP’s financial sustainability measures, the consultation process has been wholly insufficient. In particular, a more explicit and well-grounded conception of intergenerational equity underpinning the financial sustainability regulations should be widely debated.

2. The Office of the Chief Actuary should be required to conduct more extensive sensitivity analyses.

As explained in the accompanying technical paper, the Chief Actuary’s stochastic modelling underpinning the probability analysis of a triggering action incorporates a range of different financial market assumptions. In our view, these scenarios should be broadened to include differing economic and demographic environments, as well as financial market assumptions. Some emphasis on investment return assumptions in modelling the entirely pre-funded additional CPP benefit is warranted, but other variables are equally important. These include future wage growth, labour force participation, and mortality rate trends. A proper uncertainty for the enhanced CPP analysis would encompass variability in all these key actuarial assumptions, including possible correlations.

As the peer review panel of the 27th CPP Actuarial Report highlighted, a range of further assumptions not only have intrinsic uncertainties, but could also be affected by the CPP enhancement :

• enhanced CPP pensions could in the long run affect labour-force participation rates at older ages and the timing of CPP pension claims;
• higher employer contributions to the CPP and a possible decline in the size of enterprise-based pension plans could affect the ratio of earnings to total compensation;
• increased CPP contributions and benefits could affect the future economic environment; and
• CPP beneficiaries receiving increased benefits could influence mortality rates.

For these reasons, the criteria for assessing the sufficiency of the first and second additional contribution rates need to be tested under different demographic and economic environments, and not just varying financial market assumptions.

3. The Office of the Chief Actuary should be required to report to Canadians and Parliament on the benefits of the CPP.

Since 2010, the CPP consolidated financial statements in the CPP annual reports and Public Accounts of Canada have been modified to include further relevant and more complete information, with the objective of educating readers and explaining how different measures should be interpreted. On the recommendation of the Office of the Auditor General of Canada, more complete information has been added regarding the financing of the CPP, the long-term financial sustainability of the CPP as assessed by the statutory actuarial reports, and the actuarial balance sheets under both open and closed group approaches. As the Office of the Chief Actuary notes, “it was felt such multiple disclosures will [provide] all stakeholders with accurate, appropriate and comprehensive information that enables informed decisions to be made.”

The Public Pensions Reporting Act should be amended to require the Chief Actuary to compile a detailed report showing not only the costs and required contribution rates, as at present, but also the benefits of the CPP to Canadians, disaggregated by sex, income, cohort, region and other variables. Further, since the net value of CPP benefits depends on the extent to which they trigger reductions in Guaranteed Income Supplement benefits and increases in income taxes, the report should also show the impacts of CPP benefits on recipients’ disposable incomes. The Minister should be required to table this report in Parliament, in addition to any cost certificate, valuation report, or assets report filed with the Minister as required by the Public Pensions Reporting Act. Contributors and beneficiaries would then be able to understand and assess the benefits of the CPP in an appropriate context, and not just the funding and cost of the program.


The CPP’s stewards have elected to adopt a more complex and value-laden approach to automatic adjustment in response to a triggering event resulting from a shortfall or funding excess. The ramifications of this decision are likely to be profound. One of many consequences will be to deepen the government’s communications challenge of explaining to Canadians how their benefit is calculated and adjusted. Additionally, the government will have to explain how and why what Canadians understand as a secure, predictable benefit may be affected by investment return volatility. Given the significance of the proposed financial sustainability approach, a wider public discussion is warranted. It’s not too late to launch a properly broad consultation regarding these regulations.

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