CPP contributions tied to investment income

par Andrew Rickard | October 31 2016 11:30AM

The Canada Pension Plan (CPP) is relying heavily on investment income as a source of revenue. If portfolio performance misses the mark by 1%, contribution rates will have to go up by about a third.

Federal Minister of Finance Bill Morneau tabled the Office of the Chief Actuary’s report on the health of the CPP in parliament on Friday. The report confirms that the new, higher contribution and benefit levels are sustainable over the long term: contributions for the additional CPP are projected to be higher than expenditures until 2058, while additional CPP assets are projected to grow from $1.5 billion at the end of 2019 to $70 billion by 2025, $196 billion by 2030, and $1,330 billion by 2050.

Linked to the market performances

However, the Chief Actuary also points out that the health of the plan depends on how the markets perform. The CPP currently holds assets that are equivalent to a portfolio invested 67.5% in equities and 32.5% in fixed income securities, and from 2019 to 2093 the report is projecting average annual real rates of return of 3.55% for the additional CPP and 3.98% for the base CPP.

"The significant reliance of the additional CPP on investment income as a source of revenues results in a high level of sensitivity of the contribution rates to financial market environments," reads the report. " If the assumed best-estimate real rate of return is decreased by 1.0% for each year over the projection period, the minimum first and second additional contribution rates would increase from 1.93% to 2.55% for the year 2023 and thereafter, and from 7.72% to 10.20% for 2024 and thereafter, respectively. This represents a relative increase of 32%."

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