Review of the 31st Actuarial Report on the Canada Pension Plan

Executive summary

Authors

This report was prepared by a review panel of three independent actuaries: Stephen Butterfield, Fellow of the Canadian Institute of Actuaries, Michel St. Germain, Fellow of the Canadian Institute of Actuaries and Fellow of the Society of Actuaries, and Jill Wagman, Fellow of the Canadian Institute of Actuaries and Fellow of the Society of Actuaries.

Terms of reference

The panel conducted its review of the 31st Actuarial Report on the Canada Pension Plan in accordance with the following terms of reference:

The peer reviewers will review the work performed by the Chief Actuary in completing the 31st Actuarial Report on the Canada Pension Plan as at 31 December 2021. Following their review, they will provide a report to the Chief Actuary and the UK Government Actuary’s Department (GAD). GAD will then provide its opinion of the peer review to the Chief Actuary.

The review report must contain opinions on the following questions:

1. Is the professional experience of the Chief Actuary and their staff who worked on the report adequate for carrying out the work required?
2. Has the work been completed in compliance with the relevant professional standards of practice and statutory requirements?
3. Did the Chief Actuary have access to the information required to perform the valuation, and were relevant tests and analysis on the data completed as might be expected?
4. Were the actuarial methods and assumptions used in completing the report reasonable?
5. Does the 31st Actuarial Report fairly communicate the results of the work performed by the Chief Actuary and their staff?

In providing opinions on the questions listed above, the peer reviewers must also provide such recommendations as they deem appropriate with respect to future actuarial reports on the Canada Pension Plan prepared by the Office of the Chief Actuary.

31st Actuarial Report on the Canada Pension Plan (AR31)

AR31 was prepared as at December 31, 2021.

The purpose of the report is to inform contributors and beneficiaries of the current and projected financial states of the base CPP and the additional CPP. The report provides information to evaluate the financial sustainability of the CPP over a long period, assuming that the legislation remains unchanged. This information facilitates a better understanding of the financial state of the CPP and the factors that influence costs, and thus contributes to an informed public discussion of issues related to the finances of the CPP.

The main results included in AR31 are as follows:

• Base CPP: The Minimum Contribution Rate is 9.56% for the years 2025 to 2033 and 9.54% for the years 2034 and thereafter, which is lower than the current 9.9% legislated contribution rate.
• Additional CPP: The First Additional Minimum Contribution Rate is 1.97% which is slightly lower than the legislated first additional contribution rate of 2.0% and the Second Additional Minimum Contribution Rate is 7.88%, which is slightly lower than the legislated second additional contribution rate of 8.0%.

Therefore, the current legislated contribution rates are sufficient to meet the minimum contribution rates. There are other important metrics disclosed in AR31 either to satisfy mandatory disclosures or to assist the readers of the report in understanding the future viability of the CPP.

AR31 also presents the results of several sensitivity tests that show how different the results would be if specific assumptions were varied and scenario analyses that show results if various scenarios were to occur in the future.

With the exception of the sensitivity tests and scenario analyses, all results represent the Chief Actuary’s current “best estimates”, with no deliberate margins of conservatism or other bias.

Opinions

With respect to the five questions included in the terms of reference, it is our opinion that:

1. The professional experience of the Chief Actuary and their staff who worked on AR31 was adequate for carrying out the work required.
2. The work on AR31 was completed in compliance with all relevant professional standards of practice and statutory requirements.
3. The Chief Actuary had access to the information required to perform the valuation and completed such relevant tests and analysis on the data as might be expected.
4. The actuarial methods used in completing AR31 were reasonable, and the assumptions were also reasonable, both individually and in the aggregate.
5. AR31 fairly communicated the results of the work performed by the Chief Actuary and their staff who worked on the actuarial report.

The remainder of this report provides and discusses the bases for these opinions, including corresponding observations and recommendations with respect to future actuarial reports.

Recommendations

We compliment the Chief Actuary and the staff of the Office of the Chief Actuary (OCA) who prepared AR31 on their competence, commitment and professionalism. They were very helpful in clarifying issues raised by the review panel and in providing additional information. In the spirit of seeking to help the Chief Actuary and their staff to continue improving their work, our report includes the following recommendations:

Recommendation 1

The report states that all assumptions are “best-estimate” assumptions which we agree is appropriate and consistent with the CPP legislation. However, we recommend that the rationale for using “best-estimate” assumptions be made clearer in the report.

Recommendation 2

In developing actuarial assumptions, the OCA tends to make extensive use of historical information, while noting recent trends and current market conditions. We recommend that the OCA adopt a more forward-looking process for developing actuarial assumptions, and that stronger consideration be given to current market expectations on interest and inflation rates.

Recommendation 3

We recommend that the OCA increase their use of benchmarking information to support the selection of assumptions. This benchmarking information may come from other pension plans, other government entities, the social security systems of other countries, etc. We acknowledge that there are few benchmarking opportunities that consider the long-time horizon inherent in the valuation of the CPP, but the information may still be useful for the first 20 – 30 years of the projections.

Recommendation 4

In developing the assumed rates of mortality, we recommend that consideration be given to enhancing the analysis of the pension level bands to have different pension bands for males and females, given the distribution of pensions is quite different. This analysis may improve the mortality assumption if adopting different bands for men and women. While the results of this further analysis may not result in material differences in cost projections, we recommend that the relationships be reviewed to confirm their materiality.

Recommendation 5

While immigration policies are political and thereby volatile, we recommend that the OCA devote more time and resources to understanding past trends and future expectations for immigration to strengthen the rationale for the assumed rates of immigration after 2024. The overall assumptions result in a slowing of the growth in the population over time. It is recommended to consider whether it may be reasonable to expect higher immigration to stem this slowdown in growth and to address the challenges of labour shortages.

Recommendation 6

We recommend that the OCA devote more time to better develop the assumption for Non-Permanent Residents. Prior to the COVID-19 pandemic, the number of Non-Permanent Residents increased substantially and we recommend that further analysis be conducted in order to strengthen the rationale for the assumption that the net number of Non-Permanent Residents will remain static in the future. We also recommend that the OCA better understand how Non-Permanent Residents will affect future immigration, including the number of immigrants and the characteristics of future immigrants.

Recommendation 7

We recommend that more thought be given to the assumed workforce participation rates for older workers. Current and future socio-economic conditions may result in more older workers remaining in the workforce longer than assumed. This is supported by recent trends in the participation rates, comparison of Canadian participation rates vs other similar countries, global trends toward increasing the retirement age, and the effect of labour shortages.

Recommendation 8

We recommend that the report provide greater clarity on the rationale for basing the assumed future investment returns on the strategic investment policy rather than the reference investment policy as investment theory would suggest that two investment policies with the same risk levels should have the same expected returns.

Recommendation 9

We recommend that the OCA continue to seek out more information on the development of assumed discount rates for other large pension plans, including the assumed returns by asset class and taking into account the differences in margins for adverse deviations included in the assumptions, investment expenses and value added by active management.

Recommendation 10

We recommend that the rationale for the gradual decrease in the risk characteristics of the investment portfolio be more fully justified. We note that we generally agree with the assumption that the investment portfolio will gradually be de-risked, but the timing and extent of such de-risking is unclear and not sufficiently justified. We note also a lack of formal policies in place to help the Chief Actuary further justify this assumption.

Recommendation 11

We note that disability incidence due to mental health related issues appears to be increasing. While the definition of disability in the CPP may preclude certain mental health related claims, in conjunction with the implementation of the government of Canada’s Disability Inclusion Action Plan’s First Pillar – Financial Security, we recommend that this area be monitored closely to determine whether a corresponding change in disability incidence assumptions is warranted for the purpose of the valuation of the CPP.

Recommendation 12

We recommend that the OCA devote more resources to the assumption of earnings distribution around the average as the importance of this assumption is likely to grow as more service is accrued under the additional CPP.

Recommendation 13

We recommend that the information for each sensitivity test not only include the effect on the MCR, FAMCR and SAMCR, but also disclose the extent of the change in assumption that would result in the MCR, FAMCR and SAMCR exceeding the legislated contribution rates. For example, what real wage growth would have to occur for the MCR to exceed the legislated contribution rate for the base CPP?

Recommendation 14

We recommend that the OCA provide more information in the report with respect to the overall risk that the legislated contribution rates will be insufficient to support the benefits. While the individual sensitivity information is appropriate and valuable, it may result in the reader having an overly confident opinion of the financial status of the CPP since most of the individual sensitivities do not result in the legislated contribution rates being insufficient. Some commentary that a combination of some adverse scenarios for unrelated assumptions is very possible and in combination they would result in insufficient legislated contribution rates would be helpful for readers to better appreciate the overall risk. The report could illustrate examples of such combinations resulting in insufficient contribution rates.

Recommendation 15

We recommend that the OCA increase the amount of resources given to consideration of future significant changes in the socio-economic outlook. Such future changes may be reflected in the actual assumptions or in sensitivity analysis. The valuation reflects a future world and a country that will not change significantly, which may not be the case. Given the long-term time horizon for the valuation, we recommend more emphasis to be placed on how the CPP may be affected by significant changes in the socio-economic environment.

Recommendation 16

We recommend that the OCA monitor the future developments of climate change scenarios, in particular from credible sources such as the IAA, the CIA, the Bank of Canada and OSFI. The climate change scenarios presented in AR31 are one example of other possible scenarios. We recommend that the OCA continues to work on the effects of climate change on relevant assumptions, such as possible decreases in real wages, future contributions, interest rates and equity and other returns. Some of the effects on future returns may have already been reflected in current market expectations and in asset prices. The OCA would have to take into account such market expectations. We hope that future work will be sufficiently credible to allow the OCA to incorporate those effects in the best estimate assumptions.

Recommendation 17

We recommend that the OCA continue to work towards a more user-friendly format for displaying the valuation results, including greater use of graphs and graphics.

Section 1 – Introduction

This report presents the results of our review of the 31st Actuarial Report on the Canada Pension Plan (AR31).

1.1 Terms of reference

In accordance with our terms of reference, our review focused on the actuarial work. We were not asked to, and did not, review the merits of the current design, administration or investment arrangements of the CPP. Our review of those aspects was confined to how they interact with, and are reflected in, the actuarial work.

The terms of reference for our review were as follows:

The peer reviewers will review the work performed by the Chief Actuary in completing the 31st Actuarial Report on the Canada Pension Plan as at 31 December 2021. Following their review, they will provide a report to the Chief Actuary and the UK Government Actuary’s Department (GAD). GAD will then provide its opinion of the peer review to the Chief Actuary.

The review report must contain opinions on the following questions:

1. Is the professional experience of the Chief Actuary and their staff who worked on the report adequate for carrying out the work required?
2. Has the work been completed in compliance with the relevant professional standards of practice and statutory requirements?
3. Did the Chief Actuary have access to the information required to perform the valuation, and were relevant tests and analysis on the data completed as might be expected?
4. Were the actuarial methods and assumptions used in completing the report reasonable?
5. Does the 31st Actuarial Report fairly communicate the results of the work performed by the Chief Actuary and their staff?

In providing opinions on the questions listed above, the peer reviewers must also provide such recommendations as they deem appropriate with respect to future actuarial reports on the Canada Pension Plan prepared by the Office of the Chief Actuary.

1.2 Procedures followed

Our review was conducted as a close collaboration of the three panel members. The review work took place over the months from November 2022 through April 2023.

We received AR31 on December 15, 2022, the day after it was tabled in Parliament. We received the first set of working papers underlying the report on November 24, 2022. The OCA subsequently provided us with additional requested information.

We had three days of meetings in February 2023 with the Chief Actuary, members of the OCA, officials from the Economic Analysis and Forecasting Division of the Department of Finance Canada, representatives of the Demography Division of Statistics Canada and representatives of the Canada Pension Plan Investment Board (CPPIB). In advance of these meetings, we submitted 65 questions / comments to the OCA. In addition, we asked numerous questions during our meetings, and some follow up questions after the meetings. All parties responded promptly and fully to each request we made or provided reasons if a response was not possible.

We reviewed the materials presented at the CPP Virtual Seminar on Demographic, Economic and Investment Perspectives held virtually in September 2021.

We also reviewed the following documents:

• PowerPoint presentations prepared by the OCA, providing information on:
  • The development of the methods and assumptions used in the valuation, including each of the demographic and economic assumptions;
  • The projections of the contributions, investment income and expenditures of the plan;
  • The financing methods reviewed in the valuation, including the main results and conclusions of the valuation;
  • The reconciliation of the results of the valuation compared to the previous valuation; and
  • The rationale for the selection of scenario analyses and sensitivity testing and the results of such testing and analyses;
• the 2022 Annual Report of the CPPIB;
• the actuarial valuation of the Québec Pension Plan as at December 31, 2021;
• Historical documents that are maintained on the website of the OCA;
• The Rules of Professional Conduct and the applicable Standards of Practice of the Canadian Institute of Actuaries, and the International Standards of Actuarial Practice of the International Actuarial Association; and
• The key provisions of the statute establishing the CPP.

We held several meetings by teleconference and corresponded by email.

We agree on all the opinions and recommendations presented in this report.

In our work, we concentrated on what we consider to be the most important issues – the data used, the actuarial methods employed, the actuarial assumptions selected, the scenario testing and sensitivity analyses undertaken and the reporting. We reviewed the sources of the data, and the processes used by the OCA to test and analyze the data; however, our mandate did not include a detailed audit of the data. Similarly, we reviewed the procedures used by the OCA to test the actuarial computer models; however, our mandate did not include a verification of the accuracy of the models.

1.3 Statutory actuarial requirements

Section 115 of the Canada Pension Plan requires that an actuarial review be conducted once every three years and that a report is produced that:

• Regarding the base CPP:
  • Shows the projected pay-as-you-go contribution rates, that is, the contribution rates applicable for each year that develop expected contributions equal to that year’s expected expenditures; and
  • Determines the following contribution rates:
    • The contribution rate, calculated in a prescribed manner, that provides for steady-state funding of the base CPP, excluding post-1997 benefit improvements; and
    • The contribution rate, calculated in a prescribed manner, that provides for the full funding of post-1997 benefit improvements.
• Regarding the additional CPP:
  • A first additional minimum contribution rate (FAMCR), calculated in a prescribed manner, which provides for the funding of benefits provided under the additional CPP that are in respect of earnings below the YMPE; and
  • A second additional minimum contribution rate (SAMCR), calculated in a prescribed manner, which provides for the funding of benefits provided under the additional CPP that are in respect of earnings above the YMPE.

Section 113.1 of the Canada Pension Plan requires that a financial review of the CPP be prepared every three years after 1997 by the federal and provincial Ministers of Finance. This review is to take into account the most recent report of the Chief Actuary prepared in accordance to Section 115. Section 115 states that projections must extend for at least 75 years into the future.

Separate funding objectives are established for the base CPP and the additional CPP.

• The financing objective of the base CPP includes:
  • a steady-state contribution rate calculated as the lowest constant rate for which the projected ratio of assets-to-expenditures 10 years after the end of the review period matches the corresponding projected ratio 60 years after the end of the review period; and
  • a full funding rate for increased or new benefits for which the cost equals or exceeds 0.02% of contributory earnings (the “de minimis” rule).

  The minimum contribution rate for the base CPP is the sum of the steady-state contribution rate and full funding rate.

• The financing objective of the additional CPP is stated in terms of the First Additional Minimum Contribution Rate and Second Additional Minimum Contribution Rate (FAMCR and SAMCR) that must be determined before and after taking into account the full funding of any increased or new additional benefits. The FAMCR and SAMCR are defined as the lowest level contribution rates applicable after the end of the review period, such that the following conditions are met:
  • the present value of projected additional open group obligations is at least equal to the projected additional assets and present value of projected additional contributions (open group assets);
  • the projected ratio of assets-to-expenditures of the additional CPP is the same in the 50th and 60th years following the end of the review period, but no earlier than in the years 2088 and 2098, respectively; and
  • the SAMCR is equal to 4 times the FAMCR.

The Calculation of Contribution Rates Regulations, 2021 describe the two funding objectives of the base CPP. These regulations were amended in 2021 to replace the Calculation of Contribution Rates Regulations, 2007.

1.4 Recommendations of the last review panel

The actuarial review panel for AR30 made nine recommendations arising from its review, plus numerous other observations or suggestions for improvement. Our terms of reference do not include a review of the prior recommendations and the actions taken thereupon. However, a summary of the recommendations and the actions taken was provided by the OCA and is included in the Appendix.

1.5 Purpose of CPP actuarial reports

The purpose of the report is to inform contributors and beneficiaries of the current and projected financial states of the base CPP and the additional CPP. The report provides information to evaluate the financial sustainability of the CPP over a long period, assuming that the legislation remains unchanged. This information facilitates a better understanding of the financial state of the CPP and the factors that influence costs, and thus contributes to an informed public discussion of issues related to the finances of the CPP.

In AR31, the financial performance of the CPP is measured through several key metrics, including:

• the projected pay-as-you-go contribution rates and asset to expenditure ratios by year to 2055 and then every fifth year through to 2100, under both the current legislated contribution rate and the MCR;
• the MCR of the base CPP and the FAMCR and the SAMCR of the additional CPP calculated at the current valuation date and how these rates are projected to evolve over the next four triennial valuation reports, assuming that actual experience matches the actuarial assumptions;
• a number of sensitivity tests and scenario analyses, which illustrate the results that would be obtained under various changes in either future experience or actuarial assumptions; and
• a balance sheet showing estimates of the assets as a percentage of the liabilities under an open group approach as at December 31, 2021 and December 31, 2030.

The current MCR, FAMCR and SAMCR are the most significant of these results. If the MCR of the base CPP is higher than the legislated contribution rate, and the federal and provincial governments do not agree on a course of action, the insufficient rates provisions in Section 113.1 of the Canada Pension Plan will apply to automatically increase the contribution rate and freeze benefits. There are similar provisions that apply if the FAMCR and/or the SAMCR of the additional CPP are higher than the legislated contribution rates.

The other results are also useful because they provide information regarding the long-term pattern of revenues and expenditures of the CPP and the unpredictability and variability of the different cash flows if the assumptions are changed or not realized. They also allow comparisons to be made with other countries’ social security programs.

It is essential to recognize that all the results are estimates. All but the sensitivity tests and scenario analyses represent the Chief Actuary’s “best estimates”, with no deliberate margins for conservatism or other intentional bias. They present what the outcome will be if future experience exactly matches the actuarial assumptions. The assumptions apply for 75 years and are forecasts of uncertain future events and conditions and, therefore, are not amenable to precise prediction.

The estimates shown in AR31 are essential to provide guidance in financing the CPP and in performing other planning and management tasks. Yet, no matter how carefully they are prepared, they are still estimates. Thus, it is important that readers look at the sensitivity tests and scenario analyses to enhance their understanding that the range of possible actual outcomes is wide and could even be wider than illustrated by such sensitivity tests and scenario analyses.

1.6 Main results of the 31st Actuarial Report

The main results included in AR31 are as follows:

1.6.1 Base CPP

• The pay-as-you-go contribution rate increases from 9.08% of contributory earnings in 2022 to 13.04% in 2075 and remains at a similar level thereafter.
• The MCR is 9.56% for the years 2025 to 2033 and 9.54% for the years 2034 and thereafter, down from 9.72% in AR30.
• Using these MCRs, the ratio of assets to expenditures is projected to increase slightly from 8.1 in 2025 to 8.4 in 2034 and to be the same in 2084.
• Under a continuation of the current 9.9% legislated contribution rate, the ratio of assets to expenditures is projected to increase slightly from 8.1 in 2022 to 8.4 in 2030, and to continue to grow thereafter to 10.7 in 2050 and 13.2 in 2100.
• The main reason for the decrease in the MCR in the inter-valuation period was better than expected investment experience, partially offset by changes in the real rate of return assumption for 2022 primarily due to the subsequent event recognized in the valuation.

1.6.2 Additional CPP

• A FAMCR of 1.97% and a SAMCR of 7.88% for 2025 and thereafter, a small decrease from the rates of 1.98% and 7.92% revealed in AR31.
• Under the legislated first additional contribution rate of 2.0% for 2023 and thereafter and the legislated second additional contribution rate of 8.0% for 2024 and thereafter, the ratio of assets to expenditures is projected to increase rapidly until 2026 and then decrease after that, reaching a level of 26 by 2080 and remaining close to that level through 2100.
• There was no significant reason for the slight decreases in the FAMCR and the SAMCR, but rather the decreases were the result of numerous small experience items and changes in assumptions.

In aggregate, AR31 shows that the current funding requirements for the CPP are expected to be more than sufficient to fund the future benefits of the CPP. Of course, actual experience will differ from the actuarial assumptions and future valuations will determine whether the extent of this experience is such that the CPP benefits will continue to be adequately funded under the current funding requirements.

Section 2 – Professional experience

In this Section we address the following question:

2.1 Background

AR31 as submitted by the Chief Actuary to the Minister of Finance, was tabled in Parliament on December 14, 2022. The Chief Actuary is Assia Billig, a Fellow of the Society of Actuaries (2004) and of the Canadian Institute of Actuaries (2005). Ms. Billig was appointed Chief Actuary within the OSFI in April 2019.

She joined the OCA in 2008, where she was involved in the preparation of statutory actuarial reports on the CPP and Old Age Security Program, as well as various national and international actuarial studies. Prior to joining the OCA, she worked in private pension consulting.

Ms. Billig was the vice-chair of the International Actuarial Association (IAA) Social Security Committee for a number of years and is the chair of the Technical Commission on Statistical, Actuarial and Financial Studies of the International Social Security Association. She completed her undergraduate studies in Moscow State University and has a PhD in Mathematics from the University of Alberta.

The professionals who worked most closely with Ms. Billig on AR31 are Michel Montambeault and Christine Dunnigan, both Senior Actuaries in the OCA, a Division of the OSFI. Mr. Montambeault is a Fellow of the Society of Actuaries (1992) and of the Canadian Institute of Actuaries (1992). He spends his time on issues associated with the CPP and Old Age Security program. He has worked on actuarial reviews of the CPP and the Old Age Security program in the OCA for the last 33 years. Ms. Dunnigan is a Fellow of the Society of Actuaries (2007) and of the Canadian Institute of Actuaries (2008). She spends her time on issues associated with the CPP. She has worked on actuarial reviews of the CPP over the last 8 years.

Ms. Billig, Mr. Montambeault, and Ms. Dunnigan co-signed AR31. They were assisted by a staff of actuaries, listed below.

The professionals who worked on AR31 were:

2.2 Observations

There are very few actuaries working in Canada with experience in valuing social security programs like the CPP. The data sources, macroeconomic modelling, and range of assumptions involved in actuarial valuations of these social programs are more complex than for employer-sponsored pension plans. Therefore, occupational pension plan experience is useful but not as useful as previous experience with social programs similar to the CPP. Ms. Billig and Mr. Montambeault have considerable experience and understanding of the issues involved in valuing the CPP. Ms. Dunnigan provides additional expert actuarial experience regarding issues in valuing the CPP. In addition, Mr. Dontigny has a solid knowledge of the CPP actuarial model (Actucan).

The OCA has established an internal investment function to ensure that the CPP team continues to expand their knowledge of investment-related matters and share it efficiently across the office. An actuary who is also a Chartered Financial Analyst with significant investment-related experience has recently joined the CPP team to lead the investment function. An investment consultant was also hired to assist the OCA with enhancing its methodologies for developing long-term capital assumptions. Some of the consultant’s recommendations were applied by the CPP team toward setting the investment assumptions for AR31.

The staff of the OCA is of sufficient size to spend adequate amounts of time on CPP and related matters, such as improving methodologies and data sources, performing inter-valuation studies, enhancing documentation, evaluating the cost of new benefits and liaising with other government departments and other social security actuaries, all of which contribute to the quality of the work and of the report. However, given the importance of the work of the OCA, the OCA needs to ensure that they are staffed sufficiently to be able to act upon the panel’s recommendations, to meet the increasing demands being placed upon them for further analysis and to allow them to keep up with emerging economic and demographic trends.

We observe that staff levels have grown substantially and are told that levels are expected to increase further over the next few years. We understand from our discussions with Ms. Billig that there is a continued appropriate program of staff recruiting and succession planning in place. There is a mix of more experienced and relatively new personnel on the staff of the OCA. Staff continuity has been excellent. We also note that staff are moved from one technical area to another in their primary work and/or peer review work. Thus, staff are gaining in-depth knowledge of the entire workings of the CPP and applicable actuarial models.

We are satisfied that Ms. Billig and the staff who assisted her in preparing AR31 have the relevant experience and are qualified to carry out the actuarial valuation.

Section 3 – Professional and statutory requirements

In this Section, we address the following question:

3.1 Background

To address this question, we have considered each of the following:

• Canadian Institute of Actuaries’ Rules of Professional Conduct: The Chief Actuary and their co-signatories are Fellows of the Canadian Institute of Actuaries (CIA), the professional body governing the education, qualification, conduct and work of actuaries in Canada. The CIA promulgates the professional rules and ethical standards with which a member must comply and thereby serve the public interest. The Rules of Professional Conduct are the Institute’s highest level of guidance to its members. Failure to adhere to the rules may result in disciplinary proceedings.
• CIA Standards of Practice: These standards govern the work performed by actuaries in Canada. These include general standards governing all areas of practice and practice-specific standards governing work in specific areas. Part 1000 – General Standards apply to all areas of actuarial practice. Part 7000 – Social Security Programs applies to an actuary when performing or reviewing, advising on, or opining on work related to social security programs.
• International Standards of Actuarial Practice: The International Actuarial Association (IAA) develops International Standards of Actuarial Practice (ISAPs) which are model standards of practice. The IAA encourages its member associations to have in place standards of practice that are substantially consistent with these standards. ISAPs are model standards of actuarial practice and, as such, are not binding on any actuary. ISAP 2 – Financial Analysis of Social Security Programs is intended to promote the development of consistent actuarial practice for social security programs throughout the world. While not binding, it serves as a useful reference.
• Canada Pension Plan: This statute provides the terms of reference of the Chief Actuary when preparing an actuarial report in relation to the CPP. Section 113.1 identifies the actuarial information required by the federal and provincial Ministers of Finance when recommending changes to CPP benefits or contribution rates, or both. Section 115 stipulates the timing, contents and certain other aspects of the Chief Actuary’s triennial report.

Below, we consider each of these in turn.

3.2 Canadian Institute of Actuaries’ (CIA) – Rules of Professional Conduct

The following Rules of Professional Conduct of the CIA are particularly relevant to this review:

• Rule 1: A member shall act honestly, with integrity and competence, and in a manner to fulfil the profession’s responsibility to the public and to uphold the reputation of the actuarial profession.
• Rule 2: A member shall perform professional services only when the member is qualified to do so and meets applicable professional continuing qualification standards.
• Rule 3: A member shall ensure that professional services performed by or under the direction of the member meet applicable standards of practice.

We are satisfied that the Chief Actuary and their staff have met the requirements of the CIA Rules of Professional Conduct.

Further to Rule 2, Section 2 of this report expands on our assessment of the professional experience of the staff of the OCA. Under the auspices of Rule 2, the CIA has also promulgated Continuing Professional Development (CPD) requirements that are applicable to practicing actuaries. We have reviewed the CPD records of the Chief Actuary and her co-signatories to AR31, as well as the professional staff of the OCA who are Fellows of the Canadian Institute of Actuaries and confirm that they all met the CIA’s CPD qualification requirements.

Further to Rule 3, the next two Subsections expand on our assessment of the Chief Actuary’s compliance with applicable standards of practice.

3.3 Canadian Institute of Actuaries’ (CIA) – Standards of Practice

3.3.1 General Standards of Practice – Part 1000

The General Standards of Practice of the CIA are extensive and detailed and cover many different topics that are relevant to the valuation of the CPP. Below we comment on those aspects that we believe are relevant.

The actuary should take a subsequent event into account if the subsequent event:

• Provides information about the entity as it was at the calculation date;
• Retroactively makes the entity different at the calculation date; or
• Makes the entity different after the calculation date and a purpose of the work is to report on the entity as it will be as a result of the event.

The continuing and evolving impacts of the COVID-19 pandemic were exacerbated by the escalation of the conflict in Ukraine in early 2022. This escalation was considered to be a subsequent event for the purpose of AR31 since it started subsequent to the valuation date but before the date of the report. There is much uncertainty surrounding the evolving conflict and potential impacts on the projected financial state of the CPP, in particular resulting from changing levels of inflation and volatility in markets. This uncertainty was taken into account in AR31. There were no other events determined by the Chief Actuary to be subsequent events.

The CIA standard on data sufficiency and reliability requires the actuary to apply such procedures as are necessary for the actuary to arrive at a conclusion as to the sufficiency and reliability of the data. The Chief Actuary relies on data from multiple sources and has considered the qualifications, competence, integrity, and objectivity of the parties providing the data. AR31 includes a table detailing the source of each data file, the information provided in each data file, the validation processes and the OCA’s tolerance for errors. In addition, the OCA issued an in-depth report dated February 2022 entitled OCA External CPP Data Files Validation Process.

The CIA standard states that when the work involves the use of a model, the actuary should choose a model appropriate to the purpose and requirements of the work; and understand any limitations in the model that might make the results of the model inappropriate for the intended purpose or might produce a misleading result. The Chief Actuary and their staff are confident that the model used is appropriate and reliable and have been developing documentation to support the continuing use and evolution of the model.

The CIA standard on assumptions requires that the assumptions, individually and in the aggregate, should be appropriate. Most of our recommendations are with respect to strengthening the development of various actuarial assumptions. Nevertheless, we have concluded that the assumptions adopted for AR31 are reasonable, both individually and in the aggregate, and are therefore appropriate.

The CIA standard on provision for adverse deviations states that the actuary “should not include a provision [for adverse deviations] if the related work requires an unbiased calculation.” Section 113.1 of the Canada Pension Plan requires that the Chief Actuary determine the lowest constant contribution rate that, if maintained over the foreseeable future, results in specified projected asset to expenditure ratios that are constant. The Chief Actuary interprets this requirement as necessitating an unbiased calculation. Accordingly, each assumption used in the valuation is represented as a “best estimate” assumption. The consequence is that the overall valuation results, other than the sensitivity tests and scenario analyses, are likewise the Chief Actuary’s “best estimates” and do not include a provision for adverse deviations. We agree with the Chief Actuary’s use of “best estimate” assumptions but include a recommendation that the rationale for the use of “best-estimate” assumptions be better documented in the report.

In our view, the work on AR31 complies with the relevant portions of the CIA General Standards of Practice.

3.3.2 Social Security Programs Standards of Practice – Part 7000

The Social Security Programs Standards of Practice of the CIA apply to an actuary when performing or reviewing, advising on, or opining on work related to social security programs. The standards came into effect October 15, 2017 and were revised effective February 1, 2018.

In early 2022, a Designated Group (DG) was assembled to review and recommend any changes to Part 7000, as part of a general quinquennial review. François Boulé, a Senior Actuary and a member of the OCA team, serves as the Chair of the DG and Jill Wagman also serves as a member of the DG.

The DG released a Notice of Intent on October 27, 2022 that outlined the changes under consideration and requested feedback on the revisions as part of the formal due process for amending the actuarial standards of practice. Changes to Part 7000 that are under consideration include:

• Revising wording to distinguish between financing method and funding policy, which are currently used interchangeably;
• Adding one or more paragraphs on subsequent events, which do not currently exist;
• Allowing the actuary to decide whether a cut-off date for recognition of subsequent events is necessary and also that cutoff dates could vary by assumption; and
• Amending Subsection 7330 on economic assumptions to be more detailed.

In addition, the DG will likely suggest a number of changes to improve the clarity, conciseness and level of specificity provided within Part 7000.

It is worth noting that none of the changes contemplated would have a material impact on the results reported in AR31.

In our view, the work on AR31 complies with the relevant portions of the CIA Social Security Programs Standards of Practice.

3.4 International Actuarial Association (IAA) Financial Analysis of Social Security Programs International Standard of Actuarial Practice (ISAP) 2

ISAP 2 provides guidance to actuaries performing financial analyses of social security programs, or reviewing, advising on, or opining on such analyses, to give intended users confidence that:

• Actuarial services are carried out professionally and with due care;
• The results are relevant to their needs, are presented clearly and understandably, and are complete; and
• The assumptions and methodology (including, but not limited to, models and modelling techniques) used are disclosed appropriately.

In our view, the work on AR31 complies with the relevant portions of the IAA Financial Analysis of Social Security Programs – International Standards of Actuarial Practice 2.

3.5 Canada Pension Plan statute

The Canada Pension Plan stipulates the frequency, approximate timing and certain contents of the Chief Actuary’s triennial reports to the federal and provincial Ministers of Finance. In AR31, the Chief Actuary and their staff have complied with all of these statutory requirements.

Section 4 – Data

In this Section, we address the following question:

4.1 Background

Appropriate data are required for “current status” data inputs into the computer model, for “validation” (back-testing) of the model, and to develop appropriate actuarial assumptions for future years. Data from Employment and Social Development Canada (ESDC) and the Canada Revenue Agency (CRA) normally flow to the OCA through Service Canada. The report details the sources of the various data used in the valuation.

The status and validation data, and the historical data used to develop assumptions, appear to be objectively derived, factual and up to date.

The valuation data on benefits, earnings and contributions received from ESDC are tested in detail by OCA for internal consistency and reasonableness. The data from other sources are reviewed by OCA for internal consistency and consistency with past data. Any irregularities are checked out with the data source and any data errors are corrected.

The Chief Actuary has advised us that staff had access to sufficient and reliable data to complete their work, and in AR31 has provided her opinion that “the data on which this report is based are sufficient and reliable”.

4.2 Observations

We have the following observations:

• The Chief Actuary appears to have had access to the data required.
• The data are extensive and appear to be reasonably complete and available on a timely basis.
• The data are tested for reasonableness and internal consistency by the OCA and any deficiencies are resolved before the data are used.
• The Record of Earnings (ROE) file of all workers who ever made a contribution to the CPP appears to be sufficiently complete and accurate.
• Service Canada’s Master Benefit File appears to be sufficiently complete, although there is some concern about the inability to verify survivorship with respect to those residing outside of Canada.
• The CPPIB has a Reference Portfolio that represents its baseline policy for determining asset allocations. Actual asset allocations can and do deviate systematically from the Reference Portfolio as the CPPIB seeks to achieve incremental returns at reasonable risk. When the CPPIB decides to deviate from the Reference Portfolio it conducts a risk-budgeting analysis to determine that the deviation is justified on an expected risk-adjusted basis. The Chief Actuary made assumptions as to future asset allocations based on the Reference Portfolio, the risk-budgeting policy, the current actual asset allocation, the asset allocations of other large Canadian pension funds, and her judgement with respect to possible future CPPIB asset allocations.
• The CPP and QPP seminars have provided a great deal of useful information, with increased relevance over time (for example, a shift to a longer-term focus). These seminars should continue to engage presenters who are known to hold divergent views and encourage presenters to summarize the range of plausible viewpoints.
• The OCA maintains contacts with other Departments and Agencies, such as the CPPIB, ESDC, CRA, Statistics Canada, Finance Canada and the Bank of Canada, as well as with external agencies such as Retraite Québec, the Conference Board, the CD Howe Institute, and the University of Toronto’s Policy and Economic Analysis Program. All of this provides useful input.
• The OCA has identified its priorities for data enhancement that could lead to improved analysis.

In Section 6 we provide comments on how earnings are projected into the future and, in particular, how the earnings distribution of members of the CPP may change over time.

Section 5 – Actuarial methods

In this Section, we address the following question:

5.1 Background

The results presented in AR31 are deterministic projections of the future contributions, investment income and expenditures of both the base CPP and the additional CPP year by year up to the year 2100. Also included are the deterministic projected pay-as-you-go contribution rates and the minimum contribution rates for both the base CPP and the additional CPP, as set out in the CPP statute.

5.2 Macro-simulation model

The projections of the contributions, investment income and expenditures are based on the OCA’s proprietary macro-simulation model.

The model projects future cash flows starting with current market data and using the demographic, economic and other assumptions. The demographic assumptions include fertility rates, mortality rates and migration rates. The economic assumptions include labour force participation rates, price inflation, real wage growth and assumed rates of investment returns. The other assumptions include retirement rates and rates of disability and termination therefrom. With the exception of the assumed rates of investment return, the assumptions are identical for both the base CPP and the additional CPP. The assumed rates of investment return are different for the two plans as they have different reference portfolios.

The model projects the population based on data which is grouped by age and sex. This differs from the approach used for the valuations of the vast majority of occupational pension plans which use a member-by-member seriatim based model. The model is also an open group model where future new entrants are considered. The valuations of the vast majority of occupational pension plans use a closed group approach where only the benefits and contributions of existing members are considered (some valuations incorporate new entrant assumptions in the normal actuarial cost). We agree with the use of an open group model approach using data grouped by age and sex.

The model is calibrated using a back-testing procedure. Model output for years prior to the valuation date is compared against historical values. Discrepancies are investigated and resolved. Resolution includes modest adjustment factors to better calibrate the model to historical experience. We are of the opinion that the adjustments made are reasonable.

The model is written in the Fortran program language. Fortran was developed in the 1950s and is especially suited to numeric and scientific computing. Fortran has continued to be updated over the years, but nevertheless is a dated program language that is not as commonly used as other newer programming languages. The OCA regularly reviews whether Fortran continues to be the optimal program language to use for the valuation, considering both its functionality and the ability to hire staff with sufficient knowledge to program changes in the code. Following discussions with the OCA, we are of the opinion that the continued use of Fortran is appropriate.

5.3 Form of output

The model produces the following outputs:

• projections of the demographics of the covered population and the projected contributions, investment income and expenditures;
• the pay-as-you-go contribution rates and the asset-to-expenditure ratios based on the current legislated contribution rate up to 2100;
• the current MCR for the base CPP, which consists of the steady-state rate and the full funding rate, as well as the projected MCRs for each of the next four triennial actuarial reviews;
• the FAMCRs and the SAMCRs for the additional CPP;
• a balance sheet showing estimates of the assets as a percentage of the liabilities under an open group approach as at December 31, 2021 and as at December 31, 2030;
• reconciliations of AR31 results with the results in AR30; and
• sensitivity tests and scenario analyses showing the results of applying alternate assumptions.

5.4 Contribution rates – Base CPP

5.4.1 Pay-as-you-go

Section 115 of the Canada Pension Plan requires the Chief Actuary to present “pay-as-you-go” contribution rates for the base CPP, that is, the contribution rates applicable for each year that develop expected contributions equal to that year’s expected expenditures, year-by-year for the first 30 years and thereafter every five years up to at least 75 years after the valuation date.

AR31 complies with this requirement.

5.4.2 Minimum contribution rate

Section 115 of the Canada Pension Plan provides for the MCR to be the sum of the “steady-state funding” contribution rate and the “full funding” contribution rates, as follows:

• The “steady-state funding” contribution rate, as calculated in a prescribed manner, is the contribution rate that provides for steady-state funding of the CPP, excluding post-1997 benefit improvements; and
• The “full funding” contribution rate, as calculated in a prescribed manner, is the contribution rate that provides for the full funding of post-1997 benefit improvements.

The steady-state method produces a contribution rate that is the lowest constant rate that, if maintained over the foreseeable future, results in projected asset-to-expenditure ratios that are generally constant. The asset-to-expenditure ratio for a year is the ratio of the projected assets at the end of the year to the projected expenditures in the following year. In practice, the steady-state rate is computed as the lowest level contribution rate, starting three years after the review date (called the “review period”), that produces the same projected asset-to- expenditure ratios in the 10th and the 60th years following the review period. The use of these years is stipulated in the Calculation of Contribution Rates Regulations, 2021. In AR31, the asset-to-expenditure ratios for 2034 and 2084 are used for this purpose.

Paragraph 113.1(4)(e) of the Canada Pension Plan requires that post-1997 benefit improvements be separately identified and funded on a “full funding” basis. That is, the steady-state contribution rate must be augmented to reflect benefit improvements that are deemed to be earned in the future. There must also be a temporary increase in the contribution rate to liquidate any unfunded liability resulting from the benefit improvement. The duration of the temporary increase must be consistent with common actuarial practice. The Chief Actuary has chosen 15 years for this purpose; we concur that this accords with common actuarial practice in Canada.

AR31 appropriately determines the minimum contribution rates for the base CPP.

5.5 Contribution rates – Additional CPP

The financing methods used to compute the FAMCRs and the SAMCRs are defined in the Calculation of Contribution Rates Regulations, 2021 as the lowest level of contribution rates, applicable after the end of the review period, such that:

• the present value of projected additional open group obligations is at least equal to the projected additional assets and present value of projected additional contributions (open group assets);
• the projected assets-to-expenditures ratio of the additional CPP is the same in the 50th and 60th years following the end of the review period, but no earlier than in the years 2088 and 2098, respectively; and
• the SAMCR equals the FAMCR multiplied by the ratio of the earnings replacement rate of the second tier of the additional CPP to the replacement rate of the first tier (33.33%/8.33%, or 4).

The first requirement satisfies Paragraph 113.1(4)(d)(ii) of the Canada Pension Plan which states that contribution rates must be no lower than the rates that result in projected contributions and investment income that are sufficient to fully pay the projected expenditures of the additional CPP over the foreseeable future.

The second requirement satisfies Paragraph 113.1(4)(d)(i) of the Canada Pension Plan which states that, beginning with the year 2024, contribution rates are the lowest constant rates that can be maintained over the foreseeable future.

We agree with the manner in which AR31 complies with these requirements.

5.6 Actuarial balance sheet

An actuarial balance sheet compares assets to actuarial liabilities as at December 31, 2021 and as at December 31, 2030 on an open group basis.

In an open group actuarial balance sheet, it is assumed that the CPP is ongoing into the future, and the balance sheet takes into account future contributions and benefits of current and future members. Benefits and contributions are discounted to the valuation date at the assumed rate of investment return.

We agree with the methods used to determine the actuarial balance sheet.

5.7 Reconciliation with AR30

Actuarial standards of practice require that a valuation include a reconciliation of the changes in the financial position of the CPP since the previous valuation. The valuation includes a reconciliation of the MCR for the base CPP and a reconciliation of the FAMCR and SAMCR for the additional CPP, compared to those shown in AR30.

We agree with the reconciliations provided in the report.

5.8 Sensitivity testing and scenario analyses

There are various sensitivity tests and scenario analyses provided in AR31. These sensitivity tests and scenario analyses assist the reader in understanding the potential variability in future funding of the CPP and the future risks facing the CPP.

Although we have some recommendations for improvement, we generally agree with the sensitivity testing and the scenario analyses provided in AR31.

Section 6 – Assumptions

In this Section, we address the following question:

6.1 Background

The actuarial assumptions reflect the expected future experience of the CPP. In selecting the actuarial assumptions, it is expected that the actuary consider a number of factors, including:

• long-term historical data and trends;
• short-term historical data and trends;
• evidence of whether a “regime switch” or structural change has taken place;
• recent amendments to the CPP;
• any changes in policy (for example, CPPIB investment policy, ESDC administration policies and/or government policies on such items as inflation and immigration);
• expert academic and professional research;
• benchmarking with other similar plans; and
• other external sources of relevant information.

All assumptions incorporated in AR31 can be described as “best-estimate”, that is, the assumptions were developed, in the judgement of the Chief Actuary, such that adverse or favourable deviations of actual future experience from each of those assumptions are equally likely.

The assumptions are intended to apply over the long-term, so some weight is expected to be given to long-term historical data. However, where the actuary judges that more recent data for a particular assumption indicates a regime switch or a trend that is likely to continue for the long-term, the actuary is expected to recognize that switch or trend in the assumption.

For many of the assumptions used in the model, the Chief Actuary has adopted a method that actuaries describe as “select and ultimate”. Under this approach, the particular assumption gradually changes over a period of years (the “select period”) from one that initially is close to actual recent experience to one that reflects the actuary’s best-estimate of the long-term future (the “ultimate” assumption). The length of the select period can differ for different assumptions. The choice is based on the actuary’s judgement and depends on factors including the nature of the assumption involved and on how significantly the ultimate assumption differs from recent experience.

Deciding on the best estimate assumption is not based on a unique theory or scientific source but relies on judgement. The Chief Actuary and her staff gather expert opinions on the key assumptions from a variety of sources and use their judgement to develop their best-estimate assumptions. The most one can do is to arrive at an estimate that is “reasonable”. The panel members collectively recognize this limitation in assessing the work of the Chief Actuary.

Because of the wide range and complexity of the assumptions and methodologies involved in actuarial reviews of the CPP, it is desirable for the Chief Actuary to seek out the advice and guidance of experts, including actuaries, demographers and economists, to help ensure that a wide range of analysis and opinion is considered and to enhance the credibility of the actuarial reviews.

The Chief Actuary has developed rigorous processes for the selection of assumptions. All decisions on assumptions are made in consultation with her internal staff. They draw upon the expertise of officials from other government departments and agencies who participate in interdisciplinary seminars, maintain effective two-way communication with the CPPIB, and devote a considerable amount of time to keeping abreast of experts’ views on demographic and economic matters. They also consider the comments and advice contained in the reports of the actuarial review panels that reviewed the previous actuarial reports.

Below is a commentary with respect to our review of the development of each of the key actuarial assumptions. As a general comment, we believe that the assumptions were developed taking into account all of the above listed factors. However, in our opinion, there may be too much bias given to past historical trends rather than taking into account forward-looking views. An example is the expected future ages of retirement where the past may not be a good indicator of the future.

6.2 Demographic assumptions

6.2.1 Fertility

Fertility rates are used to project the assumed number of births in each future year. The valuation develops the assumed number of future births by using assumed fertility rates by five-year age bands, which vary by calendar year, and applying these fertility rates to the projected female population.

The ultimate expected fertility rates for each age 5-year age band have been developed through consideration of past experience and future expectations.

In considering past experience, the OCA has noted that fertility rates have dropped considerably since the 1960s and 1970s but have largely stabilized over the last 20 years. The OCA has been cautious about placing too much emphasis on 2019 and 2020 experience as it may have been affected by the COVID-19 pandemic. The OCA has assumed that the recent trends to higher fertility rates for older women and lower fertility rates for younger women will continue into the future. Finally, the OCA has considered the fertility rates for other Group of 7 (G7) countries.

In considering future expectations, the OCA has taken into consideration the expected introduction of subsidized government daycare over the next few years. In allowing for this change in government policy, the OCA has reviewed the effects on the fertility rates in Quebec when similar legislation was introduced.

The assumed fertility rates by 5-year age bands have been graded from current levels to the assumed ultimate assumption by 2029.

The same analysis has been undertaken for Quebec and the rates for the rest of Canada have been obtained by subtracting Quebec from the whole of Canada.

In aggregate, the assumed total fertility rate is expected to increase slightly over the next 8 years, but to ultimately be similar to the total fertility rate prior to the COVID-19 pandemic.

We concur with the OCA’s approach in developing the assumed rates of fertility. We believe that the approach used and the resulting assumption are reasonable. In future, we suggest that the OCA spend more time considering the effects of immigration on the fertility rate. It is unclear whether immigrants tend to have higher or lower fertility rates (the recent experience of Germany suggests it may be higher), but in any event, it would be a worthwhile exercise to better understand this relationship.

6.2.2 Mortality

The assumed rates of mortality were developed in two steps: (1) development of general Canadian population assumed mortality; and (2) development of assumed mortality for the several types of beneficiaries (e.g., retirees, disabled, dependents and survivors). The purpose of the second step is to adjust the general population mortality rates to account for the specific mortality experience of CPP retirement and survivor beneficiaries. Mortality rates for disability beneficiaries are based on actual experience for that segment of the population.

The basis for the general Canadian population mortality included the Canada Life Tables from the Canadian Human Mortality Database for the period covering 1921-2011 and the Statistics Canada Life Tables for the period covering 2012-2020.

In order to exclude the impact of 2020 COVID-19 pandemic mortality data from the starting point and transition period of the mortality improvement rate assumptions, mortality rates and mortality improvement rates were projected starting from 2019. For 2020, projected mortality rates were replaced by the actual mortality rates from Statistics Canada, while for 2021 and 2022, COVID-19 and Opioid adjustment factors were applied to increase the projected mortality rates.

Annual mortality improvement rates (MIRs) are analyzed by age, sex and period. For the purpose of projecting MIRs, the starting 2019 MIRs were calculated as the average annual MIRs experienced in Canada and Québec over the last known 15 years 2004-2019, based on the Canadian Human Mortality Database and Statistics Canada Life Tables mortality rates. The ultimate MIRs were derived using a combination of backward- and forward-looking approaches. The analysis of Canadian experience over the period 1921 to 2019, was combined with an analysis of the possible drivers of future mortality improvements. It should be noted that the focus was placed mainly on ages over 65. MIRs for males at most ages are currently higher than those for females but are assumed to decrease to the same level as female rates from 2039 onward. The mortality assumptions used in AR31 produce slightly lower life expectancies for males and females than those produced by AR30, primarily due to the recent slowdown in the rate of mortality improvement. The gap between male and female life expectancy is expected to continue to shrink but not disappear.

The AR31 ultimate mortality improvement rates are the same as those assumed in AR30 at all ages and both sexes. These are a 0.8% annual improvement through age 89, decreasing to 0.0% at age 110. The AR31 ultimate improvement rates for males and females under 65 are lower than the improvement rates used in the U.S. Social Security (OASDI) 2021 Trustees Report, but higher for males and females aged 65 to 89. The CPP assumed mortality improvement rates are lower at all ages for both males and females than those assumed in the United Kingdom. In comparing mortality improvement rate assumptions with other countries, it is important to take into consideration starting levels of mortality rates. Canadian mortality rates are lower than the US at all ages and are lower than the UK for ages 40 and over. The second important caveat when comparing countries is that countries differ in many instances (e.g., health care, lifestyle, inequalities, etc.) and this impacts mortality rates. Thus, while international comparisons are conducted, such information should be carefully interpreted.

Separate studies of mortality for retirees, those who are disabled and survivors were performed. A study was conducted of mortality for four pension level bands for retiree categories.

6.2.3 Migration

There are four components to the assumed rate of migration:

• Immigration;
• Emigration;
• Change in non-permanent residents; and
• Flow of people between Canada and Quebec

6.2.3.1 Immigration

Past rates of immigration have varied substantially due to differing socio-economic conditions, changing attitudes towards immigration, political considerations, world events affecting refugees and many other factors. The COVID-19 pandemic significantly curtailed immigration in 2020 and 2021, but immigration in 2022 was higher than normal and the government targeted numbers for 2023 are also higher than normal. The variations in historical immigration rates makes it very difficult to use past trends to predict the future.

AR31 assumes that immigration will gradually decline over the following 10 years until an ultimate steady state is obtained in 2033 which is based on the 10-year historical average prior to the COVID-19 pandemic (i.e., from 2010 to 2019).

The OCA cites many reasons why future immigration levels may be higher or lower than historical immigration levels. However, we believe that four overriding factors may lead to higher immigration levels in the future:

1. It takes 20-30 years for the decrease in the fertility rate to manifest itself in a lower number of Canadians of working age. The lower fertility rates of the past few decades and the impending retirement of the baby boomers means that immigration may need to play a larger role in maintaining an appropriate working age population.
2. The projections show the increase in the total population declining from the current rate of about 1.0% per year to about 0.5% per year by 2050. It may be reasonable to assume that increased immigration may be used to maintain an increase in the population of about 1.0% per year.
3. The population projections show the ratio of the working age population (20-64) to the older population (65+) decreasing from 3.3 in 2022 to 1.9 in 2100. It may be reasonable to assume that increased immigration may occur to mitigate this large decrease.
4. Recent announcements by the government regarding their immigration plan to grow the Canadian economy could have a significant impact on immigration levels and the CPP, with targets of 465,000 permanent residents in 2023, 485,000 in 2024 and 500,000 in 2025.

6.2.3.2 Emigration

The assumed rates of emigration and their development are reasonable.

6.2.3.3 Non-permanent residents

The number of non-permanent residents generally increased every year between 1995 and 2019. The COVID-19 pandemic brought a decrease in the number of non-permanent residents. With the COVID-19 pandemic ending, the number of non-permanent residents is rising again. The two largest categories of non-permanent residents are international students and temporary workers (under a number of different programs).

The movement of non-permanent residents is not well understood and is very difficult to predict. Certainly, there is some relationship between non-permanent residents and immigration, as a number of non-permanent residents ultimately become immigrants. On average, non-permanent residents are likely to be younger and better educated than immigrants coming directly into the country as many of them are international students. Therefore, understanding the dynamic of non-permanent residents is important not only in properly reflecting their contributions and expenditures, but also in understanding the characteristics of future immigrants.

6.2.3.4 Interprovincial migration

The assumed levels of interprovincial migration are not material and are reasonable.

6.3 Economic assumptions

6.3.1 Labour force

The labour force is projected implicitly through assumed levels of labour force participation rates, job creation rates and unemployment rates. The labour force participation rates are determined for 5-year age bands by sex.

The OCA has put significant thought into the development of the appropriate labour force participation rates for each age band, including rationale and supporting data. In general, the labour force participation rates are expected to increase for each age cohort group as labour shortages grow, primarily due to the aging of the baby boomers. The assumption by sex includes a gradual decrease in the labour force participation rate gap between males and females but assumes that a gap will continue into the future.

The assumption for net job creation in Canada is established so that the assumed rate of unemployment, 7.5% in 2021, decreases to 5.7% in 2023 due to the recovery from the COVID-19 pandemic and then gradually increases to the ultimate assumption of 6.1% from 2027 onwards. This is in line with various economic forecasts and reflects moderate economic growth.

We largely agree with the assumptions underlying the development of the assumed labour force, including the labour force participation rates, the job creation rates and the unemployment rates. The one area where we have some concern is with respect to the labour force participation rates for older workers.

We believe that, because of improvements in health and life expectancy, together with the prospect of tight labour markets associated with the retirement of the baby boomers, and technological developments that make working easier, as well as the trend in other countries to raise the retirement age, there will be a strong tendency for individuals to continue working to a later age in the future. This trend has already started in Canada and in many other countries. Furthermore, we expect that many Canadians will retire gradually and will continue to work part time. These considerations will change the entrenched social expectations of early retirement. A combination of these factors is likely to result in significant increases to the labour force participation rates for Canadians over the age of 55 and, in particular, those over the age of 60. We note that AR31 does indeed incorporate increases in labour force participation rates at older ages based on the above-mentioned factors. However, we still think that the assumption could benefit from further research and analysis.

6.3.2 Price increases

The rate of price inflation is a necessary assumption for an actuarial review of the CPP as contributions, benefit payments and investment returns are all affected by inflation.

Inflation in Canada was extremely volatile during the 20th century, with long runs of both very high and very low inflation. In the 21st century (at least before 2020 and the COVID-19 pandemic), there was remarkable success at keeping the annual inflation rate in Canada generally within a range of +/-1% around the Bank of Canada’s policy target of 2%.

However, with the COVID-19 pandemic and the war in Ukraine, there was a significant increase in the rate of inflation. Accordingly, the OCA is assuming inflation rates significantly higher for 2022 at 6.9% and slightly higher for 2023 to 2025., with an assumption that the Bank of Canada will renew its inflation target commitment (2% per year, with a range of 1% to 3%). The Chief Actuary has therefore assumed a rate of inflation in AR31 of 2.0% for the year 2026 and thereafter.

We note that such assumption is consistent with many forecasts by economists and with the implicit inflation rates in real return bonds. Also, our inquiries lead us to believe that the current framework with respect to prices will continue for a long time and that there is no reason to expect a change to the current target of 2% per year.

6.3.3 Real wage increases

Both contributions and initial benefits under the CPP are affected by wage increases. Subsequent benefit increases are affected by inflation. The wage increase assumption is separated into two parts: the inflation assumption (discussed above) and the real wage increase assumption (the portion of wage increases above inflation).

The assumed rate of real wage increases is developed by summing five components of wage growth; productivity, compensation ratio, earnings ratio, average hours worked and price differential. Considerable analysis is done to determine the best-estimate assumption for each of these components. The most material component is the rate of productivity growth.

For the long-term, AR31 assumes that productivity growth will be 1.05% per year. This is roughly in line with the experience over the last 20 – 30 years and appears to be in mid-range of the views of economists and other knowledgeable entities. The other components are expected to be marginally negative so that the long-term real wage growth is assumed to be 0.9% per year. A 0.9% per year increase in real wages is consistent with the views of many economists. We are however concerned about the effects of current and future labour shortages and whether this will result in pressure for higher increases.

The current high inflation environment and the impending economic downturn are expected to put short-term downward pressure on real wages, particularly as much of the increase in inflation is due to outside influences. AR31 reflects this lower than expected short-term wage growth by assuming real wage growth of minus 2.4% in 2022, grading to the ultimate long-term assumption of 0.9% per year over the next 5 years.

6.3.4 Real rate of return on investments

Sizeable funds are projected to accumulate for both the base CPP and the additional CPP and the rate of investment return is therefore an important factor in determining the contribution rates. As at December 31, 2021, the assets of the base CPP were $544 billion and the assets of the additional CPP were $11 billion. The assets of both plans are projected to grow significantly over the coming decades.

As with the assumed increases in employment earnings and benefit payments, part of the assumed nominal rate of investment return is attributable to general price inflation. In this section, we focus on the real rate of investment return (that is, net of the rate of inflation).

The foundation of the CPPIB’s investment strategy is a two-asset portfolio, referred to as the “Reference Portfolio”. The Reference Portfolio is used to establish how much risk the CPPIB is intending to take and consists of a global equity benchmark and a Canadian government nominal bond benchmark.

The CPPIB has different Reference Portfolios for each of the base CPP and the additional CPP. The Reference Portfolio for the base CPP is 85% global equity and 15% Canadian government nominal bonds. The Reference Portfolio for the additional CPP is 55% global equity and 45% Canadian government nominal bonds.

To invest the assets of the base CPP and the additional CPP according to their Reference Portfolios, the CPPIB developed a two-pool investment structure made up of a Core pool and a Supplementary pool. The Core pool is a diversified portfolio of equities, fixed income and real assets, whereas the Supplementary pool consists of fixed income securities. The base CPP is invested 100% in the Core pool. As such, the Core pool has the same risk characteristics as the Reference Portfolio for the base CPP. The additional CPP is invested in both the Core pool and Supplementary pool such that the overall risk level is consistent with its Reference Portfolio.

As at December 31, 2021, the asset mix of the base CPP is 55% equities (29% public, 26% private), 18% fixed income (19% marketable bonds, 4% non-marketable bonds, 16% credit, -16% cash) and 22% real assets. The -16% cash is debt used for leverage purposes. For the base CPP, the best-estimate real rate of return assumption in AR31, net of investment expenses, is minus 15.92% in 2022, then increases to 2.91% in 2023 grading to an ultimate assumption of 4.02% in 2040 and later. This produces an average real rate of return over the 75-year projection period of 3.69% per year.

For the additional CPP, the best-estimate real rate of return assumption in AR31, net of investment expenses, is minus 14.62% in 2022, increasing to 1.87% in 2023, grading to an ultimate assumption of 3.62% in 2040 and later. This produces an average real rate of return over the 75-year projection period of 3.27% per year.

For the year 2022, the best estimate assumption includes provision for the subsequent event recognized in 2022, with the lower returns based on actual experience through June 30, 2022. We support making an adjustment to the 2022 rates of return due to this subsequent event.

The ultimate rates reflect a “building block approach” whereby, in real terms:

• Long-term Government of Canada bonds are assumed to yield 2.0% per year from 2033 onward.
• Marketable bonds (Core pool) are assumed to return real 1.3% per year by 2035 and thereafter.
• Credit, which includes investments in corporate bonds, private debt and private mortgages is assumed to return an ultimate real rate of 2.2% per year in the Core pool and 2.9% per year in the Supplementary pool from 2035 onward.
• The ultimate total real rate of return for public equities is 4.2% per year beginning in 2035.
• The ultimate total real rate of return for private equities is 5.1% per year beginning in 2035.
• Real assets are assumed to provide a real return that increases from 2.4% in 2023 to an ultimate rate of 4.1% in 2035 and beyond.

The OCA characterizes the asset mix of the base CPP as at December 31, 2021 to be 55% equities, 23% fixed income securities and 22% in real assets. Although the CPPIB has not adopted long-term asset mix targets, the Chief Actuary assumes an ultimate allocation of assets equal to 50% equities, 30% fixed income securities and 20% real assets. This assumption is based on an expectation that the CPPIB will choose to de-risk the assets as investment income represents a greater share of revenues.

6.4 Other assumptions

6.4.1 Retirement rates

The benefits paid from the CPP (and to a lesser extent the contributions paid into the CPP) are affected by the ages at which individuals start their CPP pension. The CPP’s normal retirement age is 65, the earliest commencement age is 60, and the latest commencement age is 70.

Those who choose to receive the retirement benefit while continuing to work must still participate in the CPP by making continuing contributions (matched by their employer) until age 65, and they receive commensurate benefit increases. Between ages 65 and 70, pensioners who are working can opt to contribute to the CPP and, if so, their employers must also contribute, with commensurate benefit increases to the pensioner.

The Pre-65 Downward Monthly Adjustment Factor is 0.6% and the Post-65 Upward Monthly Adjustment Factor is 0.7%. In accordance with subsection 115(1.11) of the Canada Pension Plan, the Chief Actuary must recalculate the pension adjustment factors and specify them in every third triennial report. This was last documented in Actuarial Study No. 18: Canada Pension Plan Actuarial Adjustment Factors, published in April 2017. This study indicated that the 0.6% early retirement reduction factor and the 0.7% late retirement addition factor were deemed to be suitable at that time. There is no requirement for these factors to be reviewed in AR31.

Although these adjustment factors were expected to encourage participants to apply for benefits at a later age, the removal of the Work Cessation Test has in part offset this effect. If experience matches the assumed retirement rates, we believe that many Canadians would be commencing their CPP pension while continuing to work. This is earlier than they probably should be commencing their pensions due to the taxation effects of early commencement.

We believe that Canadians and their financial planners will gradually gain a better understanding of the value of deferring pensions under the CPP. Our view is that the combination of working later and understanding the negative taxation effects of commencing a CPP pension while still working will result in more Canadians delaying commencement of their CPP pension. While the financial effects of such change in behaviour would not be significant (the adjustment factors are actuarial equivalent), we encourage the OCA to spend more time considering this assumption with the view of perhaps assuming more delayed pension commencements in the future.

6.4.2 Disability incidence and termination

Disability incidence rates (DIRs) (i.e., the number of new disability cases as a proportion of the eligible population) are used to calculate the number of new disability beneficiaries in every projection year. The process consists of the multiplication of the population by the disability eligibility and incidence rates for a given year, age, and sex. The assumed disability incidence rates are the same for the base CPP and the additional CPP.

To determine the historical DIRs, an extract of disability benefits from the Service Canada CPP Master Benefit file as at February 2022 as well as statistics from the Employment and Social Development Canada (ESDC) CPP & OAS monthly statistical bulletins were used.

With the exception of more recent years (2019-2021), DIRs for both sexes have been relatively stable since the late 1990s. However, volatility in the incidence rates was observed over the period 2019 to 2021 which was attributable to administrative and COVID-19 pandemic related factors.

In 2021, the DIRs were 2.25 new cases per 1,000 for males and 2.98 new cases per 1,000 for females. The 2021 DIR for males represents a substantial decline over recent experience and is one of the lowest historical DIRs. The 2021 DIR for females represents a substantial decline – the DIR for females has not been lower since 1999.

According to ESDC, due to the COVID-19 pandemic, the intake of CPP disability applications decreased by approximately 25% in 2020 as less Canadians applied for the benefit. Possible reasons include the availability of the Canadian Emergency Response Benefit (CERB), more Canadians teleworking and the difficulty of obtaining signed medical reports from doctors (which is required as part of the application process). The decrease in intake has contributed to a lower CPP disability inventory and less decisions made in 2021. The assumption is that the decrease in new disability cases was a temporary decrease as CPP disability intake has returned to normal levels as the COVID-19 pandemic eases.

The AR31 ultimate aggregate values for the DIRs for males and females were set at 2.90 and 3.60, respectively. Since the aggregate values in 2021 for males and females are 2.25 and 2.98, respectively, it was assumed that the ultimate values of 2.90 and 3.60 would be reached gradually five years after 2021, in 2026. The AR30 assumption for years 2020 and later was 2.95 for males and 3.65 for females, just slightly above the DIRs assumed in AR31.

Another related assumption of disability incidence is the termination of those who were collecting disability benefits. The two components of these terminations are deaths and recoveries. Under AR31, the mortality of males in receipt of disability benefits is slightly worse at ages below 40, while marginally better thereafter compared to AR30. Under AR31, the mortality of females is slightly worse at younger ages, while slightly better at middle ages, and about the same thereafter compared to AR30. In AR31 both males and females are recovering slightly sooner compared to AR30, until the differences become negligeable around age 47.

6.5 Other considerations

6.5.1 Earnings distribution

The demographic assumptions are used to project the current population and number of covered workers into the future. However, the valuation largely depends not on numbers of members but on the amount of covered earnings.

We understand that the OCA has access to individual earnings data, except that there is a cap on earnings of $99,999. This data is used to determine averages by 5-year age bands and sex, but only considering earnings up to the YMPE (for the base CPP) and up to the AYMPE (for the additional CPP). While AR31 reports these averages, the actual valuation incorporates distributions around these averages. In projecting earnings into the future under the “best-estimate” assumptions, it is assumed that the distribution around these averages remains constant.

There is much discussion in the media about earnings inequality and, in particular, a widening of the gap between low and high earners. While this may be true at the very high and low earnings levels, it is unclear whether it is true for earnings levels that are material to the CPP. It can also be a very polarizing topic and incorporating an assumption of a widening or narrowing wage gap must be supported thoroughly.

AR31 includes a scenario analysis showing a widening of the earnings gap. This analysis shows that a widening of the gap may have a detrimental effect on the funding of the CPP.

6.5.2 CPP operating expenses

CPP operating expenses include those incurred by various government entities in managing the CPP but exclude those incurred by the CPPIB in managing the assets of the CPP. AR31 includes a projection of operating expenses for the base CPP and the additional CPP, both in dollar terms and as a percentage of total earnings.

Based on historical information and future expectations provided by ESDC, the OCA has projected future expenses as a percentage of total earnings to be 0.084% for the base CPP, a slight decrease from recent expense levels and 0.031% for the additional CPP, a slight increase from recent levels.

6.5.3 CPPIB expenses and added value due to active management

CPPIB expenses are not included in CPP operating expenses in AR31 but are reported as allocated to the CPPIB assets and accounted for separately in the investment expenses assumption. We support this method of reporting.

AR31 assumes that investment management expenses for the Core pool will be 0.95% per year. Of these, 0.77% per year are attributable to active management. Consistent with Canadian actuarial practice, AR31 reflects an assumption that the added value from active management will exactly equal the incremental expenses incurred to pursue that active management strategy. That is, no net added value is assumed to be either gained or lost. The Peer Review report for AR30 contained a full analysis on historical CPPIB expenses and added value due to active management which supports this assumption.

We agree with this approach at the current time and believe it is important to closely monitor the relationship both between incremental returns and incremental expenses, and the allocation of expenses between the basic CPP and the additional CPP, with a view to refining this assumption in the future.

6.6 Assumptions in the aggregate and opinion thereon

The Chief Actuary’s actuarial assumptions are best estimates, based on their review of past experience and judgement about the likely course of future experience. For most assumptions, there is considerable room for actuarial judgement. As a result, the range of values that would be considered reasonable can be quite wide. In our review of the major actuarial assumptions, we concluded that each of them is within the reasonable range.

Notwithstanding all this, we caution the reader that, since the range of reasonable assumptions is wide, so too is the range of reasonable valuation results. The sensitivity tests in AR31 present plausible ranges of results. However, actual results could be outside of the lower and higher cost projected results.

Section 7 – Sensitivity tests and scenario analyses

The core valuation measures the financial position of the CPP using best-estimate assumptions. Appendix E provides information on the uncertainty of results. This information includes sensitivity to varying plan experience, sensitivity to changes in individual actuarial assumptions and scenario analyses whereby certain macroeconomic events are assumed to occur.

7.1 Inter-valuation investment experience

7.1.1 Base CPP

There are two sensitivity tests with respect to investment return:

1. A one-time shock of 10% or 20% investment related gain / loss; and
2. A stochastic forecast showing probabilities of the MCR at the next triennial valuation if the only experience item differing from expected was investment related experience.

The results of these sensitivity tests are valuable to the reader. In particular, a one-time investment related loss of 20% would result in the MCR being very close to the legislated contribution rate. Also, there is a 16% probability that the MCR at the next valuation will exceed the legislated contribution rate (assuming no other experience gains or losses and no changes in the actuarial assumptions). These are not insignificant risks and present valuable information to the reader.

We question whether there is similar value in Table 111 as the low scenario and the high scenario are not applicable at this time.

7.1.2 Additional CPP

Information is presented on similar sensitivity for the additional CPP. However, as there are limited assets in the additional CPP, the tests are done 20 years into the future.

While we laud the OCA for trying to provide additional information, we question whether there is value in showing sensitivity information assuming variability 20 years into the future. The information shown does little other than indicate that the additional CPP currently has little investment related risk but is expected to have greater investment related risk in the future. The quantity of this “greater” risk is really simply unknown at this time.

7.2 Sensitivity testing

The report includes sensitivity tests on the most important assumptions. We believe that the assumptions selected for the sensitivity tests were the appropriate assumptions. Below, we provide some comments on each of the sensitivity testing.

7.2.1 Fertility

In general, the higher the assumed fertility rates, the better is the financial position of the base CPP as there are expected to be more future contributors to fund the past service liability of the base CPP. The opposite is true for a lower assumed fertility rate. There is minimal effect on the additional CPP of changes in fertility rates as there is no material unfunded liability. We agree with undertaking sensitivity analysis of fertility rates on the base CPP only.

The range selected for the sensitivity analysis was largely based on the range of values recently observed in the G7 countries. The sensitivity tests are a lower-cost ultimate total fertility rate for Canada of 1.84 and a higher-cost ultimate rate of 1.24 (compared to the assumed total fertility rate of 1.54). While this range is supportable based on the experience of other G7 countries, we suggest that it represents a very large deviation and that actual experience is unlikely to differ to this extent. Nevertheless, we are comfortable with the scenarios presented.

7.2.2 Mortality

The assumed rates of mortality are projected in the future using mortality improvement scales (one for males and one for females). If mortality improves at greater rates than assumed, members will live longer than assumed and the financial position of both the base CPP and the additional CPP will be worse than shown in the valuation. The opposite will be true if mortality improves at lesser rates than assumed.

The range selected for the sensitivity analysis on the mortality improvement scale was to assume that mortality improvements would fail to materialize (life expectancies at age 65 in 2050 are about 2 years lower) or that mortality improvement rates are higher than those assumed (life expectancies at age 65 in 2050 are about 2 years higher). This range of deviation results in a MCR decreasing from 9.54% to 9.17% (under the lower life expectancy scenario) and, more importantly, a MCR increasing from 9.54% to 9.86% (under the higher life expectancy scenario).

Given the high degree of uncertainty surrounding the mortality assumption and, in particular, future rates of improvement in mortality rates, the sensitivity of results is critical to understand and possibly explore more deeply. In particular, as more evidence and trends emerge globally, including advances in medicine and treatments, continued analysis into what mortality and improvement rates could lead to contribution insufficiency would be worthwhile to understand.

7.2.3 Migration

Sensitivity testing was undertaken only in respect of the base CPP. No sensitivity testing was done for the additional CPP under the premise that the assumed rates of migration are not a material assumption. We agree with this approach. We also agree that the ranges shown for the high cost and low cost scenarios are appropriate.

7.2.4 Inflation

The sensitivity tests for this assumption are a higher-cost scenario with an ultimate price increase rate of 1.0% and a lower-cost scenario with an ultimate rate of 3.0%. It is common for to show sensitivity to economic conditions by varying the assumed rates by 1% and we believe that the sensitivity testing for the rate of inflation is appropriate.

7.2.5 Real wage increases

The sensitivity tests for this assumption assume a variation of 0.6% in the assumed rate of real wage growth which was selected based on the aggregate experience of other G7 countries. We believe that the range is appropriate.

We note that this sensitivity test is particularly useful since the results can be counter-intuitive given that changes in the rate of increase in real wages both lowers contributions and lowers benefits.

7.2.6 75-year average real rate of return

The sensitivity tests for this assumption were developed using a stochastic approach with the higher-cost scenario being the scenario that was at the 90th percentile and the lower-cost scenario being the scenario that was at the 10th percentile. As the investment risk for the additional CPP is less than the investment risk for the base CPP, this approach resulted in a higher variation in returns for the base CPP than for the additional CPP.

This is by far the most volatile of the sensitivity tests. The higher-cost scenario results in minimum contribution rates well in excess of the legislated contribution rates for both the base CPP and the additional CPP.

We agree with the manner in which this sensitivity test was undertaken, however, we note that many such stochastic sensitivity testing for investment volatility considers the 5th and 95th percentiles as the range of likely outcomes. This sensitivity test highlights the fact that investment risk is the largest single risk facing the CPP.

7.2.7 Disability

Sensitivity testing was undertaken only in respect of the base CPP and only in respect of the incidence of pre-retirement disability. No sensitivity testing was done for the additional CPP under the premise that the incidence of pre-retirement disability is not a material assumption. No sensitivity testing was done for post-retirement disability since it is a relatively new benefit and there is not yet any credible experience on which to base the assumption. We agree with undertaking sensitivity analysis of the rates of incidence of disability on only pre-retirement disability and for only the base CPP.

If rates of disability are higher than assumed, the cost of the CPP will be greater as both benefits will be higher, and contributions will be lower. The opposite will be true if rates of disability are lower than assumed.

The sensitivity tests for this assumption are an ultimate lower-cost rate per thousand eligible workers of 1.90 for males and 2.60 for females, and an ultimate higher-cost rate of 3.90 for males and 4.80 for females compared with the best estimate assumptions of 2.90 for males and 3.60 for females. Under the lower-cost scenario, the MCR decreases to 9.31 and in the higher cost scenario, it increases to 9.76.

While the range of disability incidence rates used appear to be appropriate, it relies on the current definition of disability under the CPP remaining unchanged. With increasing rates of disability due to mental health and Canada’s Disability Inclusion Action Plan, it is possible that the definition of disability could be modified, and incidence could increase in the future. We recommend the OCA to be diligent in reviewing the causes for disability incidence.

7.3 Scenario analyses

In addition to the sensitivity tests on individual assumptions, AR31 includes financial information on four alternate scenarios.

7.3.1 Higher and lower economic growth

AR31 includes the effect on the best estimate MCR and AMCR of two deterministic scenarios of future economic growth. These scenarios are not derived from economic forecasts of GDP but are derived by changing best estimate assumptions on participation rates, unemployment rates, retirement take up rates and real wage increases. It would have been useful to illustrate the impact of changing these assumptions on GDP growth.

The assumptions on immigration are not changed, although one would expect that future economic growth would affect policy decisions on immigration levels. The effect would have been greater with changes in immigration assumptions.

The analysis shows separately the effect of the change in the real wage assumptions, although it is difficult to see how different scenarios of economic growth would not affect real wage increases.

The analysis shows a very plausible range of MCR between 9.11% and 10.12%, and of AMCR between 1.73%/6.92% and 2.34%/9.36%.

We find this analysis very useful, in that it shows how an increase in contributions above the legislated levels are very plausible and that decision makers need to be careful before suggesting improvements.

7.3.2 Change in earners / earnings distribution

AR31 includes a scenario analysis showing a widening of the earnings gap. The best-estimate scenario assumes a stable distribution of earners and earnings by level over time with, the same nominal wage increase applied to all earners independent of their level of earnings.

In the future, the pattern of increase in earnings by level may change as the profile of the labour force evolves. New technologies, automatization, labour shortages and evolving skills requirements are among the factors that can influence earnings and earners distributions, which could lead to a widening of the earnings gap between lower and higher earners.

Under the considered scenario, instead of having uniform wage increases for all earners over the projection period, different wage increases are assumed until 2045 based on the level of earnings. After 2045, uniform wage increases in line with the best-estimate assumption are applied. This analysis shows that a widening of the gap may have a detrimental effect on the funding of the CPP, increasing the MCR by 0.34% to 9.88%.

As noted in Section 4 of this report, we suggest the OCA pursue more detailed analysis on earnings distributions of CPP contributors and the changes in such distributions over time. In Section 6.5.1, we also recommend that the OCA devote more resources to the assumption of earnings distribution around the average as we believe that the importance of this assumption is likely to grow, particularly as more service is accrued under the additional CPP.

7.3.3 Stagflation

We commend the OCA for including a scenario of stagflation in AR31. Prior to 2021, very few people would have predicted a return of stagflation. However, the events of 2020 and 2021 make the return of stagflation a very real possibility.

We believe that the manner in which stagflation is modelled is appropriate. In particular, stagflation will lead to a prolonged (up to 10 years) period of increased unemployed, decreased real wage increases and decreased investment returns. As noted in AR31, while the decrease in investment returns would be detrimental to the CPP, the reductions in the workforce and the reduced real wage increases would largely offset the lower investment returns such that the period of stagflation would only have a moderate effect on the MCR. This information is comforting to the reader.

We encourage the OCA to continue to think outside the box at each valuation in considering the current economic environment in developing plausible scenarios for the future analysis.

7.3.4 Climate change

The climate change scenarios presented in AR31 are one example of other possible scenarios. We recommend the OCA continues to work on the effects of climate change on relevant assumptions, such as possible decrease in real wages, future contributions, interest rates and equity and other returns. Some of the effects on future returns may have already been reflected in current market expectations and in asset prices. The OCA would have to take into account such market expectations. We hope that future work will be sufficiently credible to allow the OCA to incorporate those effects on the best estimate assumptions.

We commend the OCA for including these scenario analyses as they provide a good indication of some of the risks facing the CPP.

We believe that the illustration of alternative scenarios adds considerable value to the actuarial review. In light of this, we recommend that the OCA consider the use of additional alternative scenarios, possibly incorporating key elements of both economic and demographic assumptions on an internally consistent multi-variable basis.

Recent developments relating to the COVID-19 pandemic underscore the importance of multi-factor sensitivity analyses of the CPP. These developments to date demonstrate the interrelations and high correlation of some of the demographic, economic and investment factors under tail conditions. Although such conditions are impossible to accurately predict, their use in scenario development illustrates the value of such analysis in the assessment of the sustainability of the CPP. They can also be useful in setting the values used in sensitivity testing of the program.

We believe that sensitivity and scenario tests represent valuable tools, if used appropriately. They provide the reader information that may be used to estimate the financial impact of a change in a particular best-estimate assumption. They also point out that, because of the uncertainty involved in any projection of the future, the best-estimate results will not turn into reality, as well as the importance of the key assumptions used.

The reader should be cautious in interpreting the information provided about the likely variations in the assumptions. In particular, the reader should be aware that actual outcomes can range more widely than are shown by the sensitivity and scenario tests and that the likelihood of experiencing results outside the range shown may be even higher than is projected. This is due to the inherent unpredictability and interrelationship between some of the key assumptions, rather than a defect in the Chief Actuary’s analysis.

Section 8 – Communication of results

In this Section, we address the following question:

8.1 Background

AR31 is a publicly available report. Various supporting information is available on the OSFI website. The supporting working papers for AR31, which provide a comprehensive overview of the methodology and assumptions used in deriving the projections, are provided to all provincial governments and are available to the public upon request. We believe that the information in AR31, together with the other supporting documentation, is sufficient for any reader to obtain a full understanding of the valuation.

8.2 Observations

AR31 includes a great deal of detail, a comprehensive Executive Summary, and many useful tables and charts. The overall conclusions are clearly set out.

AR31 has both a broad audience and a technical audience. The broad audience is mainly interested in the high-level results of the actuarial review. The technical audience of actuaries, economists, demographers, policy analysts, and others is interested in more extensive detail regarding the provisions, data, methods, assumptions, demographic projections and financial projections.

The Chief Actuary recognizes the dual nature of the audience and has included the high-level results in the main body of the report, while placing the more technical information in appendices. Thus, the form of the report continues to be a compromise, containing more detail than is needed by the broad audience, and less than may be desired by technical readers.

We anticipate that the Chief Actuary will continue to enhance the format and information provided in the actuarial valuation report in future such reports. For example, even more charts could be provided to illustrate several additional areas of this complex topic. The Chief Actuary may look to the Actuarial Report of the Quebec Pension Plan as at December 31, 2021, and valuation reports for other very large pension plans for ideas on how to improve the visual aspect of the report.

We also believe that in several of the tables included in the report, a certain number of years of historical data need to be added to provide perspective to the reader to assist in understanding the patterns involved. At the same time, certain tables, for example Table 7, could be shortened by excluding the data for some of the individual years.

Signatures

This report has been prepared in accordance with accepted actuarial practice in Canada, and is respectfully submitted on May 5, 2023 by

• Stephen Butterfield, FCIA
• Michel St. Germain, FCIA, FSA
• Jill Wagman, FCIA, FSA, Chairperson

Appendix A

Responses of the Office of the Chief Actuary to the recommendations of the AR30 independent review panel

The following presents the opinions and recommendations of the AR30 independent peer review panel and the corresponding actions taken or to be taken by the OCA.

A.1. Professional experience

Opinion and recommendation of the peer review panel:

OCA’s planned action on Recommendation 1: As a result of this recommendation and prior to AR31, the OCA hired an external consultant to assist in enhancing the OCA’s methodologies to develop long-term capital assumptions in the context of the investment assumption-setting process for the CPP Office of the Chief Actuary Page 2 of 9 November 2022 actuarial reports. The consultant is a Fellow of the Canadian Institute of Actuaries as well as a Chartered Financial Analyst (CFA) with over 40 years of combined experience in the actuarial and investment fields. The consultant met with representatives of the CPPIB and OCA team members in order to gain a thorough understanding of CPPIB’s investment framework and the OCA’s assumption-setting process. His overall assessment is that the OCA’s assumption-setting process is robust and that the level of research that is conducted goes beyond what he has seen with peers in his experience. The consultant prepared a report outlining some recommendations and areas of research that could further improve the OCA’s assumption-setting process. Some of these recommendations were implemented for AR31, and others will be implemented for future reports. The consultant worked in close collaboration with existing OCA members throughout the project. A significant portion of the research supporting the consultant’s recommendations was conducted by OCA members. The consultant also met with OCA members on a weekly basis to discuss various investment-related topics.

Between AR30 and AR31, the OCA also identified employees who have experience and/or interest in conducting investment-related work. These employees are from both the social security side and pension plan side of the OCA and were involved in various investment projects over the last couple of years. They are building their investment expertise and working together as a team. An actuary, who is also a CFA, has been hired to lead this group of employees and act as a permanent investment specialist for the office. The objective is to work towards having a formal investment function within the OCA to ensure that the OCA continues to expand its knowledge of investment-related matters and shares it efficiently across the office.

Finally, OCA staff attend professional webcasts dedicated to investment-related issues on an ongoing basis. They are encouraged to attend CIA Pension and Investment Seminars or any other relevant webcasts.

A.2. Professional and statutory requirements

Opinion and recommendation of the peer review panel:

OCA’s planned action on Recommendation 2: The OCA implemented a rigorous documentation project of its valuation model, including the programs and processes to perform valuations runs. A consultant was hired to assist in documenting the process in detail. The project lead on this project at the OCA has been working with Actucan for 27 years. The documentation project is nearly final and is expected to be completed before the next triennial report. All the documentation will serve as training and resource material for OCA staff.

The OCA is not considering replacing its valuation model (Actucan) with other software. The reason is that there is no off-the-shelf software available that would provide a good replacement for Actucan. Further, there is substantial risk to moving to a new software. Even if a good replacement were available, any new software would need to have a good track record, where it is widely used, has been shown to be reliable, and is regularly maintained. The software behind Actucan (Fortran) still meets all these criteria. The OCA would need a strong rationale to show that any new software would be an improvement over Actucan.

Even though the OCA does not intend on replacing Actucan, the OCA plans on improving all the surrounding systems to Actucan, such as data preparation, the user interface, and automatization of the use of output. As well, the ongoing documentation project will include learning resources for Fortran, such as manuals and videos.

A.3. Data

Opinion and recommendation of the peer review panel:

OCA’s planned action on Recommendation 3: The OCA continues to work with its data providers to address data enhancement priorities.

1. For the Record of Earnings file provided by Service Canada - Removing the $99,999 limit on earnings for each individual per employer:
   • Following AR30, the OCA was in further contact with Service Canada regarding this issue. The OCA was informed by Service Canada that the capacity to process change requests has been limited due to priority being given to major transformation projects underway until 2024-2025 regarding the CPP and OAS program (including the enhancement to the CPP). As well, and as previously indicated by Service Canada, increasing the ROE file $99,999 earnings limit would involve highly complex work since there would be impacts to exchanges, reports, and correspondence. Service Canada stated that discussions are continuing with partners to determine the best approach and timing for increasing the ROE earnings limit. As such, for the time being, this issue remains unresolved. → Unresolved
2. Audit Confirmations of Data used for Valuations
   • As requested by the OCA to ESDC, the OCA now receives, as of 2021, annual documents from ESDC regarding the attestation of data quality in the Record of Earnings and CPP Benefit Master Files.

A.4. Methodology

Opinion and recommendations of the peer review panel, and OCA’s planned actions:

OCA’s planned action on Recommendation 4: The OCA puts a lot of thought into how to illustrate the sensitivity of the Plan’s sustainability to various factors. In addition to the individual sensitivity tests to key assumptions, the AR31 continues to include scenarios of higher and lower economic growth. Although not specific, these scenarios highlight that many factors could lead to long-term economic growth in Canada being different than assumed under the best-estimate scenario. The factors mentioned are broad in scope and include geopolitical conflicts such as the current conflict in Ukraine, health crises such as the COVID-19 pandemic, extreme weather events due to climate change, the timing and pace of transition to a green economy, the pace of technological advances and innovation, worldwide policies on protectionism vs. globalisation as well as demographic pressures from an aging population.

The investment section of the Appendix on uncertainty was also reviewed in AR31. The focus of the section is to illustrate the impact of intervaluation investment experience on the minimum contribution rates in a more direct fashion than in previous reports.

In addition, AR31 includes a new section that focuses on assessing and illustrating downside risks due to potential or emerging trends (base CPP only). Although the scenarios presented in this section are not meant to be predictions, they are useful in understanding the potential risks facing the Plan. For this purpose, three potential downside risks were considered: a widening gap in earnings between lower and higher earners, stagflation, and climate change.

The stagflation scenario in AR31 takes into account the economic and investment impacts of a potential period of unanchored inflation and high unemployment resulting from the evolving impacts of the pandemic and escalation of the conflict in Ukraine. For the climate change scenarios in AR31, the effects of three different hypothetical transitions to a lower carbon economy on the GDP growth rate are used as a basis to assess the potential impact on the base Plan minimum contribution rate.

OCA’s planned action on Recommendation 5: The OCA meets with Statistics Canada to discuss the OCA’s demographic assumptions. The general comments provided by Statistics Canada indicated that the OCA’s assumptions are reasonable. The OCA consults as well on an ongoing basis with peers at the U.S. Social Security Administration and the Québec Pension Plan (QPP) regarding various topics, including demographic trends. The OCA also collaborates with staff at the QPP on the International Social Security Association’s survey of assumptions, which gathers information on assumptions used for social security programs around the world.

In respect of the economic assumptions, the OCA will continue to consider the economic forecasts from a number of sources such as the Conference Board of Canada, University of Toronto, federal Department of Finance, major Canadian banks, and others.

As mentioned in response to Recommendation 1 above, the OCA hired an investment consultant to assist with enhancing the OCA’s methodologies to develop long-term capital assumptions in the context of the investment assumption-setting process for the CPP actuarial reports. An actuary with the CFA designation later joined the OCA to assist with this ongoing work and act as a permanent investment specialist for the office. The OCA will as well continue to maintain contact and hold discussions with investment experts at the CPPIB.

The OCA will also continue to hold its regular triennial CPP-related seminars where various demographic, economic, and investment experts are invited to present on their long-term perspectives. The most recent CPP seminar was held virtually by the OCA in September 2021. As well, OCA staff will continue to attend seminars held by Retraite Québec on the long-term perspectives in respect of the Québec Pension Plan (QPP). The most recent QPP seminar attended by OCA staff was held virtually in October 2021. Such QPP seminars occur regularly and are of benefit to the OCA, since projections for Québec are required for the CPP actuarial valuations. The various presentation materials from the CPP and past QPP seminars are available on OSFI’s Web site at: Inter-Disciplinary Seminars.

As done for previous reports, the OCA will consider all of the above-mentioned information in developing the best-estimate assumptions as well as assumptions for sensitivity analysis and lower- and higher-cost scenarios for the CPP actuarial reports.

While the views of external experts are considered, the ultimate responsibility for the assumptions and methodology rests with the Chief Actuary.

A.5. Assumptions in the aggregate

Opinion and recommendation of the peer review panel:

OCA’s planned action on Recommendation 6: As mentioned above, the OCA hired an investment consultant to assist with enhancing the OCA’s methodologies to develop long-term capital assumptions in the context of the investment assumption-setting process for the CPP actuarial reports. For AR31, the consultant reviewed and recommended changes to the OCA’s existing investment assumptions methodologies. In order to improve the sophistication of the OCA’s investment model for the CPP, as well as more closely match the CPPIB’s investment strategy, some of these recommendations were implemented, including updates to the valuation models of developed market sovereign bonds, credit, and developed market equities.

As also mentioned earlier, the OCA hired a CFA, who is also an actuary with significant experience in retirement and investment consulting. He is responsible for leading an internal investment function within the OCA, with a view of staying up to date on trends and continuously improving our assumption-setting process.

The allocation of expenses between the base and additional Plans will continue to be monitored as more information becomes available. Finally, recognizing the importance of leverage as part of CPPIB’s current investment strategy, AR31 reflects some leverage in the assumed ultimate asset mix.

A.6. Communication of results

Opinion and recommendation of the peer review panel:

OCA’s planned action on Recommendation 7: For AR31, the Executive Summary was replaced with a much shorter (three pages) section of highlights of the Report, consisting only of summary tables with the most significant information for the reader. As well, a one-page standalone infographic document of the Report highlights will be published.

Given the size of the CPP actuarial report, the OCA decided not to include additional charts for AR31. As well, given the number and size of tables in the report, it was decided not to include a certain number of historical years before projections in most tables. The OCA will reconsider expanding the use of charts and adding historical data before projections in tables for future reports.

Additional information regarding CPP actuarial reports is available to the public upon request.

A.7. Other matters related to AR30

Recommendations of the peer review panel and OCA’s planned actions:

OCA’s planned action on Recommendation 8: For AR31 and in accordance with the Canadian Institute of Actuaries’ guidance regarding the determination of best-estimate discount rates, it is assumed that the additional returns resulting from CPPIB’s active management strategy (0.77% for the base CPP and 0.52% for the additional CPP) will equal the investment expenses incurred from the active management strategy. This assumption is made for AR31, since the OCA considers that there was not enough supporting evidence to justify consistent and reliable added returns from CPPIB’s active management strategy over the long term.

The OCA will continue to analyze the incremental expenses incurred over time to implement the CPPIB’s active management strategy in order to assess whether value is being added (or lost) consistently and reliably over the long term.

OCA’s planned action on Recommendation 9: The OCA continues to maintain effective two-way communication with both the CPPIB and Statistics Canada.

The OCA is in regular contact with the Demography division of Statistics Canada, and both offices are well aware of the methods used for each organization’s respective demography projections.

The OCA and the CPPIB met regularly over the last three years to discuss the CPPIB’s investment strategy and overall investment perspectives. The communication between the two organizations has resulted in improved sharing of information, which in turn allowed the OCA to improve the process for the development of the investment assumptions and range of variability for AR31. The relationship is also beneficial to the CPPIB. The CPPIB uses information from the OCA in order to develop their overall risk targets and Reference Portfolios. The Chief Actuary and a Managing Director from the CPPIB delivered an international presentation on two separate occasions in 2022 highlighting the importance of effective collaboration between investors and actuaries and using the relationship between the OCA and CPPIB as an example.