Annual Report of the Canada Pension Plan 2014–2015

Contributions

The CPP is financed through investment income and through mandatory contributions from employees, employers and those who are self-employed.

Workers start contributing to the Plan at age 18, or from the Plan's beginning in 1966, whichever is later. The first $3,500 of annual earnings is exempted from contributions. Contributions are then made on earnings between $3,500 and $53,600, which is the earnings ceiling for 2015.

Employees contribute at a rate of 4.95 percent, and employers match that with an equal contribution. Self-employed individuals contribute at the combined rate for employees and employers of 9.9 percent on net business income, after expenses.

While many Canadians associate the CPP with retirement pensions, the CPP also provides disability, death, survivor, children's and post-retirement benefits. The CPP administers the largest long-term disability plan in Canada. It pays monthly benefits to eligible contributors with a disability and also to their children, helps some beneficiaries return to the workforce through vocational rehabilitation services and offers return-to-work support.

Most benefit calculations are based on how much and for how long a contributor has paid into the CPP and, in some cases, the age of the beneficiary. With the exception of the post-retirement benefit, benefits are not paid automatically—everyone must apply.

Retirement pensions

To begin receiving a retirement pension, the applicant must have made at least one valid contribution to the Plan and must have reached the age of 60.

Retirement pensions represent nearly 77 percent ($29.6 billion) of the total benefit amount paid out ($38.7 billion) by the CPP in 2014–2015. The amount of contributors' pensions depends on how much and for how long they have contributed and at what age they begin to receive the benefits. In 2015, the maximum monthly retirement pension at age 65 was $1,065. The average payment in 2014–2015 was $543.05.

Adjustments for early and late receipt of a retirement pension

Canadians are living longer and healthier lives, and the transition from work to retirement is increasingly diverse. The CPP offers flexibility for older workers who are making the transition to retirement.

CPP contributors can choose the right time for their retirement pension based on their individual circumstances and needs. Contributors have the flexibility to take their retirement pension earlier or later than the normal age of 65. In order to ensure fair treatment of contributors and beneficiaries, those who take their retirement pension after age 65 receive a higher amount. This adjustment reflects the fact that these beneficiaries will, on average, make contributions to the CPP for a longer period of time but receive their benefit for a shorter period of time. Conversely, those who take their retirement pension before age 65 receive a reduced amount, reflecting the fact that they will, on average, make contributions to the CPP for a shorter period of time but receive their benefit for a longer period of time.

Since 2011, a gradual change in these adjustment factors was implemented to modernize the CPP. By 2016, the adjustment factors will have reached their adjusted actuarially fair levels. The new factors will ensure that, on average, payments of retirement pensions are the same over time regardless of when individuals choose to begin their pensions.

Post-retirement benefits

In 2012, a new CPP benefit, the post-retirement benefit, was implemented. It allows CPP retirement pension beneficiaries who keep working to increase their retirement income by continuing to participate in the CPP, even if they are already receiving the maximum CPP retirement pension.

Canadians between the ages of 60 and 64 who receive a CPP or QPP retirement pension and work outside of Quebec began making mandatory CPP contributions toward the post-retirement benefit on January 1, 2012, while those between the ages of 65 and 70 who receive the retirement benefit while working can choose whether to continue contributing. No contributions are made after age 70. Contributions toward the post-retirement benefit do not create eligibility for or increase the amount of other CPP benefits. Payment of the benefit started in 2013.

In 2014–2015, 755,000 CPP retirement pensioners received a post-retirement benefit. The maximum monthly benefit amount at age 65 for 2015 was $26.63. The average monthly payment in 2014–2015 was $11.84. As a working beneficiary, each year of contributions results in a post-retirement benefit, which is payable the following year. It is added to any previously earned post-retirement benefits. The amount of these benefits increases with the cost of living and is payable until the death of the contributor.

Disability benefits

The disability pension provides partial earnings replacement to CPP contributors who cannot work due to a severe and prolonged disability resulting from a physical or mental condition. Dependent children of disabled beneficiaries may also be eligible for children's benefits.

In 2014–2015, a total of $4.2 billion in benefits were paid to 329,000 disabled beneficiaries and to 83,000 children of disabled beneficiaries. These benefits represented approximately 11 percent of the total benefits paid out by the CPP in 2014–2015.

The disability pension includes a monthly flat rate, which was $465.84 in 2015. It also includes an earnings-related portion, which is 75 percent of the retirement pension that would have been earned had the contributor not become disabled. In 2015, the maximum disability benefit was $1,264.59 per month. The average monthly payment in 2014–2015 was $866.53.

The benefit paid to dependent children of disabled beneficiaries is a flat rate. In 2015, the amount was $234.87 per month. To be eligible, children must be either under age 18, or between ages 18 and 25 and in full-time attendance at school or university.

Survivor benefits

Survivor benefits are paid to the surviving spouse or common-law partner of the contributor and his or her dependent children. The benefit amount varies depending on a number of factors, including the age of the surviving spouse or common-law partner at the time of the contributor's death and whether the survivor also receives other CPP benefits.

In 2014–2015, there were 1.1 million survivors receiving benefits. In 2014–2015, survivor benefits represented nearly 12 percent ($4.5 billion) of the total benefits paid out by the CPP.

The maximum survivor's pension for those under age 65 was $581.13 per month in 2015. This includes a flat-rate portion of $181.75 and an earnings-related portion, which is 37.5 percent of the deceased contributor's retirement pension. The maximum monthly amount at age 65 and over was $639.00, consisting of 60 percent of the deceased contributor's retirement pension. For 2014–2015, the average monthly payment for all survivor pensions was $328.27.

The benefit paid to dependent children of deceased contributors is a flat rate. In 2015, the amount was $234.87 per month. To be eligible, children must be either under age 18, or between ages 18 and 25 and in full-time attendance at school or university.

Death benefits

The CPP death benefit is a lump-sum payment that amounts to six times the amount of the deceased contributor's monthly retirement pension, up to a maximum of $2,500. In 2014–2015, death benefit payments represented less than 1 percent of the total benefits paid out by the CPP. The average payment was $2,294 in 2014–2015.

Benefit summary

The table below summarizes the maximum and average monthly amounts paid to beneficiaries by benefit type.

* at age 65

Provisions

The CPP includes provisions that help to compensate for periods when individuals may have relatively low or no earnings. Dropping low- or no-earnings periods from the calculation of average earnings increases the amount of one's CPP benefit.

Features

The CPP also includes many progressive features that recognize family and individual circumstances. These features include pension sharing, credit splitting, portability and indexation.

Actuarial reporting

The Twenty-sixth Actuarial Report on the Canada Pension Plan presents the financial status of the CPP as of December 31, 2012, and takes into account the recent changes to modernize the Plan, as well as the actual demographic and economic trends since December 31, 2009. According to the Report, the CPP is expected to meet its obligations and remain financially sustainable over the long term under the current contribution rate of 9.9 percent.

A panel of three independent Canadian actuaries, selected by the United Kingdom Government Actuary's Department (GAD) through an arm's length process, reviewed the Twenty-sixth Actuarial Report on the Canada Pension Plan. The external panel's findings confirmed that the work performed by the OCA on the Report met all professional standards of practice and statutory requirements, and stated that the assumptions and methods used were reasonable. In addition to these main conclusions, the panel made a number of recommendations regarding the preparation of future actuarial reports. The recommendations dealt with various aspects of the reporting process, including data, methodology, assumptions and communication of results. The GAD concluded that the opinions given by the panel adequately addressed all the main issues. As a result, Canadians can have confidence in the results of the Twenty-sixth Actuarial Report on the Canada Pension Plan and the conclusions reached by the Chief Actuary about the long-term financial sustainability of the Plan.

The next triennial actuarial report on the Canada Pension Plan, which reports on the financial status of the Plan as of December 31, 2015, is due by December 2016.

To view the CPP's actuarial reports, reviews and studies, visit the Office of the Superintendent of Financial Institutions website.

Funding approach

When it was introduced in 1966, the CPP was designed as a pay-as-you-go plan with a small reserve. This meant that the benefits for one generation would be paid largely from the contributions of later generations. This approach made sense under the demographic and economic circumstances of the time, due to the rapid growth in wages, labour force participation and the low rates of return on investments.

However, demographic and economic developments, as well as changes to benefits and an increase in disability claims in the following three decades, resulted in significantly higher costs.

When federal, provincial and territorial Ministers of Finance began their review of the CPP's finances in 1996, contribution rates, already legislated to rise to 10.1 percent by 2016, were expected to rise again—to 14.2 percent by 2030—to continue to finance the CPP on a pay-as-you-go basis. Continuing to finance the CPP on the same basis as in the past would have meant imposing a heavy financial burden on the future Canadian workforce. This was deemed unacceptable by the participating governments.

Amendments were therefore made in 1998 to gradually raise the level of CPP funding by: increasing contribution rates over the short term; reducing the growth of benefits over the long term; and investing cash flows not needed to pay benefits in the financial markets through the CPP Investment Board in order to achieve higher rates of return. A further amendment was included to ensure that any increase in benefits or new benefits provided under the CPP would be fully funded. The reform package agreed to by the federal and provincial governments in 1997 included:

• The introduction of steady-state funding – This replaced pay-as-you-go financing to build a reserve of assets and stabilize the ratio of assets to expenditures over time. According to the Twenty-sixth Actuarial Report on the Canada Pension Plan, the level of assets under steady-state funding is projected to stabilize at a level equal to about five years of expenditures. Investment income from this pool of assets will help pay benefits as the large cohort of baby boomers retires. Steady-state funding is based on a constant rate that finances the CPP without the full-funding requirement for increased or new benefits. The steady-state rate was determined to be 9.84 percent for 2016 and thereafter in the Twenty-sixth Actuarial Report on the Canada Pension Plan.
• The introduction of incremental full funding – This means that changes to the CPP that increase or add new benefits will be fully funded. In other words, benefit costs are paid as the benefit is earned, and any costs associated with benefits that are already earned and not paid for are amortized and paid for over a defined period of time, consistent with common actuarial practice. In the Twenty-sixth Actuarial Report on the Canada Pension Plan, the full-funding rate was determined to be 0.01 percent for 2013 and thereafter. According to CPP Regulations regarding the calculation of the Plan's contribution rates, if the full-funding rate is less than 0.02 percent, then it is deemed to be zero. As a result, the full-funding rate under the Twenty-sixth Actuarial Report on the Canada Pension Plan is deemed to be zero, and the funding of the most recent amendments to the CPP is provided entirely by the steady-state rate. The minimum contribution rate required to fund the CPP, which is the sum of the steady-state and full-funding rates, is thus equal to the steady-state rate of 9.84 percent for 2016 and thereafter.

Both of these funding objectives were introduced to improve fairness across generations. The move to steady-state funding eases some of the contribution burden on future generations. Under full funding, each generation that receives benefit enrichments is more likely to pay for them in full and not pass on the cost to future generations. These full-funding requirements were made operational through new regulations that came into effect with the passage of An Act to amend the Canada Pension Plan and the Old Age Security Act (2008).

Financing

According to the financial projections of the Twenty-sixth Actuarial Report on the Canada Pension Plan, the annual amount of contributions paid by Canadians into the CPP is expected to exceed the annual amount of benefits paid out up to and including 2022, and to be less than the amount of benefits thereafter. Funds not immediately required to pay benefits will be transferred to the CPP Investment Board for investment. Plan assets are expected to accumulate rapidly over this period and, over time, will help pay for benefits as more and more baby boomers begin to collect their retirement pensions. In 2023 and thereafter, as baby boomers continue to retire and benefits paid begin to exceed contributions, investment income from the accumulated assets will provide the funds necessary to make up the difference; however, contributions will remain the main source of funding for benefits.

The goal of the financing policy of the CPP is to ensure the long-term financial sustainability of the Plan by stabilizing the ratio of assets to expenditures under the steady-state contribution rate. As such, the key measure of the financial health of the CPP is the adequacy and stability of the CPP's steady-state contribution rate and, thus, the legislated rate over time. The Twenty-sixth Actuarial Report on the Canada Pension Plan provides comparisons of the assets, actuarial liabilities, asset shortfall and assets to liability percentages under two approaches. The first, referred to as the "open group approach," considers the benefits and contributions of both current and future Plan participants and is consistent with the partial funding design of the CPP. Under this approach, the Plan's assets represented 99.6 percent of the actuarial liability (with an asset shortfall of $8.9 billion) as at December 31, 2012. The open group approach is considered by the OCA as being the most appropriate in the context of the CPP and confirms the Plan's long-term financial sustainability under a 9.9 percent contribution rate. The second approach, the "closed group approach," considers only current participants and does not recognize future contributions as a major source of financing and, as such, it is considered by the OCA as being inappropriate in assessing the financial sustainability of the CPP. A study, titled Assessing the Sustainability of the Canada Pension Plan through Actuarial Balance Sheets – Actuarial Study No. 13 describes both approaches in more detail and is available on the website of the Office of the Superintendent of Financial Institutions.

If, at any time, the legislated contribution rate is lower than the minimum contribution rate, and if the Ministers of Finance do not recommend either increasing the legislated rate or maintaining it, then legislative provisions would apply to sustain the CPP. An increase in the legislated rate would be phased in over three years, and benefit indexation would be suspended until the following triennial review. By law, any further enhancement of the CPP must be fully funded. The next triennial review in 2016–2018 will examine the financial status of the CPP based on the results of the next triennial actuarial report.

CPP Account

A separate account, the CPP Account, has been established in the accounts of the Government of Canada to record the financial elements of the CPP (i.e. contributions, interest, earned pensions and other benefits paid, as well as administrative expenditures). The CPP Account also records the amounts transferred to, or received from, the CPP Investment Board (CPPIB). Spending authority is limited to the CPP's net assets. The CPP assets are not part of the federal government's revenues and expenditures.

In keeping with An Act to amend the Canada Pension Plan and the Canada Pension Plan Investment Board Act (Bill C-3), which came into force on April 1, 2004, the CPPIB is responsible for investing the remaining funds after the CPP operational needs have been met. The CPP Account's operating balance is managed by the Government of Canada.

CPP Investment Board

Created by an Act of Parliament in 1997, the CPPIB is a professional investment management organization with a critical purpose—to help provide a foundation on which Canadians build financial security in retirement. The CPPIB invests the assets of the CPP not currently needed to pay pension, disability and survivor benefits.

The CPPIB is accountable to Parliament and to the federal and provincial Ministers of Finance who serve as the CPP's stewards. However, the CPPIB is governed independently from the CPP, operating at arm's length from governments. Its headquarters are located in Toronto, with offices in Hong Kong, London, Luxembourg, New York and São Paulo.

The CPPIB's legislated mandate is to maximize investment returns without undue risk, taking into account the factors that may affect the funding of the CPP and its ability to meet its financial obligations.

According to the Twenty-sixth Actuarial Report on the Canada Pension Plan, the Chief Actuary reaffirmed that the CPP remains sustainable at the current contribution rate of 9.9 percent throughout the 75-year period of his report. The report also indicates that CPP contributions are expected to exceed annual benefits paid until 2023, when a portion of the investment income from the CPPIB will be needed to help pay CPP benefits.

For more information on the CPPIB mandate, governance structure and investment policy, visit the Canada Pension Plan Investment Board website.

CPP assets and cash management

The 2004 legislation (Bill C-3) stipulates that any excess cash to the CPP must be transferred to the CPPIB once the benefit and administration expenses have been paid, to gain a better return. The cash flow forecasts of the CPP determine the amount of funds to be transferred to or from the CPPIB, and these forecasts are updated regularly.

The CPP administration continues to work closely with the CPPIB, various government departments and banks to coordinate these transfers and manage a tightly controlled process. A control framework is in place to ensure that the transfer process is followed correctly and that all controls are effective. For instance, the CPP administration obtains confirmation at all critical transfer points and can therefore monitor the cash flow from one point to the next.

CPP net assets

As at March 31, 2015, the CPP net assets totalled $269.6 billion. The Government of Canada held $5.0 billion to meet CPP financial needs. The remaining $264.6 billion is managed by the CPPIB.

For the 10-year period ending March 31, 2015, the Fund held by the CPPIB had an annualized net rate of return of 8 percent or $129.5 billion in cumulative net investment income.

Investing for our future

In terms of net assets, the CPP Fund ranks among the world's 10 largest retirement funds. In managing the Fund, the CPPIB pursues a diverse set of investment programs that contribute to the long-term sustainability of the CPP.

In 2006, the CPPIB made the strategic decision to move away from index-based investments towards a more active investment approach in order to seek returns higher than those available from passive investments.

The CPPIB invests in public equities, private equities, bonds, private debt, real estate, infrastructure, agriculture and other investment areas. The CPPIB's investments have become increasingly international, as it diversifies risk and seeks growth opportunities in global markets. In doing so, the CPPIB applies its comparative advantages—scale, certainty of assets and a long investment horizon—to pursue the best investment opportunities in the world.

The CPPIB draws on internal expertise and partnerships with external investment managers to build its global portfolio.

CPPIB reporting

The CPPIB reports on a quarterly basis. Legislation requires the CPPIB to hold public meetings at least every two years in each province, excluding Quebec, which operates the QPP.

The purpose of these meetings is for the CPPIB to present its most recent annual report and to provide the public with the opportunity to ask questions about the policies, operations and future plans of the CPPIB.

Collecting and recording contributions

All CPP contributions are remitted to the Canada Revenue Agency (CRA). The CRA also assesses and verifies earnings and contributions, advises employers and employees of their rights and responsibilities, conducts audits and reconciles reports and T4 slips. To verify that contribution requirements are met, the CRA applies a compliance and enforcement process that can vary from a computerized data match to an on-site audit.

As of March 31, 2015, there were 1,734,765 existing employer accounts. In 2014–2015, the CRA conducted 51,331 examinations to promote compliance with the requirements to withhold, report and remit employer source deductions. Employers and employees account for approximately 95 percent of contributions, and the remaining 5 percent comes from the self-employed. In 2014–2015, contributions amounted to $45.0 billion.

Overpayment of benefits

Consistent with its mandate to manage the CPP effectively, Employment and Social Development Canada (ESDC) has procedures in place to detect benefit overpayments. During 2014–2015, overpayments totalling $75 million were detected, $49 million in overpayments were recovered and debts of $4 million were forgiven. The above figures represent a net increase of $22 million in the accounts receivable for the year.

Operating expenses

CPP operating expenses of $1.337 billion in 2014–2015 represent 3.45 percent of the $38.7 billion in benefits paid. Table 1 presents the CPP's operating expenses for the last two years.

Online service delivery

Service Canada is continually improving its self-service web-based options. Clients can now use the Internet to make enquiries, apply for a CPP retirement pension, conduct transactions and access other information on CPP benefits and provisions by visiting the website http://www.esdc.gc.ca/en/msca/cpp_oas_information.page . CPP contributors can also view and print an official copy of their Statement of Contributions (SOC) by visiting the website http://www.servicecanada.gc.ca/eng/services/pensions/cpp/contributions/soc.shtml. Contributors can also use this online service to request that copies of their SOC be issued by mail. Further, CPP recipients can view and print copies of their tax slips for the current year and the previous six years. In 2014–2015, approximately 91,000 individuals applied for their CPP retirement benefits online.

Service Canada has responded in the past few years to growing expectations regarding service delivery. My Service Canada Account and other self-serve tools have expanded citizens' capacity to find and access information online. My Service Canada Account provides a single point of access for users to apply for a CPP retirement pension and to view and update their information with the CPP program. Enhancements to the My Service Canada Account will further promote self-serve options for clients within the secure online tool.

Since 2005, CPP clients have been able to access their personal information securely online. They can view their monthly payment amounts and, if they live in Canada, can update their mailing address, phone numbers and direct deposit information.

Service Canada has promoted the use of online services through:

• targeted mailing of promotional inserts in existing mass mailings;
• promotional messages within standard client correspondence;
• improved navigation to online services on the Service Canada home page; and
• promotional messages from staff at points of service and call centres.

Seasonal promotional activities are also undertaken where appropriate, such as promoting the online tax slip service during the tax-filing season. A significant increase in the use of online services is anticipated for benefit applications within the next few years.

Processing benefits

In 2014–2015, Service Canada processed approximately 280,300 applications for retirement benefits, and 91 percent of these benefits were paid within the first month of entitlement, exceeding the national objective (see Table 2).

During the same period, Service Canada also processed approximately 70,000 initial applications for disability benefits. Decisions were made on 81 percent of these initial applications within 120 calendar days of receipt of the completed application.

With regard to disability benefit reconsiderations, Service Canada processed approximately 13,200 requests. Seventy-eight percent of all reconsideration decisions were made within 120 calendar days of receipt of the request.

The 2014–2015 national results for disability benefits represent the third year of strong results after the targets were missed in 2011–2012. These results reflect the Department's ongoing workload recovery efforts that focused on improving service levels and reducing the average processing times.

A continued strong emphasis on communication with clients and their physicians helped Service Canada staff make well-informed decisions and helped disability applicants better understand the reasons for those decisions.

Ensuring program integrity

To ensure the accuracy of benefit payments, the security and privacy of personal information and the overall quality of service, ESDC continues to modernize the CPP program and further enhance the efficiency, accuracy and integrity of its operations.

Meeting the expectations of Canadians—that government services and benefits be delivered to the right person, for the right amount, for the intended purpose and at the right time—is a cornerstone of ESDC's service commitment. Enhanced and modernized integrity-related activities within the CPP program are essential to meeting these expectations and ensuring the public's trust and confidence in the effective management of this program.

These activities consist of risk-based analysis measures, which ensure that appropriate and effective controls are in place and that the causes of incorrect payments are understood. Integrity-related activities also include reviews of benefit entitlements and investigations to address situations in which clients are receiving benefits to which they are not entitled.

Integrity-related activities also detect and correct existing incorrect payments, reduce program costs by preventing incorrect payments and identify systemic impediments to clients receiving their correct and full benefit entitlement.

As part of its efforts to address overpayment situations, ESDC has a program-integrity function that investigates suspected client error and fraud. By recovering overpayments and preventing future incorrect payments, these activities resulted in $9.4 million in accounts receivable as overpayments and prevented an estimated $7.1 million from being incorrectly paid in 2014–2015. A further estimated $59.8 million has been prevented from being incorrectly paid for future years after 2014–2015. The recovered overpayments are credited to the CPP, thereby helping to maintain the long-term sustainability of the Plan.

In 2011, ESDC adopted the Identity Management Policy Suite, which aims to enhance program integrity while safeguarding and streamlining identity management processes in a manner that mitigates risks to personal and organizational security, and enables well-managed citizen-centered service delivery.

The Identity Management Policy Suite provides guiding principles for ESDC organizations delivering services, benefits or programs, including the CPP. It assists them in the implementation of sound identity management practices across multiple service delivery channels (in-person, phone, mail and online).

The Identity Management Policy Suite also helps reduce costs, inefficiencies and the risk of errors, as well as improves the service experience for CPP clients. The mitigation of risks associated with false or inaccurate claims regarding the true identity of an individual or an organization is fundamental to the integrity of the CPP program.