Re-examining the CPP's 'net asset' position

Current determination of pension plan's financial position fails to consider future obligations

Re-examining the CPP's 'net asset' position

Those with their eye on Canadian pension funds would know that the Canada Pension Plan (CPP) and its counterpart Quebec Pension Plan (QPP) are in healthy “net asset” positions. But a critical analysis notes that, because of the way countries’ pension systems are categorized, the reality might not be so simple.

“Canadians did accumulate assets in these plans at a rapid rate over the last 20 years, but … the value of pension benefits accrued and owed to retired Canadians is still about 3.4 times the size of the assets,” said Alexandre Laurin, director of Research at the C.D. Howe Institute, in a new intelligence memo.

As Laurin explained, Canada’s CPP and QPP fall under a category of countries where government employee pensions are intertwined with social security insurance schemes, which are typically financed through annual contributions dedicated to a cover their annual cost.

“Under the system of national accounts and the international Government Finance Statistics convention, social security schemes’ financial flows are treated as any other current government revenues and expenses,” he said. In other words, the flows going into social security programs are not deemed to give rise to a government liability for future entitlements, and income statement and balance sheet figures reported by Statistics Canada shows only in-year flows, as well as the surplus of contributions and investment income over benefits that have accumulated over the years.

The problem, Laurin said, is that the “net asset” position attributed to CPP and QPP pertain to their financial assets and liabilities, without regard for pension obligations to workers and retirees. Those obligations are legislated based on CPP program parameters and eligibility, on which Canadian workers rely for their retirement plans and expectations.

Altering the commitments of the CPP will not be easy, he added, since major reforms will require consent from at least seven out of 10 provinces representing two thirds of Canada’s population.

“Not showing the pension liabilities makes our public pension plans appear to be in a substantial ‘net asset’ position – about 20 percent of GDP in the latest PBO long-term sustainability report,” Laurin said. “Add the pension liabilities, and our public pension plans are in a considerable net debt position.”

The actuarial value of accrued pension obligations as of December 31, 2018, he said, is $1.2571 trillion, while net assets in CPP as of the same date amounted to $371.7 billion. The upshot is that the net liability of CPP, considering its net assets and obligations, is $885.4 billion.

But even in its partially funded state, Laurin said the CPP can still be sustained into the future. Assuming current contributors allow their contributions to be used toward current beneficiaries’ liabilities, the CPP is also expected to be able to pay future pension benefits to born and unborn participants. He calculated that the present value of those benefits is $2.6744 trillion, exceeding the present value of future contributions by $355 billion.

“This means that enough assets accumulated to cover the future shortfall of contributions,” he said. “But in no case is the CPP in a substantial ‘net asset’ position.”


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