OTTAWA, Ontario - Legislation now awaiting passage in Parliament would financially fortify the Canada Pension Plan, that country's compulsory public pension plan.
In time, the planned changes to the CPP should produce one of Canada's largest pension funds.
In September, the government introduced a bill to amend the 32-year-old plan. The bill is expected to pass.
A key facet of the changes would be the creation of a larger pool of reserves that should reach bring the total CPP to about C$100 billion Canadian dollars (U.S.$72.57 billion) in 10 years. Such assets would come from higher contribution rates as well as investment returns.
Under the plan, a new organization, called the CPP Investment Board - operating at arm's length from the government - would handle the CPP's investing. That board will start Jan. 1, 1998, if the legislation passes.
At its heart, the legislation aims to make the CPP financially secure, especially with the expected bulge of demand to come as baby boomers retire.
But the changes also bode well for Canada's financial markets. And, indirectly, Canadian institutional investors overall might benefit. A large pool of new assets, when added to existing investments in the Canadian markets, might start to overwhelm those markets. That, in turn, could force the government to abolish the 20% limit on foreign investments by pension funds.
As consultant Keith Ambachtsheer, president of KPA Advisory Services in Toronto, forecasts: the foreign content limitation "will be gone within two years, and if we're lucky, within one."
But for now, the focus is on the CPP amendments. While the proposed changes to that program require the nod both of Canada's Parliament and of two-thirds of its provinces that have two-thirds of Canada's population. Approval is virtually assured. Earlier this year the government obtained agreement from eight provinces on this plan, which includes some slight benefit reductions for future retirees.
Although the changes would not produce a fully funded system, they would create one that contained four to five years' funding of future benefits.
But even that requires, in large part, a rise in contribution rates. Today, contributions equal 5.85% of pay, up to a C$35,800 ceiling; contributions are split equally between an employer and employee.
Under the new proposal, the contribution rate would increase to 9.9% of pay by the end of 2003.
As Mr. Ambachtsheer explained, the idea is to "stabilize the cost of supporting the CPP at a contributions ceiling of 9.9% of pay." If these measures were not taken now, the contribution rate as currently projected would grow to 14.2% by 2030 to cover escalating costs, experts say.
Invested CPP assets are expected to earn a 3.8% real rate of return. "And if they do, and demographics work as expected, the assumption is that the funds should be large enough to maintain the contribution rate at 9.9% through the next three to four decades," said Mr. Ambachtsheer.
Obtaining optimal returns will be the purview of the new CPP Investment Board would be run like a trusteed pension plan. That agency will have a government-appointed board of directors who will serve as plan fiduciaries. Eventually, it could be free to set its own investment policy if the federal and provincial governments agree.
However, as a transitional policy, the government already has made certain investment decisions. During its first three years, the CPP Investment Board will have to invest all of the domestic equity allocation in passive portfolios. For the same time frame, 50% of whatever is to be invested in bonds must be offered as a loan to provincial governments at market rates.
(Most CPP reserves now are lent to the provinces for a 20-year term, at a rate equal to the federal government's cost of funds.)
A combination of internal and external management is possible.
As Mr. Ambachtsheer said: "Once you get the CPP Investment Board up and running, and once you (select) a group of 12 fiduciaries . . . they have to make some decisions about how to manage the assets. It's likely they will appoint a professional CEO to put together a team and once they are in place, they will decide to do some things internally and outsource other things. But it will be run like a professional investment shop."
(Mr. Ambachtsheer advised the government on the structure of the CPP Investment Board.)
The planned changes have gained fairly broad acceptance.
But Bob Baldwin, director of the social and economic policy department of the Canadian Labor Congress, Ottawa, cited several concerns with the changes, especially the planned benefits cut. "One component of the package is that a number of benefit reductions will lower total expenditures by (almost) 10% by 2030," Mr. Baldwin said. Cuts would "fall disproportionately on women and people with disabilities," he said.
The congress is a federation of Canada's major trade unions.
And from the financial perspective, he said "over the long-term, building up the size of the reserve funds will not have much material effect on the financial viability of the CPP. It's viable as a pay-as-you-go system and not technically necessary to build up its size. And there are some downsides to building up the reserve fund. It will slow economic growth in the short term by depressing consumption, and lead people to misunderstand what is necessary for the viability of the plan over the long term. People will get too preoccupied with the role of returns of financial investments and overlook the reality that it depends on buoyant economic and employment growth."