Extra money pouring into Canada’s national pension plan following an agreement to raise premiums should be invested more conservatively than existing funds, Canada’s chief actuary said on Monday.
Canada Pension Plan Investment Board (CPPIB) has grown rapidly since its creation in 1997 through a strategy of directly investing in assets, including real estate and infrastructure, and diversifying globally to reduce its reliance on volatile equity markets and low-yielding government bonds.
Canada’s federal government and provinces agreed in principle last week to expand the Canada Pension Plan, raising premiums moderately over time to provide greater payouts for seniors. The expansion will be fully funded in advance by contributions, meaning workers must contribute to the plan for 40 years in order to get the maximum benefit.
That is different from when the CPP was set up in 1966 and benefits were paid out of existing contributions.
The plan has $279 billion (US$213 billion) in assets under management.
Chief Actuary Jean-Claude Ménard said that, while current benefits paid out by the plan are mainly financed by contributions, in the future around 70 percent could be funded by investment returns.
“We can make a case that we might want an investment policy that will generate less volatile results,” Ménard said in a telephone interview.
The chief actuary, who reports to Canada’s financial regulator, reviews the pension plan’s financial condition every three years, reporting his findings to the Canadian government. The next review is due at the end of this year.
Ménard said that asset classes currently seen as volatile include equities, while bonds are seen as more stable but offer low returns.
“The empirical evidence is telling us that stocks are one of the most volatile investments. The less volatile are money market instruments, but at the same the returns are very low,” he said.
Ménard said that the CPPIB’s existing strategy of diversification will leave it well placed to meet the new challenge.
“Diversification is giving better returns without necessarily higher volatility, so the diversification is really the key to this,” he said.
Ménard said that the Office of the Chief Actuary would talk to CPPIB and other stakeholders about changes needed to its investment strategy.
“The phasing-in period is over seven years – the main reason for that is to reduce the impact on small businesses and workers,” he said. “It also gives time for CPPIB to further discuss these important questions.”
The CPPIB said last week it did not expect the expansion to have a significant impact on its overall investment strategy.
(Reporting by Matt Scuffham; Editing by Jonathan Oatis)
(This story has been edited by Kirk Falconer, editor of PE Hub Canada)
Photo courtesy ©iStock/BrianAJackson