Given that actuarial forecasts often miss the mark, the framework governing the Canada Pension Plan (CPP) should be revised to enable easier adjustments to plan contribution rates or benefits, argues a new paper from the C.D. Howe Institute.
The Toronto-based think tank issued a paper Tuesday that reviews the Office of the Chief Actuary’s (OCA) valuation reports on the CPP. The OCA reports assess the plan’s sustainability based on contribution rates and various assumptions about factors such as fertility and mortality, investment returns and labour markets.
“Preparing the valuation is not a small undertaking, as the CPP’s future health depends on assumptions about many variables that are unpredictable in the near future, and even more so over the longer time frames,” the report said.
Among other things, the review found that inadequate investment returns are the greatest risk for contributions falling short. It also noted that sustainability concerns may arise when key assumptions miss the mark.
“If unanticipated negative risks materialize, the plan will be subject to significant political as well as economic risks,” the report said.
In turn, this highlights the need to be able to adjust the plan.
“The valuation reports reviewed imply the need for regular CPP adjustments as does the actual history of the plan,” it said.
The report concluded that the legislation governing the CPP should be reviewed to move certain parts into regulations, which would be easier to adjust to circumstances.
“The legislation that governs the CPP is highly detailed, and the need to change the detail through legislation can limit the ability to adapt quickly. The legislation should be reviewed to determine what aspects could be moved safely to regulations,” it said.
Additionally, the report recommended that the OCA’s valuation reports “expand their focus to understand what happens to the whole retirement-income system in the face of varying circumstances, including demographic, labour market, financial and economic influences.”