Episode 318 - Assia Billig: Is Canada Pension Plan (CPP) Sustainable?

August 15, 2024 Kelsey Robichaud

bio: LancasterHouse
image: BenefitsCanada

Assia Billig was appointed Chief Actuary within the Office of the Superintendent of Financial Institutions in April 2019.

The Chief Actuary prepares actuarial reports on the Canada Pension Plan, the Old Age Security program, the Canada Student Loans Program, and pension and benefits plans for federal public servants, the Canadian Forces, the Royal Canadian Mounted Police, federally appointed judges and Members of Parliament.

Ms. Billig joined the Office of the Chief Actuary (OCA) in 2008, where she was involved in the preparation of statutory actuarial reports on the Canada Pension Plan and Old Age Security Program, as well as of the various national and international actuarial studies. Prior to joining the OCA, she worked in private pension consulting.

Ms. Billig is the vice-chair of the International Actuarial Association (IAA) Social Security Committee and the chair of the Technical Commission on Statistical, Actuarial and Financial Studies of the International Social Security Association.

Ms. Billig is a Fellow of the Society of Actuaries and the Canadian Institute of Actuaries. She has completed her undergraduate studies in Moscow State University and has PhD in Mathematics from University of Alberta.

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If you’re in the Canada Pension Plan (CPP), then you won’t want to miss today’s conversation with Canada's Chief Actuary, Assia Billig. Assia’s knowledge of the CPP is extensive, having joined the Office of the Chief Actuary (OCA) in 2008, where she was involved in the preparation of statutory actuarial reports on the Canada Pension Plan and Old Age Security Program. She has served as Chief Actuary of the Government of Canada since 2019, and, before joining the OCA, she worked in private pension consulting. She is also a Fellow of the Society of Actuaries and the Canadian Institute of Actuaries. Assia joins us today for a deep dive into the most common questions about the Canada Pension Plan, from the inner workings of its financial components to the quality of governance that drives it. Discover the world-leading topics she and her team investigate, the immense power and research behind their analysis, and why the CPP is set to be sustainable for the next 75 years. We also discuss the concerns some people have about the CPP’s longevity, before examining how the actuarial report on the sustainability of the CPP, conducted every three years, reliably addresses this. If today’s conversation with Canada’s chief actuary does not instill confidence and pride in Canada’s investment in our collective retirement, then we don’t know what will! Tune in, to hear all of Assia’s keen insights and discover why she is unequivocally the best person to talk about the sustainability of the CPP.

Key Points From This Episode:

(0:00:18) Introducing today’s guest, Assia Billig and the Canada Pension Plan (CPP).

(0:04:53) What the main function of the Office of the Chief Actuary is.

(0:06:28) The independence of Assia’s office and the work that they do.

(0:07:09) Unpacking the main purpose of the actuarial report on the Canada Pension Plan.

(0:09:22) Changes that the report triggers to contribution or benefit rates.

(0:13:04) Main revenue sources for the CPP and how base CPP benefit payments are funded.

(0:14:56) Base CPP’s funded status and how funding differs for additional CPP.

(0:20:32) The sustainability of base and additional CPP and how sustainability is measured.

(0:23:22) Primary assumptions that go into sustainability analysis at the high level.

(0:27:31) Estimating expected returns for assets managed by CPP investments.

(0:30:37) The plan’s level of sensitivity to lower realized returns and other variables.

(0:35:22) How lower overall economic growth and inequality affect the plan’s sustainability.

(0:37:15) Measuring the impact of variables like climate change and other catastrophic events.

(0:43:01) When the minimum contribution rate exceeds the current legislated contribution rate.

(0:44:12) Assia’s response to people who are skeptical of the CPP's future sustainability.

Read The Transcript:

Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from three Canadians. We are hosted by me, Benjamin Felix and Cameron Passmore, Portfolio Managers at PWL Capital, and Mark McGrath, Associate Portfolio Manager at PWL Capital.

Cameron Passmore: Welcome to episode 318. Guys, after 318 episodes, I would suggest this one should be heard, listened to by 20 million or more Canadians. All those people in the Canada Pension Plan should listen to this. This was simply an incredible conversation. Ben, kudos to you for tracking down Canada's Chief Actuary, Assia Billig to join us and answer questions that come up all the time. As you said, Mark, between a segment here, if this does not instill confidence in you and give you pride in the assets of this country's building for our collective retirement, I don't know what does.

Ben Felix: I say this when I asked the second to the last question in the episode, but this came about because we did some episodes earlier in the year on Canada Pension Plan and why it's actually a really great thing for Canadians and how it's a really valuable retirement asset. While that content was generally fairly well received, there were a vocal minority of podcast listeners, but also people on Twitter saying that, “What you guys are saying is fine, except that Canada Pension Plan is not going to be there. It's not going to be sustainable. It's not going to be around when I retire.” How do you address that? But then, of course, it is addressed every three years by Canada's Chief Actuary in an actuarial report on the sustainability of the CPP. You can't send a 200-page actuarial report to someone and say, “No, look. It's fine.”

Mark McGrath: You can.

Ben Felix: You can, but they're not going to read it.

Mark McGrath: That's on them.

Ben Felix: I read it. It's great.

Mark McGrath: Of course, you did.

Ben Felix: I'll read the next one, too.

Mark McGrath: It's interesting, though, because I think a lot of people come at that question from a financial standpoint, like, is financially, is CPP going to be here? Also, from a governance standpoint, there's conspiracy theory type comments out there that the government's going to bill for CPP to cover deficits and that type of thing. Hearing the Chief Actuary discuss a little bit about the quality of governance and that was super fascinating as well.

Ben Felix: Super fascinating. This was literally, who is the best person in the world to talk to about the sustainability of CPP. Then she is it. She's the person.

Cameron Passmore: She loves it. She loves it.

Ben Felix: That was also further reassuring just to see how excited she is about the work she's doing for CPP and for Canadians.

Cameron Passmore: Some of it is world-leading, like the discussion around modelling climate change and the uncertainty around that and the impact of the pandemic and migration and things that you wouldn't normally think about would be part of her role.

Mark McGrath: The intellectual horsepower that goes into the analysis and the modelling that they do is just incredible. We only scratched the surface on it. Wow.

Ben Felix: The independence. That's something that stood out to me as well, is that her office, the Office of the Chief Actuary, has a ton of independence to do the work that has to be done without government interference. They also get external peer review from other actuaries.

Mark McGrath: And other countries. She mentioned they have conversations with other countries, or other content even on, to just collaborate in some scenarios, which is really fascinating.

Ben Felix: We'll talk about Assia a little bit. Assia Billig is Canada's Chief Actuary. She was appointed Chief Actuary, which is within the office of the Superintendent of Financial Institutions in April 2019. Assia talks about her role and her office's role, but the Chief Actuary prepares actuarial reports on the Canada Pension Plan, the old age security program, Canada student loans program, and pension benefits and plans for federal public servants, and a few other things. She joined the Office of the Chief Actuary in 2008. She's also the Vice Chair of the International Actuarial Association, Social Security Committee, and the Chair of the Technical Commission on Statistical Actuarial and Financial Studies of the International Social Security Association.

Cameron Passmore: She's also a Fellow of the Society of Actuaries and the Canadian Institute of Actuaries. She got her undergraduate studies at Moscow State University and has a PhD in Mathematics from the University of Alberta. She talked about her Alberta connection, given the recent fires in Jasper, which is so incredibly tragic.

Ben Felix: She's the best person in the world to talk to, not just by the nature of the role that she has, but also, her academic pedigree and background. I thought this was a fascinating conversation. Like you said, at the beginning, Cameron, this is something that every Canadian should hear.

Mark McGrath: Guys, you’re ready to go to the episode?

Cameron Passmore: Let's go.

Ben Felix: Let's go to the episode.

Mark McGrath: All right. Here it is, episode 318 with Assia Billig.

***

Ben Felix: Assia Billig, Canada's Chief Actuary, welcome to the Rational Reminder Podcast.

Assia Billig: Thank you very much for having me.

Ben Felix: We're very excited to be talking to you. To start off, Assia, can you talk about what the main function of the Office of the Chief Actuary is?

Assia Billig: Office of the Chief Actuary provides the independent valuation services and advisory services to the federal government. It includes the statutory actuarial valuations for such program with the Canada Pension Plan, old age security, Canada Student Financial Assistance Program, Employment Insurance Program, as well as the public sector pension and insurance plans, including benefits to veterans. As you can see, we cover very wide range of programs, and I probably should say, that they cover every almost single Canadian age 18 and over. For example, for the Canada Pension Plan, the number of members is 23 million. For the Employment Insurance Program, it's 20 million. These are big, big numbers, as you can see.

The majority of our actuarial reports, they are statutory, so they’re prescribed by legislation and the table in Parliament by an appropriate minister. I have a very dual situation within the Office of Superintendent of Financial Institutions, where we’re located. I report to the superintendent, but I am solely responsible for the content and actuarial opinions of our reports. Our work is informing the politicians, the parliamentarians, the public, or the financial status of the plans and the risks these programs are facing.

Ben Felix: That's really interesting. It sounds like, there's quite a bit of independence for your office to do the work that you have to do.

Assia Billig: Yes, there is quite a lot of independence. This independence is enshrined in the legislation and the fact that we do work for the departments and we’re located outside of all these departments. There are other safeguards to our independence. For example, our report for the Canada Pension Plan is reviewed by independent actuaries, and they pronounce themselves on the reasonableness of our assumptions, methodologies and many other things.

Cameron Passmore: What's the main purpose of the actuarial report on the Canada Pension Plan?

Assia Billig: For Canada Pension Plan, we produce the actuarial report every three years. It's there, more than 200 pages document. So, if you have time, welcome to read it. You can find it on our website. It contains the wealth of information. The main purpose is to determine the minimum contribution rates, so that can sustain the plan. After we – both components of the plan, because the Canada Pension Plan, as you may know, has two components, the base plan, which was the benefits and existence prior to 2019, and the additional plan which is the enhancement that was enacted in 2019.

We determined this minimum contribution rates and we compared these rates with the legislative contribution rates. Just to remind you for the base CPP, the legislative contribution rate is 9.9% on earnings up to the year maximum pensionable earnings, which are about 70,000 in the 2024. For the additional CPP, these contribution rates are 2% up to YP, year maximum pensionable earnings, we called it YMP, and another 8% between YMP and the additional YMP, which is 14% higher than YMP.

We compare these two rates, the rates that we determined and the rates that are prescribed by legislation. If the rates that we determined, if they are lower than the legislative rates, the plans are deemed to be sustainable. In addition to the minimum legislative rates, I said, the report contains the wealth of information, we project the contributors’ contributions, beneficiaries, expenditures, assets. All this information services and basis of the tri-annual review of the Canada Pension Plan by federal, provincial, territorial ministers of finance, the stewards of the CPP. In addition, of course, we inform the plan members on the financial status of the plan. Once again, let me repeat that the report is tabled in Parliament by the Minister of Finance.

Ben Felix: I do want to mention that just for listener, the report is actually fascinating. It really is an interesting read. There is a ton of good information in there.

Cameron Passmore: I'm curious, Assia, what outcome of the report would trigger a change in the contribution, or benefit rates?

Assia Billig: I will talk about base CPP, because additional CPP is not mature enough, but it's true for additional CPP as well. If we show the minimum contribution rate, which is higher than legislative contribution rate, of actually for additional CPP, it's falling outside to some prescribed ranges. The Minister of Finance need to decide what to do, how they're going to address the situation. Many of the options is to change the contribution rate, to change benefits, to do both, or actually, to do nothing, as long as they reach an agreement.

They reach an agreement if two-thirds of the provinces covering two-thirds of the population agree on the course of action. This is their role. If they don't reach their agreement, this is where the things are becoming interesting, because the legislation has so-called the self-sustaining mechanism. If they don't reach an agreement and the trigger and the report happens, then certain actions occur. For the base CPP, it's the increase in contribution rate and freezing of the indexation and benefits. For additional CPP, it's also changing indexation, changing accrual and benefits. There's a last resort, increasing the contribution rate.

Once again, self-sustaining mechanism. They are the safety net. Basically, coming into place if politicians cannot agree on the course of action. What also can happen, there may be changes to the plan if minimum contribution rates are actually lower than the legislative contribution rate. This is normally done when there is a sufficient margin between the rates that we determine and the legislative contribution rates, and the plans need to be modernized, to be better aligned with the labour market and retirement behaviour of Canadians.

Ben Felix: How common is it for the actuarial report to actually result in changes to benefits or contribution rates?

Assia Billig: Not very common. I should say that over last one and 20 years from 2023, the legislative trade stayed at 9.9%. Then every single report, we showed the minimum contribution rate is less than 9.9%. Over the last couple of reports, less than the contribution rates for the additional CPP. However, the benefits were changed. Several years ago, the benefits were changed to introduce, for example, the post-retirement disability benefits for early retirees, and to remove some reduction in the survivor benefits for younger survivors.

Going back in history, in 2009, a major reforms package was introduced when people were allowed to work after retirement and still continue to earn the CPP benefits. This was a major thing, because it's really aligned with the retirement behaviour of Canadians. Changes happened, but normally the changes happen, as I said, to align better the plan with the reality of the Canadian relatives. Every time the changes happen, the cost implications of these changes are very extensively discussed. I should say, that the governance mechanism of the plan with the federal provisional discussions, the requirement of agreements of the two-thirds of the provinces with two-thirds of the populations, make improvement changes very unlikely.

Ben Felix: A lot of those changes that you just mentioned sounded like enhancements. Is that correct?

Assia Billig: Yeah.

Mark McGrath: Interesting. Assia, what are the main revenue sources for CPP?

Assia Billig: Well, base additional CPP are financed by the contributions that are paid in the equal measure by employers and employees, 50-50, and by investment income. CPP fund, which you probably hear quite a lot about it, and then used as a segregated fund. It's totally segregated from the government, and it's governed by its own legislation. It's totally arm-length from the government. Its mandate, it's invested by the organization we spoke, the Canada Pension Plan Investments. Its mandate is to invest the money in the sole interest of contributors and beneficiaries.

As of March 21st, 2024, the fund was 632 billion. I like to digest this number, 632 billion. It's a very large number. About 94% of this fund was in respect to the base CPP, and 6% with respect to additional CPP, which is in the early stage of its existence, currently, is my true rate.

Cameron Passmore: I'm curious, how much of the base CPP benefit payments are funded by contributions versus investment income?

Assia Billig: The contributions to the base CPP fully cover the outgoing payments from the plan. Basically, the whole investment income, as we speak, now stays in the fund. We projected, by 2030, about 9% of investment income will be needed to pay for the benefits, and this number is projected to increase to 16% by 2050. Even then, a large portion of the investment income still will stay in the fund and will be invested.

Ben Felix: What is the funded status of base CPP?

Assia Billig: Oh, this is an expression that I don't like. Funded status. To answer your question, let's go a little bit in history and talk about the financing, the history of financing of the plan. As you know, the plan was introduced in 1966 as a pay-as-you-go plan with very small reserve. When I'm talking, saying pay as you go, it means that the contributions are supposed to cover the benefits. Basically, what we collect, we pay out.

Over the years, the contributions were increased, the benefits were improved, and we ended up by 1997, which the plan was very small reserve for 36 million, not billions. Millions. 36 million. The prediction by the Chief Actuary at that time that the contribution rates need to increase to more than 14% by 2030. Then, in 1997, the major reform was introduced, and the main features of these reforms, the contribution rate was gradually increased by 29.9%. But what was also very important, it was decided to create the Canada Pension Plan Investment Board and to invest the excess of contributions on the markets that needed to pay benefits in the markets.

Today, the base CPP is a partially funded social insurance program. Contributions still play an extremely important role in the life of the base CPP. Right now, 70% of the total revenues of the plan are coming from contributions and only 30% from investment income. As you understand, contributions is the main source of revenues. We projected it will continue.

The plan is financed using approach with used, it’s called state-to-state approach. Sorry, I'm getting a little bit technical here, but I think it's important to understand. This is the approach which is basically, stabilize the ratio of assets to the expenditure. It looks how many years of expenditure can be paid from the actual asset, existing asset. This approach is supposed to stabilize this level.

Another thing that was introduced in the 1997 report that all new benefits are supposed to be fully funded. When we're talking about fully funded, we're talking about the present value of future contributions related to those benefits should be equal to present value of future benefits. Basically, why I'm telling you all this, the base CPP is a social contract. It's not your regular defined benefit pension plan. It's a social contract. You today, as young people, and I think you're all younger than I am, allow today to take your contributions and pay benefits to the current beneficiaries. You are doing this in exchange and with understanding when you need the benefits, the future contributors will do the same. They will pay for your benefits from their contributions.

What it means in practice, when we assess the sustainability of the base CPP and the additional CPP as well, we need to consider the contributions and benefits of future contributors and future retirees. Saying that, a fully funded, over-funded status as is understood by the private pension plans is not really applicable to the base CPP. Base CPP was never intended to be fully funded in this sense. If you're interested, once again, in the degree of pre-funding, I think it's nice to look at the ratio of the importance of the investment income for the plan. As I said, today it's 30% and we project by 2050 to be about 40% of the total revenue is coming from investment income and 60% still coming from the contributions.

Ben Felix: Okay, that's really interesting. Base CPP is not designed to be fully funded ever.

Assia Billig: No, it's not designed. It's a partially funded program. I should tell you that basically, if you look around the world, I think I probably know one social security program, which is so-called fully funded, and it is in Middle East. The rest of the program is they are either partially funded, or pay as you go.

Ben Felix: You mentioned this briefly, but I want to come back to it to make sure the listeners understand. Can you talk about how funding is different for base CPP and additional CPP?

Assia Billig: When additional CPP was introduced, basically, the idea is that the generations are paid for their benefits as they earned. It was achieved through the fact that the money were invested in the market right away. The link between benefits and contributions was strengthened. The benefits were accrued gradually. Right now, the plan is not mature, so let's not look at the plan right now, because right now, contributions, of course, constitute a huge part of the revenues, because there is a very small fund. At maturity, the investment income will constitute about 70% of the revenues. Basically, it's inverse with respect to the base CPP.

Mark McGrath: As of the last actuarial report, how sustainable is base CPP at the current contribution rate?

Assia Billig: I have good news for you. It's sustainable for the next 75 years. The minimum contribution rate that we determine is 9.54%, which is quite lower than 9.9% of the legislated rate. If we talk about the asset to expenditure ratio, right now it stands at eight and it's projected to increase to 11% to 2050 under the legislative contribution rate. We also project that the asset will reach 1.2 trillion in today's dollars by 2050. 1.2 trillion in today's dollars.

Cameron Passmore: I don't know, guys, but that all sounds pretty good to me.

Mark McGrath: That sounds good.

Assia Billig: These are very big numbers. Yes.

Cameron Passmore: How sustainable is additional CPP?

Assia Billig: Additional CPP is sustainable as well. The minimum contribution rates are slightly lower than the legislative contribution rates. At maturity, we expect that asset to expenditure ratio will stabilize at a level of about 25 to 26. We project the asset to be reached by 2050 to 800 billion in today's dollars. Think about the trillions in the asset.

Cameron Passmore: Wow.

Ben Felix: Those are big numbers.

Assia Billig: These are big numbers, but these are good news. These are all good news.

Ben Felix: Sounds like really good news. You've mentioned the minimum contribution rate. When we're talking about plan sustainability, how is that being measured? What is the metric that says, yes, this is sustainable?

Assia Billig: There's a lot of mathematics. I'll try to describe it in a high level. Basically, what we do for the base CPP, we find the minimum rate. First of all, there are two components to the minimum contribution rate. There is a steady state rate and full funding rate. Right now, the steady state rate is 9.53 in the delta, which is a very small amount, is the full funding rate. What we do to determine the steady state contribution rate, we stabilize asset and expenditure ratio in two points in time, which is right now in two years, which are 50 years apart. Today, this year is at 2034 and 2084.

For additional CPP, it's a little bit more complex model. But basically, we are sure we find the stable minimum contribution rate, such that basically, there are enough contributions and investment income to pay for benefits. I can go to the complex mathematical explanation, but I don't think it probably will be very interesting for your listeners. If they're interested, they can go and look at our report.

Mark McGrath: Ben's very interested. What are the main assumptions that go into the sustainability analysis at a high level?

Assia Billig: Oh, a lot of assumptions. First of all, I mentioned in the beginning that CPP covers all workers and retirees in Canada, except Quebec. Basically, what we need to start with is to project the population of Canada and the population of Quebec. To do that, we make assumptions about the fertility, the migration rates, as well as mortality rate. After we project the population, we need to project the labour force, because basically, the population of contributors and then eventually, beneficiaries is based on the labour force. We make assumptions regarding the labour force participation rate, unemployment rate. We make assumptions about earnings growth and earnings distribution. Then eventually, we make assumptions about the behaviour, retirement behaviour, Canadians. When do they retire? Do they work after retirement?

Finally, last but not least, we make assumptions about returns on the assets invested by the CPP investments. The report is more than 200 pages, which describes a lot of these assumptions. Once again, you're welcome to read the report. But I should also say, that the report has a very nice two-page executive summary, which can give you an idea of what's going on with the plan.

Ben Felix: The executive summary is great. My favourite part of the report though is the sensitivity analysis at the end. We're going to ask some questions about that in a minute, but that stuff's a lot of fun to read.

Cameron Passmore: How do you approach making best estimate assumptions for the projections?

Assia Billig: It's a mixture of signs and R. We make assumptions for the next 75 years. Of course, we don't have crystal balls. Nobody knows what will happen over 75 years. What we do, we look at the past trends. We examine them very carefully. We look at the existing environments. We look at the emerging trends. For example, climate change, or AI, or geopolitical tensions. We decide to which extent these trends are going to continue, both past and emerging. We apply mathematical models. Then at the end of the day, we apply judgment. This is how we make the assumptions.

You see, our reports are every three years. Our assumptions are self-correct. Every three years, we reflect the experience of what is happening and see how well our assumptions are aligned with the reality. I should tell you, I'm pretty proud about it. Our mortality assumptions over the last three years prior to report will almost bang on, except COVID, of course.

Ben Felix: That is very cool. What information sources are you drawing from when you start making all these assumptions?

Assia Billig: We do our own research. We look at the papers. We look at the relevant papers. We consult with our colleagues at the different government departments and the outside organizations, such as Statistic Canada, Conference Board of Canada, the Department of Finance Investment Board. In the beginning of each annual review, we organize the interdisciplinary seminar, where we consult with the demography, economy and investment experts. One such seminar is coming this coming September. When we develop our assumptions, we present these assumptions as well to specialists, just to check for their reasonableness.

Saying all these, the ultimate responsibility for the assumptions rests with the chief actuary. As I mentioned before, I'm solely responsible for the assumptions going and for the actuarial conclusion going in our report. I also mentioned that before, we have the independent peer review. That part of this independent peer review process is to opine on the reasonableness of our assumptions. We have so far, nine independent peer reviews, and every time they opine that our assumptions are within the reasonable range.

Mark McGrath: How do you estimate expected returns for the assets that are managed by CPP investments?

Assia Billig: This is an interesting question, because it's one of the most complicated assumptions to develop. If you can understand CPP investment, employee active investment strategies, but we do not develop the assumptions on active investment strategy. According to actuarial standards and we are governed by actuarial standards, we look at the semi-passive equivalent of their investment strategy. We develop the assumptions for the wider classes, such as the private and public equity, fixed income, credit, real asset after we develop these assumptions, and not very often, they are so-called select an alternate. They are variable for the first say, 10 years, and then they gradually converge to their ultimate value when we have more uncertainty.

You should understand that when we come to CPP investment, for example, and ask them, what is their long-term assumptions? Their long-term is five years. For us, long-term is 75 years. Really, we need to apply a lot of judgment. Even when we go to any investment board, or any investment forecast for investors long-term is 5-10 years. It's incomparable of what we project.

After we develop the assumptions by the class, we apply the asset allocation to these assumptions and we adjust them for the investment returns. Something that needs to be mentioned with respect to the asset allocation that CPP, base CPP and additional CPP have two different asset allocations. It's related to the fact that they have very different sensitivity to the investment returns. This is how we approach it. We have internally three people working almost full time on the understanding of the investment.

Cameron Passmore: Wow. What are your expected return assumptions for the assets held by the CPP?

Assia Billig: In last CPP report, we assumed the average 75-year return of 5.9% for the base CPP, and 5.4% for the additional CPP. Once again, additional CPP is invested, let me say, more conservatively, with less risk than the base CPP.

Ben Felix: Super interesting. We also prepare expected return assumptions for financial planning for our clients. I sit on the projection assumption guidelines committee with FP Canada, and we actually use your numbers as one of the inputs, but it is a very complex exercise. We project financial plans, maybe not at 75 years. Maybe sometimes close to that, though. Plans are so sensitive to small changes. It's scary stuff. Your job is very scary.

Assia Billig: Oh, very similar. We’re reaching out to your class, what are your projections?

Ben Felix: We post them online. You can see them.

Assia Billig: Okay, yes. Thank you for letting me know. It's an additional source of information.

Ben Felix: Yeah, yeah, yeah. How sensitive is the sustainability of the plan to realized returns being lower than the expected returns that we just talked about?

Cameron Passmore: Scary part.

Ben Felix: Yeah.

Assia Billig: Yes. When you say realized returns, let's talk about two couple of things. First of all, where are realized returns, which is experience. The second part is what we assume for the long-term. I will give you an example for the base CPP. For example, as of last report, the asset would be 10% lower than actual asset. Then the minimum contribution rate would be 17 base percentage points higher. Instead of 9.54, it would be 9.71. Right now, additional CPP is not very sensitive, because once again, the assets is very, very small, but it will be very sensitive to that, more sensitive than the BPP when it matures.

How sensitive is the plan to assumptions? This is another question. Very sensitive. One of the tests that we do, for example, we take the assumed rate of return, which is determined as the 90th percentile. Basically, we assume at 90% of cases, the plan will return more than we assume, which is quite an extreme test, I should say. By pure coincidence, when I round these returns is 4.1 for the both components of the plan. Once again, pure coincidence.

If we assume that the plan will earn 4.1 over the long term, the minimum contribution rate for the base CPP will be 11.22%, which as you can see, it's extremely sensitive. For the base CPP, for the additional CPP, it will be 2.86%, the first minimum contribution rate, which probably doesn't sound scary. But considering that the legislative contribution rate is 2%, that’s 43% increase in the contribution rate. As I said, because the additional CPP is so much more sensitive to investment income, the importance of investment income is so much more, the sensitivity is much higher.

Mark McGrath: It's very sensitive to the returns. How sensitive is it to other variables, like fertility, mortality, migration, labour force?

Assia Billig: This sensitivity really depends on the type of financing of the base CPP and additional CPP. Base CPP is sensitive to all three demographic variables. I will not bombard you with the numbers, but it's sensitive to migration and fertility. All components of the plans are sensitive to mortality, which is if you think about it, the longer people live, the longer they draw benefits. It's true for any single pension plan. If, for example, we assume that people live two years longer than best estimate assumptions, the minimum contribution rate for the base CPP will increase by 32 basis points. For additional CPP, it will be 15 basis points.

Finally, labour market wage growth. This is very interesting assumptions, because base CPP and additional CPP react differently to the movement of the real wage, or wage growth assumptions. For the base CPP, it affects contributions right away. Eventually, it will affect the expenditures. The higher is the real wage increase, the lower is the cost for the base CPP. The relationship is reverse. It's inverse for the additional CPP. Once again, because I said the investment then can be so much more important and this relationship for additional CPP is much closer to actually what's happened in the traditional defined benefit pension plans. The higher is the real wage, the more the additional CPP will cost.

Ben Felix: If we just take base CPP, for example, is it possible to say which of all those variables that we just talked about, including investment returns, which one of them is the plan most sensitive to? Which variation in which of those variables matters the most to the outcome of the plan?

Assia Billig: It's hard to say, measure sensitivity. Because sensitivity is in the eyes of the beholder, how we determine the sensitivity test. I would say, that probably, investment income, mortality and real wage, economic growth, these are more sensitive variables. Keep in mind also, that demography normally, unless you have COVID, is a slower developing variable. It's very rarely we have shocks. We can have quite significant shocks on investment fronts, as well as recessions in economic environment.

Cameron Passmore: Just on that, how does lower overall economic growth affect plan sustainability?

Assia Billig: We do the test on a low economic growth. When I talk about low economic growth, I talk about the low labour market participation rate, high unemployment, lower wage growth. For base CPP, as I said, it's affected negatively. The test that we do increase the base CPP contribution rate to 10.12%, which is higher than 9.9%.

Talking about these scenarios, I think you should keep in mind, these are not predictions. Our predictions, our projections are the best estimate. These are just illustrations. You shouldn't really take this as a face value. It's an illustration of how the different reality can affect the CPP.

Mark McGrath: Does it change in the income distribution, like a widening gap between the low earners and high earners? How does that affect sustainability of the plan?

Assia Billig: You really read the report really well. I can feel that you are going by the test that we have prepared in your questions. Yes, we did the test. If I can, basically say, increase in the quality. Right now, I can do the best estimate assumptions where I assume the stable distribution of earnings and earners. We basically assume that the gap between in the earnings between the low earners and high earners stays more or less constant. If we assume that this gap will be widening, this will cost CPP big time.

The reason for that is because if you remember, CPP doesn't cover the full earnings. It's cover only earnings after a certain limit. If you increase earnings over this limit, the contributions are not flowing to the plan. The plan will become more costly.

Ben Felix: You mentioned climate change earlier. How do you model the potential impacts of something like that?

Assia Billig: Last report was the first report we started to dip our toes into this very complex topic. I should say, that I'm very proud of the office, because we're almost the first ones in the world who started to look at the impact of the climate change and the sustainability of the social security programs.

If you think about it, the climate can affect the plan for different channels. It can affect for demographic channels, impacts on mortality, impacts on migration, think about climate refugees. It can also impact the plan for the macroeconomic channels, like the economic growth, investment returns, and so on. Impacts could come from the physical risks, such as chronic risks, such the increase in the temperatures, rising sea levels, all through the acute risks, such as extreme weather events, storms, heat waves, the fires. We all heard this recent tragic news about Jasper. I almost cried. I love this little city so much and spent a lot of my youth hiking around that. It's so sad.

Last report, we decided to start to look what can happen. We decided not to look at the demographic variables, because there is a lot of uncertainty. Instead of that, we started to look at the impacts on the GDP. This is the variable that which is very often modelled in the different sources, such as NGFS and other sources how the GDP will be impacted. The challenge, of course, is to translate the impacts of GDP to the labour market and investment impacts. What we have done, we reviewed the number of sources, mostly public, some private sources, and we developed the free transition scenarios. The successful transition, orderly transition, the failed transition. Sorry, the disorderly transition, and the failed transition. We translated the impacts on GDP to the labour markets for the increase in the real wage increase. We also translated the impacts for the returns on equities.

Cameron Passmore: Wow.

Assia Billig: The result, I see you shaking your head. Yes, it's pretty completely.

Ben Felix: It's incredible. It's just an unbelievable modelling exercise.

Assia Billig: It is a quite complex exercise. Of course, we simplified a lot, because you see, we're not climate scientists. Once again, these illustrations, and what I also need to mention, very purposefully, we made these downside scenarios. We didn't consider the impacts of new technologies, of emerging business opportunities. They're purely downside scenarios, like illustration of potential downside risk. What we found is that under disorderly transition and failed transition in both cases, the minimum contribution rate exceeded 9.9%. The impacts are quite important.

We continue the work. We are working right now on the trial study, where we're looking at the demographic risks and a little bit more in-depth in the macroeconomic and investment risks. Basically, the goal of this exercise is to determine what we're going to do for the upcoming actuarial report. Because really, I would love to include the climate in the best estimate assumptions, but there's so much uncertainty, so much depending on the climate policy. They change almost every day. I'm pretty sure, we're staying with scenarios. I'm giving you a little spoiler alert.

Cameron Passmore: Speaking of uncertainty, you've mentioned the pandemic a couple of times. How do events like that affect the way you approach your projections?

Assia Billig: Catastrophic events, like pandemic, they definitely disrupt the time series, the historic data. For many variables such as, for example, migration. In our analysis, we need to exclude pandemic here from our analysis. Because if you're thinking about it, the border closed. Basically, there were no migration. It will take these years as a part of our analysis to really disrupt the results.

What is much more interesting is mortality, of course. What was not clear with mortality? Is it the systemic shift, or just the outlier? Because what we don't really know to which extent COVID would impact the long-term mortality. What are the long-term impacts on our health? What are the long-term impacts that will emerge, probably several decades after the pandemic? We still don't know the answer to this question. I think scientists don't know it either. It will require much more experience and much more research to do that. What we decided to do, we decided to treat it a little bit like the outlier and decided to assume that the basically, mortality will return to the pre-pandemic path.

It was a very interesting exercise and it took us a lot of thinking and consulting. We talked a lot to our counterpart in the US, for example, what do they think about it, to our counterpart in Europe. Very interesting times. Very interesting times from point of modelling and from point of research.

Mark McGrath: There's an incredible amount of testing and scenario testing and sensitivity analysis that you guys do. I'm curious. In all of these scenarios that you run, how frequently does the minimum contribution rate exceed the current legislated contribution rate?

Assia Billig: The answer to this question actually depends very much at which level is the minimum contribution rate under the best estimate assumptions. If it's close to 9.9, and of course, you will have a lot of tests where we will have rates exceeding 9.9. In the last report, the minimum contribution rate is quite low. We had only a few tests when the sensitivity that the rate was higher than 9.9%. I think I mentioned them, like a low long-term investment return, low economic growth, and two climate scenarios.

Ben Felix: We've got two more questions for you. The last one is about you. The second to the last one, I'm going to ask now. I'll give you some quick background though. One of the reasons that we wanted to talk to you is that we did a few podcast episodes earlier this year on Canada Pension Plan, why it's a really valuable asset and why it's a good thing for Canadians. We've got a lot of feedback from our audience, from people saying that, “Well, CPP is not going to be there. It's going to collapse,” and comments like that. Obviously, who better than you, literally, in the world to talk to about that? What would you say to people who are skeptical of CPP's future sustainability?

Assia Billig: CPP is in excellent financial health. I should say, it's also in excellent governance health. Right now, as I said, we estimate that financially, CPP is sound for the next 75 years. The current governance process, the triennial reviews, regulatory triennial reviews, and the self-adjustment mechanism really guarantee that no unprudent decisions are going to be made with respect to the CPP.

What I will tell to the people, if you do your retirement planning, please count CPP as one of the major retirement income source for your retirement. CPP is my passion. As long as I'm in the office, I promise you that we will do very thorough financial review of the CPP. I'm sure my successors are going to do the same, the same as my predecessors.

Ben Felix: It's all pretty encouraging.

Cameron Passmore: I'm very happy to have you on our side doing that role. So glad you could join us. Our final question, Assia. How do you define success in your life?

Assia Billig: Oh, I'm pretty lucky in life. I think success for me is both personal success. I have wonderful family with the grown-up sons, very loving ones. Unfortunately, living very far from me. I have wonderful work. Very fulfilling work where I come to work every day and I feel that I work in the public interest. That I'm doing something which really matters to public and to Canadians.

Cameron Passmore: Amazing. Great conversation. Thank you so much for joining us. Thanks for the work you do.

Assia Billig: Thank you very much for inviting me. It's really my pleasure to talk about CPP. As you can probably feel, it's really a passion of mine.

Ben Felix: Awesome. Thanks, Assia. That's great.

Mark McGrath: Thank you.

Assia Billig: Thanks. Bye.

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