Billions of new dollars are set to flow into an expanded Canada Pension Plan, raising questions about how its money manager will generate the returns it needs.
Beginning in 2019, Ottawa and eight provinces are preparing to phase in broad increases to the contributions that workers and employers will make to fund their retirement years, in order to boost the benefits they will receive.
Canada Pension Plan Investment Board, which manages CPP's $280-billion investment portfolio, will likely have to take a unique investment approach with the new money, according to the chief actuary of Canada.
"There will be – or there might be – a different investment policy, because we should invest the money in a different way," said Jean-Claude Ménard. He added that the intention is to report the financing approach and results of the existing CPP funds separately from the new "CPP2" contributions.
Fifty years ago, when the Canada Pension Plan was conceived, the rate of contributions was set low, and early participants received larger benefits than what they paid into the fund. That shifted the burden of paying for retirees down to younger workers.
When those contributions started to appear inadequate, the fund was reformed in the late 1990s to set contribution rates at a higher level of 9.9 per cent, split between employees and employers.
"We said: 'We're not going to do that again.' In other words, we're not going to enhance the CPP benefits without first paying for them," pension consultant Keith Ambachtsheer said of the reforms. The Canada Pension Plan Act was changed to make sure future benefit increases would be prefunded.
Around this time, CPPIB was also allowed to invest beyond government bonds and expand its holdings into stocks, real estate, infrastructure and other assets with higher risks.
The new CPP expansion is designed as a "fully funded" plan from the beginning. Employees would have to contribute to the plan for a full 40 years to get the maximum benefits. As the expansion ramps up, workers will contribute a greater amount of money to CPP and receive higher benefits.
Mr. Ménard said the new CPP benefits will be primarily generated by investment returns. For every dollar of pension payment, "30 per cent will come from contributions – so a lower contribution rate because it's fully funded – and 70 per cent will come from investment earnings. And then the investment risk is very different than the current CPP."
He said there would be discussions about this different risk profile with CPPIB and other stakeholders, and he has "reason to believe" that the investment policy would be different.
Mr. Ambachtsheer said when a pension plan relies so heavily on investment income, that money needs to be thought about very carefully. The plan will initially build up assets faster than it pays out benefits, but over time that will change. Once the plan is mature, it may have to take on lower-risk investments, to ensure that it can meet its promises even in volatile financial markets.
"That means that the volatility of that asset pool becomes more of a factor than currently is the case [with the existing CPP system] … where most of the benefits are going to be paid by contributions," he said.
CPPIB was unavailable to comment.