The Canada Pension Plan is one of the most valuable retirement assets available to Canadians. By my calculations, a 26-year-old today who maxes out their CPP contributions until age 65 will receive around $3,800 per month for life, adjusted for inflation, starting at

age 70. That amount is guaranteed for life and increases with the Consumer Price Index once the benefit starts. But is it really guaranteed? Only if the Canada Pension Plan remains solvent. I'm Ben Felix, Chief Investment Officer at PWL Capital, and I'm going to tell you

why CPP probably will be there when you retire, and why not counting on it is likely a mistake. As of 2025, the maximum annual combined employer and employee Canada Pension Plan contribution will be approximately $8,860, and it is extremely valuable to

retirees. Inflation-indexed annuities are not available for sale privately in Canada, and most employers have stopped offering defined benefit pension plans to their employees. Unlike Social Security in the US, CPP is partially funded, meaning that it is able to sustain paying a portion of future benefits

out of the assets held by the plan, as opposed to fully relying on new contributions to fund benefits. Despite CPP being a well-run and well-funded pension plan, a lot of people are skeptical that it will be there for them when they retire. This view has real

financial planning implications. Someone who does not count on CPP would need to save substantially more than someone who does, and people who think CPP will collapse any day now are more likely to take their pension benefit early, which has real, quantifiable expected costs. I'm going to argue that thinking this way is

A big mistake when CPP was introduced in 1966: it was like Social Security in the US, a pay-as-you-go plan. This means that all benefits for retired members were funded by contributions from working members of the plan. Changing demographics have strained Social Security, but Canada had the foresight to

introduce partial funding before this became a problem. Back in 1996, it became clear that an aging population, increasing longevity, and the retirement of the baby boomer generation would make the plan unsustainable in the future. A major CPP reform in 1997 increased

contribution rates and introduced the Canada Pension Plan Investment Board (CPPIB). I suspect that some of the CPP skeptics out there still remember that this problem was identified back in 1996, but didn't get the memo that a solution was enacted.  CPPIB has the mandate of

investing excess contributions of the plan in the financial markets to help fund future benefit payments. Rather than a pay-as-you-go program, CPP became a partially funded program intended to be sustainable far into the future. The sustainability of the plan is determined by Canada's Chief Actuary, who provides

independent valuation and advisory services to the federal government. The independence of the Chief Actuary to report on the health of government programs without interference is enshrined in legislation.  The report on CPP independence from government interference is further supported by independent peer review from external

actuaries. Stated simply, the opinion of the Chief Actuary and their report on CPP sustainability are not government propaganda. The actuary report on the CPP determines the minimum ongoing contribution rates for the plan to be sustainable. These minimum contribution rates are compared to the legislated contribution

Contribution rates are the rates that determine how much Canadians are currently required to contribute. If the minimum contribution rates are below the legislative rates, the plan is deemed unsustainable. On the other hand, if the legislative rate is deemed insufficient, the Minister of Finance may decide to

change the contribution rate, change CPP benefits, do both, or do nothing. In any case, two-thirds of the provinces covering two-thirds of the population must agree on any changes to the plan. If an agreement is not reached to resolve an insufficient contribution rate, the CPP

legislation has a self-sustaining mechanism. For base CPP, this means an increase in the contribution rate and freezing of the indexation of benefits. While the possibility for detrimental changes like this exists, recent changes have been beneficial. We've seen post-retirement disability benefits for

early retirees added, the removal of some reductions in survivor benefits for younger survivors, and the introduction of post-retirement benefits. An important point to reiterate here is that CPP is not fully funded and is not designed to be fully funded. It is designed to be

sustainable through a combination of ongoing contributions from working Canadians and investment income from the CPP Investments portfolio. CPP holds the seventh largest pension fund in the world, currently sitting at $646.5 billion, with 30% from investment income. The contribution from investment income is

projected to increase to 40% by 2050. Right now, contributions coming into CPP fully cover ongoing benefits, while all investment income is reinvested into the portfolio. It's projected that by 2030, about 9% of benefits will be funded by

Investment income increasing to 16% by 2050. This is exactly what was planned for with the CPP reforms in 1997; it is working as intended. Demographics are changing, reducing contributions going into the plan relative to the benefits it needs to pay, but there's a pool of

assets there to fund the shortfall. The 31st Actuarial report on the CPP finds that the minimum contribution rates are well below the legislated rates, suggesting that the plan is sustainable for the next 75 years, at least. For example, the minimum contribution rate

for base CPP is 99.54%, which is lower than the legislated rate of 99.9%. Of course, these are long-term projections with a ton of uncertainty surrounding each assumption. To address this, the actuarial report runs through multiple adverse scenarios to test the

sustainability of the plan. They look at a range of outcomes for things like investment returns, economic growth, fertility, mortality and migration, inflation, income distributions, and climate change. While some adverse scenarios suggest that there would be a required increase in the minimum contribution rate, most do not.  Most

impactful are low investment returns, low economic growth, and some of the worst climate scenarios. But overall, the plan is resilient to changes in the assumptions. On the topic of investment returns, I do want to come back to how CPP Investments manages the funds' assets. Early on, they employed a simple index

investing strategy for public stocks and bonds, but in 2006 they made an explicit shift toward active management to provide access to a broader set of investment strategies—their words, not mine. Today, their total costs to manage the portfolio come out to about 1% of

The portfolio's value: 1% to manage $646 billion is wild! If you don't already know my stance on this, I think that most investors, including wealthy families and pension funds, should probably keep it simple and invest in low-cost index funds.

For the majority of their portfolios, an index portfolio would cost very little to manage and implement. But instead, we're paying 1% for active management. I'm not crazy to think that a fund the size of CPP's could just index.

Norway's sovereign wealth fund, which is even larger than CPP's, does mostly look like an index investor and, unsurprisingly, has much lower costs than CPP. To be fair, CPP Investments has a different mandate than Norway's fund; CPP has to meet real long-term liabilities.

The CPP benefits it has to pay out, which are relatively fixed in nature. Evidence does suggest that the investment management model employed by CPP Investments, often referred to as the Canadian pension fund model, does a good job hedging real long-term liabilities. CPP Investments claims that they have

comparative advantages allowing them to invest in markets that wouldn't make sense for an individual household. These include a long-term investment horizon, their significant size and scale, the certainty of the assets they manage, and being the beneficiaries of generally predictable and stable cash flows. There

is anecdotal evidence that CPP Investments has been able to use these advantages to create value for the fund on some specific deals, but overall and in the long run, it's not obvious that active management has been paying off in terms of returns. CPP Investments has a

Reference portfolio that it uses as a benchmark; it is 85% global equity and 15% Canadian government bonds. Since the inception of its active management strategy in 2006 through to the end of its fiscal year 2024, the actively managed portfolio trailed the reference portfolio by 0.1%.

Annualized, or $42.7 billion. There's also a question of whether 85% equity and 15% fixed income is the right benchmark. The CPP portfolio is heavily invested in illiquid private assets, making its overall level of riskiness hard to compare to a portfolio of public

stocks and bonds. If they are taking more risk than the reference portfolio and underperforming it, that is not great. I'm not crazy about the complex and elaborate investment model that CPP Investments is currently running. I think they would be doing just fine if they

had stuck with indexing back in 2006. I mean, I don't just think that; I know it, because they have trailed the reference portfolio since then. But it's also important to recognize that CPP Investments should be benchmarked on its ability to hedge its real long-term

liabilities, which it does seem to be succeeding at, not on its ability to beat a passive benchmark. Despite my concerns and my preference for a more passive approach, CPP Investments could be doing worse. They are managing a portfolio diversified across asset classes all

over the world, and their investment model is well-suited to the purpose of hedging its real long-term liabilities. If stocks have lower returns in the future, their exposure to other risk premiums should help the fund. Time will tell, but at least so far they've been

able to nearly match the reference portfolio while hedging their real liabilities, which is pretty impressive considering their high costs.  Canada Pension Plan is a well-managed and well-funded public pension plan. It is designed to withstand the demographic shifts that we are currently experiencing.

through, and it's resilient to multiple adverse scenarios that could affect the fund's sustainability. While it does employ a relatively expensive active management strategy that I don't fully agree with, it has nearly matched its benchmark since 2006, and research suggests that its investment management model is well

suited to its purpose. In the words of Canada's Chief Actuary, CPP is in excellent financial health; it's also in excellent governance health. If you do your retirement planning, please count CPP as one of the major retirement income sources for your retirement. If

you want to hear more from Canada's Chief Actuary, Asia Billig, she was a guest on episode 318 of the Rational Reminder podcast. If you don't know what that is, it's my podcast; we release an episode every week. You should check it out. Thanks for watching. I'm Ben Felix,

Chief Investment Officer at PWL Capital. If you enjoyed this video, do me a favor: send it to someone who thinks CPP won't be there for them when they retire.

Will Canada Pension Plan (CPP) Still Be There When You Retire?

I post videos on investing, financial decision-making, and living a good life.

My name is Ben Felix. I am a Portfolio Manager and the Head of Research at PWL Capital. I am a CFA charterholder and CFP professional. I am securities licensed in Canada by CIRO.

All channel content is produced and owned by PWL Capital Inc.


Ben Felix

Value and Guarantee of the Canada Pension Plan (CPP)

CPP is a valuable retirement asset for Canadians, with potential monthly payments of around $3,800 (adjusted for inflation).

The guarantee of CPP payments depends on the plan's solvency.

Maximum annual CPP contribution (employer and employee) will be approximately $8,860 in 2025.

CPP is partially funded, unlike a fully pay-as-you-go system.

Skepticism about CPP's future impacts financial planning and pension benefit decisions.

Initially a pay-as-you-go plan, CPP underwent reforms in 1997 due to demographic changes.

Reforms included increased contribution rates and the creation of the CPP Investment Board (CPPIB).

CPPIB invests excess contributions to fund future benefits, making CPP partially funded.

The Chief Actuary independently assesses CPP sustainability, with their reports supported by peer review.

Minimum contribution rates are compared to legislated rates to determine plan sustainability; provincial agreement is needed for changes.

Recent changes have included beneficial additions to CPP benefits.

CPP is designed to be sustainable through contributions and investment income; it's not fully funded.

CPP holds a large pension fund, with investment income projected to increase.

Investment income is projected to fund a growing percentage of benefits.

The 31st Actuarial report suggests sustainability for at least 75 years.

Actuarial reports assess various adverse scenarios to test plan resilience.

CPP Investment Management and Active vs. Passive Strategies

CPP Investments shifted to active management in 2006, incurring approximately 1% management costs.

The speaker expresses preference for a passive index-based investment strategy.

Comparison with Norway's sovereign wealth fund, which employs a largely passive approach.

CPP Investments' mandate differs; it must manage long-term liabilities.

Since 2006, the actively managed portfolio slightly underperformed its reference portfolio.

Concerns about the complexity and cost of the active management strategy.

CPP is well-managed and resilient to adverse scenarios.

Despite concerns about the investment strategy, it has nearly matched its benchmark and effectively hedges liabilities.

The speaker recommends including CPP in retirement income planning.

Reference to a podcast featuring Canada's Chief Actuary.

Will Canada Pension Plan (CPP) Still Be There When You Retire?

Will Canada Pension Plan (CPP) Still Be There When You Retire?

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