brucecohen wrote:CPPIB's 4% real return target is derived from the assumptions used by the Chief Actuary in CPP's triennial valuation. It's literally a moving target that's subject to review every three years after the Chief Actuary's staff does their thing. Several years ago the target was 4.2%.
If I understand correctly, one of the big drivers behind CPPIB's big push into private equity, infrastructure and commercial real estate is the cash flow from active businesses.
ghariton wrote:Bylo Selhi wrote:IOW this too shall pass. Maybe not in your (or my) lifetime. But most likely over the course of the next several decades of CPPIB's projections.
Anything is possible over a 75-year horizon, I suppose. But my impression is that rates of return have been falling over time. This is not just a short-term phenomenon. It's been going on for some 3,000 years now.
If one believes that, in future, the unput in short supply will be labour, not capital, then that should put downward pressure on rates of return for the next century or so. After that, who knows?
ghariton wrote:I do wonder how non-marketable bonds are valued. The notes to the report say that, if there is no market for an asset, an attempt is made to find close substitutes that does trade on markets. If that doesn't work, they will look at the value of discounted future cash flows. But that begs the q2uestion: Which discount rate? Unfortunately the report doesn't say. I do see a potential for circularity here.
ghariton wrote:I have found no details as to the formula for such reductions, just that "this" would happen.
(Slide This leads me to the other side of the coin. What could happen if, in
future actuarial reports, the calculated minimum contribution rate is higher than
9.9%? The default provisions in the Canada Pension Plan Act may result in
adjustments being made to the contribution rate and, perhaps, benefits in
payment if the federal and provincial governments are unable to reach an
agreement in response to the actuarial determination of the minimum contribution
rate. If the new minimum rate is 10.1%, one half of the excess of the new
minimum rate over the 9.9%, that is 0.1%, will apply to an increase in the
contribution rate and the other half will apply to non-indexation of benefits in
payment in order to keep the steady-state rate at 10.0%. In other words, the
contributors and the beneficiaries would equally support the additional cost
shown in the actuarial report.
pmj wrote:The wording in that slide is somewhat tentative! Does the legislation & regulations cause any such changes to occur - or does it just allow such changes? IOW, would a political decision be required - and if so what would be the process?
brucecohen wrote:I just checked the actual Canada Pension Plan Act but my eyes glazed over very quickly.
(2) Where any benefit has become payable commencing with a month in any year, the basic monthly amount of the benefit shall be adjusted annually, in prescribed manner, so that the amount payable for a month in any following year is an amount equal to the product obtained by multiplying
(a) the amount that would have been payable for that month if no adjustment had been made under this section with respect to that following year,
(b) the ratio that the Pension Index for that following year bears to the Pension Index for the year preceding that following year.
(1) Subject to subsection (2), the Pension Index for each year shall be calculated, in prescribed manner, as the average for the twelve month period ending October 31 in the preceding year of the Consumer Price Index for each month in that twelve month period.
(2) For any year for which the calculation required by subsection (1) yields a Pension Index that is less than the Pension Index for the preceding year, the Pension Index shall be taken to be the Pension Index for the preceding year.
the word may occurs throughout the text. I think it has a specific legal meaning; perhaps ghariton can explain. I'm guessing that legislation customarily uses may because, in theory, everything's up to the Queen.
CPPIB chief executive officer David Denison told reporters Thursday the fund is still on track to earn the rates of return it needs to remain sustainable for the next 75 years. The CPPIB needs to earn a “real” rate of return after inflation of 4 per cent annually to meet its payout targets in the future, which currently means average annualized returns of about 6 per cent annually before inflation.
The fund’s 10-year annualized rate of return is 6.2 per cent, but its five-year rate of return is just 2.2 per cent after years of recent turmoil in the markets. Mr. Denison said he is confident the fund will earn the average returns it needs over the long term despite recent short-term results.
George$ wrote:For example, what problems me is "75 years" -- "the fund is still on track to earn the rates of return it needs to remain sustainable for the next 75 years". How can this make sense to me?
While assets are growing, everything in a silly way seems "possible". Like a ponzi scheme. But when the payouts income exceed incomes - and annual returns no longer meet their 4% real expectation - how will it reduce or adjust?
Will inlationtion increases and so reduced purchasing power result in time - when the average returns no longer are possible?
Shakespeare wrote:IIRC the Caisse de dépôt et placement du Québec, which manages the QPP money, also has a mandate to promote Quebec investments and suffers for it in poorer returns.
brucecohen wrote:Shakespeare wrote:IIRC the Caisse de dépôt et placement du Québec, which manages the QPP money, also has a mandate to promote Quebec investments and suffers for it in poorer returns.
Yes. Also, QPP faces serious demographic challenges. The Quebec govt addressed that last year with a bunch of changes. Among other things, for the first time, the QPP contribution rate will be higher than the CPP contribution rate though I don't recall the details.
Note too that the QPP fund took a disastrous hit a few years ago when its managers misjudged the asset-backed commercial paper (ABCP) market.
StuBee wrote:Do they have the same "statutory end point"?
brucecohen wrote:I think a 75-year horizon is common for DB pension funds.
Check out this sneak preview from the June issue of Report On Business Magazine... The model for investing that money has gone through a rapid evolution, leaving the sleepy world of government bonds far behind and culminating in something the CPPIB’s managers call “risk budgeting.” All told, CPPIB has emerged as one adventuresome investor.
It’s all run by investment professionals like Wiseman and Bourbonnais, guys who, for some mysterious reason, think it’s more rewarding to invest on behalf of the Canadian public than make far more dough on the other side of the Street. As a Bay Street professional myself, I want to know what makes these guys tick....
brucecohen wrote:RE: When to start taking CPP (and OAS when its deferral option becomes available)
Here is a short paper published by the Boston College Center for Retirement Research. While it deals with US Social Security, the logic is applicable to CPP.
The author says the decision to delay taking benefits amounts to buying an annuity from the govt plan...at a rate much more favourable than those on annuities from insurers. The govt annuity lacks a number of the overhead costs an insurer has to include in its pricing. Also, the "pricing" on the govt annuity is based on average longevity while insurers use above-average longevity.
Bottom line: Now that taking CPP does not exempt you from having to pay contributions on new employment/self-employment income, it pays to wait unless you're longevity-challenged.
steves wrote: I don't know why, but most individuals I talk to opt for early CPP. Myself included.
AltaRed wrote:It is simple. A bird in hand is worth two in the bush. We might all hope to live to a healthy 90 or 95 but the actuarial tables say otherwise. I took mine early too with no regrets.