Canadians still worried about CPP

It’s been more than 10 years since the Canadian Pension Plan changed its structure, venturing into the stock market to shore up its balance sheet, but a large number of Canadians are still worried that their CPP dollars won’t be around when they hit 65.

Ian Dale, the CPP Investment Board’s senior vice-president of communications and stakeholder relations, says about 50% of Canucks don’t realize that the pension plan is safe for at least 75 more years.

“The truth is really significantly different than what a lot of people think,” he says. “Representatives of national pension funds around the world come to Toronto to see how this model works. The Canadian success story is better known internationally than at home.”

One of the reasons people are still worried about the CPP, is that they remember 1996, when the Liberal government sounded the alarm that the plan was in dire need of retooling. The message that things weren’t going well frightened millions of Canadians so much, that a lot of people still don’t realize the plan has changed.

“A lot of people just don’t know,” says Valerie Chatain-White, a Winnipeg-based CFP. “They will come into my office and question, ‘will I have CPP?’ ”

Christopher Hatherly, a CFP in Vancouver, adds that many Canadians have a hard time believing what the government says, even though the CPP has been reformed.

“I still have skeptical clients,” he says. “This primarily has to do with individuals’ mistrust of government and given government’s track record of being less then honourable over the years.”

Despite what clients might think, the CPP is healthier than ever. The fund has $120 billion in it — last year it grew by $18.6 billion, $13.1 billion of that coming from investments.

That’s a big change from 1996 when $11 billion flowed into the fund from contributions, while $17 billion was paid out. “It was clear that it would not be sustainable as it was constructed at that time,” explains Dale.

The federal and provincial finance ministers knew that they had to act, so they altered the CPP by increasing contribution rates for six years, freezing some benefits and, most importantly, adding an arm’s length investment board that was set up to diversity the plan’s portfolio.

The finance ministers also allowed the CPP board to invest its money for 25 years without paying out. That means it will be 2020 before the first dollar of investment income will go to retirees. Even then, only one-third of investing income will go towards pension payments.

Dale points out that by the time the CPP starts using its investment money in 12 years, the fund should have about $310 billion. “The reality is that the CPP is on solid ground and will be there going forward,” says Hatherly. “I would answer, ‘yes it will be there when they retire.'”

With such a strong pension — and 10 years having passed since the reforms — it’s hard to understand why so many Canadians don’t know that it is secure. Hatherly says the Conservatives, and the Liberals before them, have done a poor job in promoting the new CPP.

“It is primarily for the federal government to educate the public,” he says. “They have done this from time to time in various statements but for the most part such statements go unheard by the media.”

He adds that the media was writing about CPP when things weren’t going well, but today the topic “doesn’t sell papers.”

Dale says planners can be “part of the solution by telling their clients what’s the truth.”

Hatherly explains to his clients that while the CPP will still be there when they retire, but that it is only meant to replace 25% of the earnings they paid into the CPP and there will be clawbacks through taxes. “When we are doing retirement projections we try to plan around government benefits,” he explains, “They are nice, but generally not a necessity for a comfortable retirement.”

Chatain-White says the first thing she does when talking about CPP is to get the client to call 1-800-O-Canada to find out how much government pension they will receive. Then she works that number in with OAS, their pension plan from work, RRSPs and investments. “The biggest challenge is people, by and large, don’t understand different income sources,” she says. “I truly believe with the complexities that are out there now, it’s making it a bit more difficult for the do it yourselfer.”

Will more Canadians stop worrying about the CPP in the future? Dale thinks so. He says the bigger the fund grows, the more people take notice. “As the fund becomes larger and the CPP Investment Board has become more visible, those impressions are changing,” he says. “Now that there’s more than $120 billion in the fund, Canadians are noticing.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(01/21/08)

Bryan Borzykowski