Wed, 2014-02-26

$200 Billion

Buoyed by strong returns across all sectors this is the latest estimate of what the Canada Pension Plan is currently worth.

It's big, it's prominent and it is run by a large and sophisticated organization known as the Canada Pension Plan Investment Board (CPPIB).   They in turn subcontract various portfolios to chosen experts in various fields that are responsible to them.

"Yes, but will it be there for me?"   The Chief Actuary thinks so.   He indicates that at current levels the plan is sustainable for the next 75 years provided it can earn 4.9% after inflation.

Successive government of the days have been tweaking the program to ensure long-term sustainability.  We've seen numerous changes to contribution levels, flexibility and eligibility.  Expect more to follow.  I also won't be shocked if those currently collecting will fare a little better than those in the future but that is not unique to only this pension program.

Business owners with small corporations may opt out of the program entirely but there are pros and cons of this.  Each situation is different so best to check with your accountant.

What can we learn from the plan?

Let's start with the make-up.  Approximately half is invested in equities (stock) comprising 32% stock market securities and 18% in private equity.  A further 17% is invested in real estate and infrastructure.  The remaining 33% is invested in fixed income and similar which includes bonds and cash alternatives. 

Therefore, some of the holdings are for immediate and future needs while some are for longer-term growth.   Most provide income in the form of dividends, rent or interest along the way.   Some of the products (infrastructure and alternative investments) may be beyond the reach of the average investor although most everyone participates in real estate through the appreciation of their own home.  Their overall fees to manage as a percentage of assets is also very low enhancing returns.

I've counselled many over the years that could approximate what the value of their investments were within a very close range.  Yet when asked if they knew what they might be entitled to from CPP in which they are contributing 5% of their net income (10% if self-employed up to the YMPE $53,000 in 2014) they had absolutely no idea.

If you contribute 5% of your income to a plan designed to approximate 25% of your income in retirement shouldn't we know?