Starting this week, the Canada Pension Plan Investment Board will receive additional Canada Pension Plan contributions to invest as part of a new CPP enhancement.
Employer and employee contributions to the CPP will both increase by one per cent to 5.95 per cent by 2023. The increased contributions are being phased-in, starting with an increase on Jan. 1, 2019 from 4.95 per cent to 5.1 per cent. Starting in 2024, there will be a phased-in second yearly maximum earnings ceiling, with additional contributions for both the employee and employer between the first and second earnings ceilings.
The contributions, benefits and resulting assets for the additional CPP must be accounted for separately from those in the base CPP, said the 2018 CPPIB annual report.
The additional CPP is designed to be fully-funded, yet the base CPP is designed to be partially-funded. The CPPIB’s annual report says that investment income will play a larger role in sustaining the additional CPP than it does for the base CPP, noting shortfalls in long-term investment income would have a greater impact on future contributions for the additional CPP.
The CPPIB will manage this process by using a two-pool investment structure, said the report. “To meet these objectives, on January 1, 2019, CPPIB will establish two investment pools, each divided into units that are valued daily,” the report said. “Each of the base CPP and additional CPP accounts will invest through their holdings of these units.”
There will be a core pool with the CPPIB’s existing portfolio, which is held at the risk level appropriate for the base CPP account, noted the report. “Future net cash flows to or from base CPP will be allocated to the core pool. Also, a substantial proportion of additional CPP cash inflows will be allocated to the core pool, thereby allowing the additional CPP account to share proportionately in all of the investment programs in the core pool,” the report said. “To achieve the targeted risk level and asset allocations for the additional CPP, the remaining assets of the additional CPP account will be invested in a lower-risk “supplementary pool,” comprising only fixed-income securities.”
This new two-pool investment structure has the goal of meeting the different risk targets of the base and additional CPP accounts and avoiding the costs and complexity that would be incurred if each account was managed separately, the report said.
“Over the past year, CPPIB has worked to ensure that both the base CPP and the additional CPP amounts will be managed efficiently and with a view to the opportunities that may be created as the CPP Fund grows,” said Mark Machin, president and CEO of the CPPIB, in a press release. “We will invest the additional stream of CPP with the same attention to appropriate growth, risk control and transparency that Canadians count on.”