: Ontario Retirement Pension Plan
Actuarial Funding Report as at January 1, 2018

June 23, 2016
WillisTowersWatson

Table of Contents

Section 1 : Executive Summary

  1. Purpose of the Report
  2. Scope of the Report
  3. Key Report Dates and Subsequent Events
  4. Key Results and Findings
  5. Limitations
  6. Actuarial Opinion

Section 2 : Overview

  1. Background
  2. Intergenerational and Intragenerational Equity
  3. Intended Purpose

Section 3 : Sustainability

  1. Introduction
  2. Assessment of Sustainability
  3. Sustainability Contribution Rate Differential
  4. Impact of Actuarial Valuation

Section 4 : Projection Methodology

  1. Introduction
  2. Development of Projection System
  3. Projection Method
  4. Projection Period
  5. Population Projection
  6. ORPP-eligible Members and Comparable Workplace Pension Plans
  7. Contributor and Contribution Projection
  8. Expenditures Projection
  9. Assets Projection

Section 5 : Data Collected

  1. Introduction
  2. Population Data
  3. Covered Members and Tax Data
  4. Economic Outlook

Section 6 : Actuarial Assumptions

  1. Introduction
  2. Demographic Assumptions
  3. Workforce Assumptions
  4. Economic Assumptions
  5. Other Assumptions

Section 7 : Key Results

  1. Overview
  2. Projection of Population
  3. Projection of Contributions
  4. Projection of Expenditures
  5. Projection of Plan Assets
  6. Sustainability Metrics / Sustainability Rate Determination
  7. Balance Sheet
  8. Intergenerational and Intragenerational Equity Metrics
  9. Summary of Key Projection Results

Section 8 : Risks

  1. Introduction
  2. Projection System
  3. Data
  4. Employer and Plan Member Behaviours
  5. Economic Cycles
  6. Investment Returns
  7. Operational Costs
  8. Sensitivity Testing
  9. Risk Mitigation

Section 9 : Sensitivity and Scenario Analysis

  1. Description of Sensitivity Analysis
  2. Results of Sensitivity Analysis
  3. Results of Combined Sensitivity Analysis
  4. Investment Experience Scenario Analysis
  5. Conclusions

Appendix A : Actuarial Assumption Details

  1. Overview
  2. Demographic Assumptions
  3. Workforce Assumptions
  4. Economic Assumptions

Appendix B : Plan Provisions

  1. Definitions
  2. Membership
  3. Contributions
  4. Pension Benefits
  5. Pre-retirement Death Benefit

Appendix C : Applicable Actuarial Standards

  1. Overview
  2. International Standards of Actuarial Practice
  3. Canadian Standards of Actuarial PracticeActuarial Standards Applied for Actuarial Funding Report

List of Tables and Charts

Section 1 : Executive Summary

A. Purpose of the Report

This is the Actuarial Funding Report on the Ontario Retirement Pension Plan (ORPP). It presents the initial actuarial projections of the ORPP for the 100-year period from the ORPP’s implementation date of January 1, 2018 to December 31, 2117. The Actuarial Funding Report was commissioned by the Ontario Ministry of Finance (Ministry) in support of the Ministry’s development of the ORPP legislation and plan documentation and for registration of the ORPP under the Income Tax Act, Canada (ITA).

The Government of Ontario (Government) tabled the Ontario Retirement Pension Plan Act (Strengthening Retirement Security for Ontarians), 2016 (ORPP Act) in April 2016. The ORPP Act received Royal Assent on June 9, 2016 but has not been proclaimed, and its provisions form the basis for this Actuarial Funding Report. The regulations described in the ORPP Act remain forthcoming.

The key purposes of this Actuarial Funding Report are to:

  • provide the Ministry the projected financial status of the ORPP over a long projection period,
  • provide the Ministry the information needed to evaluate the sustainability of the ORPP, as defined in the ORPP Act,
  • provide the Ministry the information needed to assist the Government with finalizing the plan provisions in accordance with the ORPP Act, and
  • provide the Ministry the information needed by the Canada Revenue Agency (CRA) to approve the registration of the ORPP under the ITA.

B. Scope of the Report

Section 2 of this Actuarial Funding Report provides the background of the ORPP. Section 3 provides the Ministry’s definition of “sustainability” and sets out the funding mechanisms to be used to maintain sustainability. Sections 4, 5 and 6 provide an overview of the methodology employed in the actuarial projections, the data collected and the actuarial assumptions used for the projections. The projections of contributions, expenditures1 and assets are set out in Section 7, along with an evaluation of the ORPP’s sustainability and balance sheet, as well as analysis in respect of intergenerational and intragenerational equity. Section 8 provides an overview of several risks affecting both the near-term and long-term projection of the ORPP. Section 9 shows the sensitivity of the projections to selected alternative assumptions, as well as illustrating how hypothetical scenarios of outcomes could impact the ORPP.

Appendix A provides further details in respect of the actuarial assumptions used for the projections and additional information collected in support of certain of the assumptions. Appendix B provides a summary of the plan provisions provided by the Ministry for this Actuarial Funding Report. Appendix C provides a summary of the actuarial standards applicable to this Actuarial Funding Report.

C. Key Report Dates and Subsequent Events

This Actuarial Funding Report was completed on June 23, 2016 (Report Date). We completed the projections contained in this report in April 2016 using a measurement date of January 1, 2018, the effective date of the ORPP. The date at which the tax data and population projection data from the Ministry and population projection assumptions were finalized for purposes of this Actuarial Funding Report is August 31, 2015. The date at which the plan provisions, other projection assumptions, and directions from the Ministry were finalized for purposes of this Actuarial Funding Report is March 31, 2016 (Cut-off Date).

To our knowledge, there were no substantive changes to the ORPP Act between the Cut-off Date and June 9, 2016, the date on which the ORPP Act received Royal Assent. Similarly, there were no changes to the directions received from the Ministry between the Cut-off Date and the Report Date.

The ORPP will not take full effect until the ORPP Act is proclaimed, the ORPP is approved and registered by the CRA, and the administrative practices are adopted. The Government (or the ORPP Administration Corporation, where applicable) has the authority to modify the plan provisions and the funding mechanisms to maintain sustainability, and to establish other policies or procedures as it deems appropriate. The plan provisions and funding mechanisms to maintain sustainability for the projections used in this Actuarial Funding Report are based on the ORPP Act and directions from the Ministry. The plan provisions and funding mechanisms to maintain sustainability described in this Actuarial Funding Report should not be construed as representing the final decisions or policies of the Government and/or the ORPP Administration Corporation.

D. Key Results and Findings

The results of the actuarial projections show the ORPP to be sustainable for the period until 2117, based on the definition of “sustainable” in the ORPP Act and our understanding as to how sustainability may be defined in the regulations. In particular:

  • The number of Active Contributors2 is projected to be 4.6 million in 2020, when all Implementation Waves are complete, out of a total working-age population of 9.3 million. By 2060, ORPP Active Contributors are projected to reach 5.1 million out of a total working-age population of 11.5 million, and by 2117, ORPP Active Contributors are projected to reach 7.6 million out of a total working-age population of 17.1 million.
  • Based on the ultimate legislated contribution rate of 3.80% of Contributory Earnings (the Total Contribution Rate for members and employers combined and after all Implementation Waves):
    • the assets of the ORPP are projected initially to grow significantly faster than expenditures between 2018 and 2030. By 2030, assets are projected to be $97 billion ($72 billion in constant 2016 dollars) and annual contributions and expenditures are projected to be $8.7 billion and $1.4 billion respectively ($6.5 billion and $1.1 billion in constant 2016 dollars). In 2030, the Assets to Expenditures Ratio is projected to reach a peak of 69.1;
    • between 2030 and 2060, the assets are projected to continue to grow significantly, reaching $960 billion ($394 billion in constant 2016 dollars). In 2060, annual contributions and expenditures are projected to be $26 billion and $28 billion respectively ($11 billion and $12 billion in constant 2016 dollars), with expenditures projected to exceed annual contributions for the first time. In 2060, the Assets to Expenditures Ratio is projected to be 33.8; and
    • beyond 2060, while the assets continue to increase, the Assets to Expenditures Ratio continues to decline until it levels off at approximately 25.5 in 2095, when the ORPP is projected to reach a mature financial condition. By 2117, the assets are projected to reach $9.6 trillion ($1.3 trillion in constant 2016 dollars) and annual contributions and expenditures are projected to reach $222 billion and $373 billion respectively ($30 billion and $50 billion in constant 2016 dollars).
  • The Sustainability Rate,3 as defined in the ORPP Act, is 3.78% of Contributory Earnings (member and employer combined). Since this is less than the Total Contribution Rate (following the Implementation Waves), the Total Contribution Rate is projected to be sufficient to maintain the ORPP.

The significant growth in the Assets to Expenditures Ratio in the early years, followed by a lengthy period of gradual decline, is a natural progression for a new social security program such as the ORPP. The ORPP is projected to take a significant number of years to mature before the Assets to Expenditures Ratio can become stable.

E. Limitations

For the purpose of this Actuarial Funding Report, the ORPP is considered a social security program. The actuarial analysis of social security programs is based on numerous assumptions. Social security programs are complex and their future contributions and expenditures depend on many economic and demographic factors. Further, the projection of cash flows for a social security program is performed for an extended time period. With the passage of time, the financial position of the social security program will almost certainly differ from any actuarial projections. Users of an actuarial projection must be aware that the actual outcome is inherently unknowable in advance and will differ from the projections.

The projections in this Actuarial Funding Report are based on the available data and best-estimate actuarial assumptions. There will be many factors that create favourable or unfavourable experience for the ORPP. For example, given that the ORPP is a new social security program which is not universal in design, the actual number of members will be directly affected by the number of employers who provide workplace pension plans that meet the definition of Comparable Workplace Pension Plans in the ORPP Act.4 Since self-employed and certain other workers are not currently eligible for the ORPP, the number of ORPP members could be higher or lower than the projections herein (or the distribution of members by age, sex or earnings bands could be different than assumed), affecting the projections of contributions, expenditures and plan assets. The future is inherently unknowable and the projections herein are intended to provide only an initial assessment of the sustainability of the ORPP.

As no contributions have yet been collected and the ORPP Administration Corporation (ORPP AC), established by the Ontario Retirement Pension Plan Administration Corporation Act, 2015 (ORPP AC Act), is not yet fully operational, the Ministry specified, based on its analysis, that Willis Towers Watson use particular assumptions for the real rates of investment return (i.e., above price inflation), investment management expenses and operational costs. The specified assumptions include an ultimate real rate of investment return of 4.0% per year and ultimate investment management expenses of 0.5% per year. While the ORPP AC has not yet developed an investment strategy, nor has it determined how that strategy will be deployed, the process is underway for the ORPP AC to develop an investment framework that will form the foundation for a long-term investment strategy for the prudent and effective investment of ORPP assets.

Independent from the due diligence conducted by the Ministry, Willis Towers Watson performed analysis to assess whether the investment return assumptions were plausible. First, we compared the assumptions specified by the Ministry to the investment return assumptions (net of investment expenses) employed by several large Ontario pension plans and found no evident shortcomings. Then, Willis Towers Watson modeled the potential real investment returns for some investment strategies which would be considered customary in Canada, without making any allowance for possible added value from active management net of related investment management expenses. We determined that there are a range of such asset mixes that could be expected to generate the specified real rate of investment return assumption of 4.0% per year, with investment management expenses of 0.5% per year. As a result of the foregoing assessments, we consider the assumptions specified by the Ministry to be plausible. However, Willis Towers Watson has no opinion as to whether the investment strategy ultimately selected by the ORPP AC would generate such returns.

Similarly, the ORPP AC must develop its administration infrastructure. Willis Towers Watson is unable to assess the plausibility of the per capita rates for operational costs specified by the Ministry and has no opinion as to whether these ORPP operational costs will be within the cost projections contained in this Actuarial Funding Report.

The projections shown in this Actuarial Funding Report were prepared using best-estimate assumptions that we selected (except for assumptions specified by the Ministry). Section 9 provides an illustration of the sensitivity of the projections to changes in the economic or demographic outlook, by analyzing alternatives for many of the key projection assumptions. For each of the selected assumptions, a low-cost and high-cost assumption has been modeled (in each case all other assumptions remain at the current best estimate), with the effect on the key ORPP metrics summarized. The sensitivity analysis revealed that the hypothetical Sustainability Rate developed using the low-cost and high-cost alternative assumptions could be between 2.9% and 5.1% of Contributory Earnings. Further, Section 9 includes sensitivity analysis under which the economic and demographic outlook for all three of the most impactful assumption sensitivities – net investment return, wage growth and mortality – is changed to the low-cost or high-cost assumptions analyzed earlier.

The foregoing sensitivities and scenarios are based on a premise where it would be possible to know from the outset how the economic and demographic factors will evolve over time. In reality, this is not possible and experience differing from the assumptions will arise over time. Therefore, Section 9 also includes two scenarios where the ORPP experiences substantial favourable and unfavourable investment experience in 2050, at a time when the ORPP has amassed a considerable amount of assets. As a result, this scenario provides insight into the potential impact such positive or adverse experience would have on the ORPP funded status and illustrates how the funding mechanisms to maintain sustainability contained in the ORPP Act would be applied in response to such experience.

The ORPP Act sets out the requirement for periodic actuarial valuations of the ORPP. Each actuarial valuation will allow for actual membership data to be collected and for actuarial assumptions and methodologies to be refined.

F. Actuarial Opinion

In our opinion:

  • the data upon which this Actuarial Funding Report is based are sufficient and reliable for the purposes of this Actuarial Funding Report;
  • the assumptions for the real rates of investment return, investment management expenses and operational costs were specified by the Ministry, and have been relied upon by Willis Towers Watson. There is insufficient information at this time on the investment strategy, its implementation, and on the administration structure to fully assess the specified assumptions. Therefore, we do not have an opinion on the appropriateness of these assumptions for the purposes of this Actuarial Funding Report;
  • the other assumptions used are, individually and in aggregate, reasonable and appropriate for the purposes of this Actuarial Funding Report;
  • the methodology used, including the selection of the open group projection method, is appropriate for the purposes of this Actuarial Funding Report and is consistent with the funding mechanisms to maintain sustainability of the ORPP as specified in the ORPP Act and the objective announced by the Government in respect of intergenerational equity;
  • based on the results of the projections contained in this Actuarial Funding Report, including the data, assumptions (including the assumptions specified by the Ministry) and methodologies disclosed herein, the Sustainability Rate to finance the Ontario Retirement Pension Plan is projected to be 3.78% of Contributory Earnings; and
  • the Total Contribution Rate of 3.80% of Contributory Earnings established in the ORPP Act exceeds the Sustainability Rate of 3.78% of Contributory Earnings.

This Actuarial Funding Report has been prepared, and our opinions given, in accordance with both accepted actuarial practice in Canada and internationally accepted actuarial practice as specified by International Standard of Actuarial Practice 2 – Financial Analysis of Social Security Programs.

Towers Watson Canada Inc.

C. Ian Markham
Fellow, Canadian Institute of Actuaries

Philip A. Morse
Fellow, Canadian Institute of Actuaries

June 23, 2016

Section 2 : Overview

A. Background

In its 2014 Budget, the Government announced its commitment to introduce the ORPP, a new social security program intended to provide Ontarians with a predictable and secure stream of income to improve their living standard in retirement.
Ontario workers, like those in other provinces, currently have three pillars supporting them financially in retirement:

  • Government of Canada programs, such as Old Age Security (OAS) and Guaranteed Income Supplement (GIS), and the Ontario Guaranteed Annual Income System (GAINS) program that provide benefits based on residency in Canada and level of income and which are entirely financed from the revenues of the Governments of Canada and Ontario, respectively,
  • the Canada Pension Plan (CPP),5 which provides a retirement benefit based on the years of participation and covered earnings for each worker, where the benefits are financed by employees and their employers (with self-employed persons paying both shares), and
  • workplace pension plans and tax-assisted savings plans.6

With the implementation of the ORPP in 2018, eligible Ontario workers and their employers will both contribute, potentially increasing the level of savings for all eligible workers and effectively creating another pillar of support for their financial security in retirement.

While the ORPP may have certain similarities to the CPP, the Government is developing the ORPP to meet its retirement income objectives for Ontarians. The high-level plan provisions announced by the Government include the following:

  • certain Ontario workers, such as the self-employed and those employed by a federally-regulated employer will not be eligible for the ORPP;
  • Ontario workers with a Comparable Workplace Pension Plan provided by their employer will not be eligible for the ORPP, except as a result of an election by their employer to opt in to the ORPP;
  • following a transition period of three years, eligible Ontario workers and their employers will each contribute above a minimum earnings threshold 1.9% of covered earnings up to the annual Maximum Annual Earnings Threshold of $90,000 (in 2017 dollars), with the Maximum Annual Earnings Threshold expected to increase in line with the annual growth in the Canadian average wage, as measured by Statistics Canada;
  • the ORPP is targeting a benefit of up to 15% of average covered earnings for Ontarians who contribute for a 40-year career; and
  • the ORPP will be administered by the ORPP AC, an entity that is arm’s length from the Government.

The Ministry engaged Willis Towers Watson to provide actuarial advice in respect of the development of the ORPP.

A key component of the actuarial advice provided to the Ministry relates to the long-term sustainability of the ORPP. In particular, this Actuarial Funding Report sets out projections of ORPP revenues (defined in this report as the contributions from eligible members and their employers plus net investment returns on ORPP assets), ORPP expenditures and the ORPP assets. This Actuarial Funding Report sets out the projected financial status of the ORPP over a 100-year period reflecting the plan provisions and funding mechanisms to maintain sustainability of the ORPP contained in the ORPP Act and, based on the best-estimate assumptions and methodologies employed for the projection, confirms the sufficiency of the member and employer contribution rates, along with expected net investment returns thereon, to finance all expenditures under the ORPP.

B. Intergenerational and Intragenerational Equity

In addition to the other objectives established for the ORPP, the Government has also expressed its desire that the ORPP will provide a degree of intergenerational and intragenerational equity. Intergenerational equity focuses on the contributions and benefits between one generation of members and another. Intragenerational equity focuses on the contributions and benefits of the members within a given generation.

One means of assessing equity between groups of members is to determine and compare the Internal Rate of Return (IRR) that each group of members is expected to earn from the ORPP. The IRR is the constant annual rate of investment return that would need to be applied to the pool of assets generated by the group’s expected contributions such that the accumulated assets are sufficient to precisely pay the group’s expected benefits. Naturally, the IRR for a group of members cannot be fully determined until all members in the group have made all their contributions and collected all their benefits, so the IRR analysis is based on a projection of future contributions and benefits for the group.

Given the pooling concepts embedded in a defined benefit social security program like the ORPP, it is not intended that each member (or group of members) receive a value exactly equal to their own (and their employer’s) contributions accumulated with an allocation of investment return and reduced by an allocation of operational costs. Such an approach would see some retirees outliving such an accumulated value if they live longer than expected, thus defeating the broader social security objectives of the ORPP.

As a result, the objective of the ORPP is to ensure that the degree of intergenerational and intragenerational equity is reasonable. In Section 7, we analyze the intergenerational equity and intragenerational equity for the ORPP.

C. Intended Purpose

Since the ORPP Act and related regulations have not been proclaimed or otherwise brought into force, and the plan has not been approved for registration by the CRA, this Actuarial Funding Report has been developed based on certain directions from the Ministry in respect of the plan provisions and the funding mechanisms used to maintain sustainability of the ORPP. Until such time as the ORPP Act is proclaimed and the regulations under the ORPP Act are finalized, this Actuarial Funding Report should be considered preliminary in nature. Subsequent to this Actuarial Funding Report, changes may be made to the ORPP Act, its regulations or the funding mechanisms to maintain sustainability which could affect the projections. Therefore, any distribution of this report should be accompanied by a clear statement that the ORPP Act has not yet been proclaimed. An Actuarial Funding Report may be prepared in respect of the final ORPP legislation if there are any provisions which differ from those used in the preparation of this Actuarial Funding Report.

This report has been prepared to present the initial projections of the ORPP based on the data collected and assumptions developed solely for this purpose. The data, assumptions and results of the projections in this Actuarial Funding Report should not be used or relied upon for any other purpose.

Section 3 : Sustainability

A. Introduction

The ORPP has been established to provide pension benefits to Ontarians for generations to come. To fulfill this commitment, it is necessary to ensure that adequate contributions are collected and are invested so that the future expenditures of the ORPP can be met. For any pension plan, the Basic Funding Equation over the life of the plan is:

Contributions + Net Investment Return         =           Benefits Paid + Operational Costs

or, in other words:

INPUTS            =          OUTPUTS

Actual contributions, investment returns (net of investment management expenses), benefits paid and operational costs may be different than assumed. For example, if investment returns are greater than assumed, and all other factors remain constant, the total of the inputs will be greater than the outputs. Alternatively, if pensioners live longer than expected, this could cause the outputs to exceed the inputs. While this Basic Funding Equation is over the whole life of the ORPP, for practical implementation it needs to be considered over a finite period and the evolution of the balance between inputs and outputs needs to be monitored. In order to manage the ORPP as a sustainable plan, it is necessary to understand each element of the Basic Funding Equation and, if the equation gets out of balance, to understand the means by which the ORPP can be returned to a sustainable state.

The ORPP AC is responsible for administering the ORPP in accordance with the ORPP AC Act and its regulations and the ORPP Act and its regulations.

B. Assessment of Sustainability

The ORPP Act incorporates a means for assessing the sustainability of the ORPP and the mechanism(s) for making adjustments to the plan provisions to address any imbalances that could occur. These provisions are expected to be supplemented in future by regulations made under the ORPP Act.

Following consultations with the Ministry, assumptions in respect of the specific requirements to be applicable to future Plan actuarial valuations have been made for the purposes of this Actuarial Funding Report. The assessment of Plan sustainability (as defined by the ORPP Act) is based on a long-term projection for 100 years from the actuarial valuation measurement date (Projection Period), of the annual ratios of Plan assets to Plan expenditures (Assets to Expenditures Ratio), the Sustainability Rate and the Sustainability Contribution Rate Differential (SCRD) of the Plan, which is derived from this projection, as outlined below:

  • The Assets to Expenditures Ratio, for a given year, is determined as the market value of Plan assets on December 31 of the year divided by the expenditures (i.e., benefits paid plus operational costs) in the year. This ratio provides an indication of the number of years that the current level of expenditures could be provided from the Plan assets without any future contributions or net investment return. As the ORPP matures, the projected value of the Assets to Expenditures Ratios should level off, meaning that the relationship between contributions, net investment returns and expenditures has also levelled off; and
  • The Sustainability Rate is the lowest contribution rate7 (members and employers combined) such that the Assets to Expenditures Ratio at the Second Stability Test Year is not less than the Assets to Expenditures Ratio at the Initial Stability Test Year, where:
    • the Initial Stability Test Year is at least 10 years after the Actuarial Review Period, defined below, and not earlier than 2080, and
    • the Second Stability Test Year is at least 10 years after the Initial Stability Test Year, and not earlier than 60 years from the end of the Actuarial Review Period.

C. Sustainability Contribution Rate Differential

The SCRD is the key measure by which the sustainability of the ORPP is assessed. It is determined as the difference between the current Total Contribution Rate being made to the Plan as of the date for which the sustainability is being assessed and the Sustainability Rate.

The ORPP Act requires an actuarial valuation of the ORPP to be conducted every three years to ensure a periodic assessment of the sustainability of the ORPP. Each actuarial valuation will cover 100 years, including both the Actuarial Review Period (defined as the three-year period immediately following the actuarial valuation measurement date) and the subsequent 97 years. For the ORPP to be considered to be Funded on a Sustainable Basis, the ORPP Act requires that the actuarial valuation must demonstrate that the SCRD, determined at the end of the Actuarial Review Period, is greater than ‑0.10% and less than +0.10% of Contributory Earnings.

D. Impact of Actuarial Valuation

A key component of the ORPP Act is the specification of actions that may be taken by the ORPP AC based on the SCRD at each actuarial valuation. Actions may be required to bring the Basic Funding Equation back into balance in a specific and consistently applied manner at each actuarial valuation. If, based on an actuarial valuation, the ORPP is considered to be Funded on a Sustainable Basis, the ORPP Act does not permit the ORPP AC to make changes to the plan provisions.

The ORPP Act specifies the ORPP to have a Funding Shortfall if the SCRD is equal to or less than -0.10% of Contributory Earnings (i.e., if the projected inputs are less than the projected outputs). If the ORPP has a Funding Shortfall, the ORPP Act provides that the plan provisions would be amended in order to eliminate the Funding Shortfall and bring the ORPP back to being Funded on a Sustainable Basis. That is, following the amendments, the resulting SCRD would be within ±0.10% of Contributory Earnings.

The ORPP Act authorizes the use of the following actions when determining amendments to the plan provisions to address a Funding Shortfall:

  • Reverse previous plan changes made as a result of one or more previous Funding Excesses, in whole or in part;
  • Reduce, simultaneously, the proportions of the growth in average wage and price inflation that are used to annually increase the Maximum Annual Earnings Threshold and pensions in payment, respectively, as follows:8
    • the proportion of the growth in average wage that is used to annually increase the Maximum Annual Earnings Threshold is reduced by no more than 10%;
    • the proportion of price inflation that is used to annually increase pensions in payment is reduced by no more than 25%;
    • the above reductions in the proportions are determined in a 2:5 ratio; and
  • In the event that, following the above amendments, the SCRD is not greater than ‑0.10% of Contributory Earnings, the required contribution rates for members and their employers are increased.

The ORPP Act does not authorize the ORPP AC to reduce accrued ORPP benefits or pensions in payment when addressing a Funding Shortfall. Rather, the ORPP Act only permits future indexing of the Maximum Annual Earnings Threshold and pensions in payment to be adjusted.

The ORPP Act specifies the ORPP to have a Funding Excess if the SCRD is equal to or greater than +0.10% of Contributory Earnings. If the ORPP has a Funding Excess, the ORPP Act provides the following direction as to what action is to be taken, if any:

  • If the SCRD is at least +0.10% of Contributory Earnings and equal to or less than +1.00% of Contributory Earnings, the ORPP AC must give notice to the Government setting out the ORPP AC’s recommendations on how to address the funding excess, which could include some or all of the following:
    • reverse previous plan changes made as a result of one or more previous Funding Shortfalls, in whole or in part;
    • decrease the Total Contribution Rate; or
    • maintain the Funding Excess.
  • If the SCRD is greater than +1.00% of Contributory Earnings,
    • the ORPP AC must give notice to the Government setting out the ORPP AC’s recommendations on how to reduce the Funding Excess such that the resulting SCRD would not exceed +1.00% of Contributory Earnings; and
    • if the Government does not make a decision in respect of the recommendation within the prescribed time period, the ORPP AC is required to reverse any previous plan changes made as a result of one or more previous Funding Shortfalls, in whole or in part, and/or decrease the Total Contribution Rate such that following all amendments, the SCRD is +1.00% of Contributory Earnings.

To ensure that members and employers can be notified of any forthcoming changes to the ORPP and that the ORPP AC can complete any necessary system changes needed to administer the ORPP as amended, the above actions would take effect following the end of the Actuarial Review Period.

Section 4 : Projection Methodology

A. Introduction

The review of the sustainability of the ORPP involves the projection of contributions, expenditures and assets of the ORPP over a long period of time. In an ideal circumstance, the actuary would consider past plan experience when establishing the actuarial assumptions and methodologies, but given that the ORPP is not yet in operation and does not have any members, such historical information does not exist.

For projections in this Actuarial Funding Report, certain assumptions were specified by the Ministry. In all other cases, we developed best-estimate assumptions based on the data and other information collected in conjunction with discussions with the Ministry and, when relevant, with consideration of the assumptions used for the CPP actuarial projections. In all cases, we applied our professional judgment.

B. Development of Projection System

The projection of a social security program is a complex exercise given the sheer number of factors, many of which are inherently unknowable in advance. In order to undertake projections of the financial status of the ORPP, it was necessary to specify and develop an actuarial model representing our best-estimate view of the interrelated demographic, economic and other factors that are expected to affect the ORPP financial status. In actuarial practice, a model designed to provide a best-estimate model is often not unique. Rather, it is possible that another actuary could develop an alternative model reflecting that actuary’s views of the factors affecting the projected financial status of the ORPP, and such an alternative model could also be considered by that actuary to be a best estimate.

It was necessary to incorporate this actuarial model into a computerized projection system. Since the ORPP is a new pension arrangement, with a design and approach to funding which is significantly different than any other pension plan in Canada, there was no existing projection system which could be directly applied to the ORPP. As a result, we developed our projection system to be consistent with our actuarial model specifications and to enable us to meet the calculation and reporting requirements specified in the ORPP Act.

The projection system takes as inputs the available data and actuarial assumptions, applies our actuarial model, and generates a plausible projection of the future financial status of the ORPP for a 100-year period. In developing the projection system, certain simplifications had to be made for computational expedience. For example, it was not possible to project each current and future Ontarian on a person-by-person basis; therefore, the data and projections have been prepared by cohorts. Similarly, it was impractical to define a unique earnings distribution for each age, sex and projection year; therefore, an approximation technique was applied to simulate the earnings distributions as needed. Other refinements were made to reasonably incorporate the actuarial model as well as the available data and assumptions into the projection system.

here are a number of limitations related to the development of an actuarial model and its representation in a projection system, noting that every projection system has some degree of limitation, introducing an element of risk. To minimize and, where possible, to mitigate these risks, a number of steps were taken to ensure that the results developed by the projection system were actuarially sound. These steps included:

  • ensuring that the mathematical calculations embedded in the actuarial model and its computerization were developed in a manner consistent with accepted actuarial practice;
  • ensuring that the data collected and, where applicable, any assumptions developed from the data collected were sufficient and appropriate for the purposes of this Actuarial Funding Report;
  • ensuring that the interim calculations from various modules of the projection system (e.g., projections of the population, projections of accrued pension credits for each cohort, projections of new pensioners and total number of pensioners, projections of amounts payable to new pensioners and total payments to pensioners) were reasonable and determined with a consistent approach from module to module;
  • determining the sensitivity of the projection results to variations in the membership data, plan provisions and/or projection assumptions, and ensuring that the alternative projection results under each sensitivity are as expected; and
  • ensuring that the calculations and sensitivities are consistent with published sensitivities from the CPP Actuarial Report, or where such calculations or sensitivities are inconsistent, that any such differences are appropriate given the different plan designs and approaches to funding.

There are several key metrics we used to assess the financial status of the ORPP, including the Assets to Expenditures Ratio, the Sustainability Rate and the assets as a percentage of liabilities on the balance sheet. There is a complex, but consistent, relationship between these metrics such that for a given change to the assumptions, the changes to one of the metrics allows us to assess the reasonableness of the corresponding changes to the other metrics. These relationships have been consistently observed throughout our development of the projection system and the projections of the ORPP financial status, increasing our confidence in the credibility of the projection system. Based on the foregoing, we are satisfied that the projection system adequately reflects the actuarial model developed for the purposes of this Actuarial Funding Report.

The balance of Section 4, along with the supporting information on assumptions and methods contained in this Actuarial Funding Report, sets out the key elements of our actuarial model.

C. Projection Method

In consideration of the funding mechanisms used to measure and maintain sustainability of the ORPP set out in the ORPP Act, the open group projection methodology has been used for this Actuarial Funding Report. A social security program is intended to operate for the long term, collecting contributions and paying benefits to successive generations of members. To achieve intergenerational and intragenerational equity, stable contribution rates and benefits under the social security program are important. Therefore, the inclusion of future generations of members is necessary in the sustainability assessment.

As a new plan, the ORPP is expected to incur significant start-up costs establishing its infrastructure, administration systems and processes, and investment management operations. The open group projection methodology effectively spreads these costs over the initial and future generations of ORPP members, rather than allocating the costs solely to the initial generation.

In our view, the open group methodology, which considers the current and expected future members of the program, is the most appropriate approach for assessing the long-term sustainability of the ORPP.

D. Projection Period

The projection period needs to be sufficiently long to allow the ORPP, as a new social security program, to mature. In its early years the ORPP will have no or few pensioners, so contributions will far exceed expenditures, allowing the ORPP assets to increase quickly. Then, as an increasing number of the members who have joined the ORPP start to retire and move from being members to pensioners, the assets will still grow significantly, and the Assets to Expenditures Ratio will start to decline. Our projections revealed that the Assets to Expenditures Ratio levels out between 2090 and 2117.

E. Population Projection

Our model starts with the projection of the population of Ontario, building from the data and assumptions developed by the Ministry’s Economic Policy Branch – Income, Employment and Demographic Issues Unit (Ministry Demographic Projection) for the period from 2012 to 2090. Starting with population data subdivided by age and sex in 2012, the Ministry Demographic Model projects annual fertility (i.e., births), mortality (i.e., deaths) and net migration into (or out of) Ontario. Net migration represents the net effect of immigration to (or emigration from) Ontario and other changes in non-permanent residence (e.g., students moving to/from Ontario as they begin/end university programs).

We understand that the Ministry Demographic Projection does not represent Government policy targets, desired population outcomes or explicit economic growth assumptions. The Ministry Demographic Projection has been developed based on extensive analysis of recent trends of, and future expectations for, fertility, net migration and mortality that affect the Ontario population. The Ministry prepared the projections separately for each of the 49 Ontario census divisions up to 2041 and projected the population in aggregate thereafter.

We have used the work of the Ministry in the preparation of the Ministry Demographic Projection until 2090. We compared the population projection prepared by the Ministry to other sources, including the Population Projections for Canada, Provinces and Territories – 2013 to 2038 (Statistics Canada

Medium Projection),9 prepared by Statistics Canada, and found the Ministry Demographic Projection to be reasonable and appropriate for the purposes of the ORPP projection. We extrapolated the Ministry Demographic Projection to extend our projections to 2117.

F. ORPP-eligible Members and Comparable Workplace Pension Plans

From the population projection, we projected the distribution by age, sex and earnings of ORPP-eligible members, the total contributions remitted and, ultimately, the total benefits paid. This entailed developing a model of the Ontario population and excluding persons who are:

  • not in the labour force (i.e., because of labour force participation rates less than 100%),
  • expected to not be enrolled in the ORPP because of age or because of the nature of their employment (e.g., with a federally-regulated employer or self-employed), or
  • deemed to already be participating in a Comparable Workplace Pension Plan.

The initial distribution of Pensionable Earnings was developed based on the data reported on 2012 tax returns and related T4 information slips for Ontario residents.10 We worked with the Ministry’s Office of Economic Policy – Statistical and Quantitative Research Branch to construct a dataset from 2012 tax returns and related T4 Statement of Remuneration Paid information slips for Ontario residents. Although self-employment income reported on the tax return is available it was excluded from this analysis. For example, if a tax filer had $50,000 of self-employment income in a year, such person was considered to have $0 of ORPP-eligible employment income in the tax data extract. Alternatively, if a tax filer had $30,000 of employment income and $20,000 of self-employment income in the year, such person was considered to have $30,000 of ORPP-eligible employment income.

We similarly needed to eliminate the employment income for workers who reside in Ontario but who are employed by a federally-regulated employer. The Ministry was able to reasonably identify, based on reported employer Business Number, Business Name, NAICS code and pension plan registration numbers, an assessment of the T4 earnings data which related to tax filers in this situation and was able to exclude such earnings from the tax data provided.

Next, it was necessary to eliminate the employment income for Ontarians deemed to be participating in a Comparable Workplace Pension Plan. Consistent with the August 11, 2015 announcements by the Government, we worked with the Ministry to isolate and exclude, on a best-estimate basis,11 the employment income for tax filers where the worker appears to participate in a Comparable Workplace Pension Plan. The available tax data included Pension Adjustments (PA) and the registration numbers for the applicable pension plans. To support this refinement of the tax data extract, the Ministry liaised with the Financial Services Commission of Ontario (FSCO). In support of the Ministry’s analysis of the PA data, FSCO provided the Ministry with information showing, for each plan registration number, whether the plan is a defined benefit (DB), defined contribution (DC) or combination plan.12 The Ministry also requested lists of registration numbers for federally-regulated pension plans and Deferred Profit Sharing Plans (DPSP) from the Office of the Superintendent of Financial Institutions (OSFI), but the data could not be obtained.13 A relatively small number of T4s with PA information that were neither covered by FSCO registered plan numbers nor thought to be from federally-regulated employment were assumed to be pension plans registered in other provinces. For the combination plans and the registered pension plans assumed to be registered in other provinces, it was assumed that these plans were DC plans for purposes of assessing the Comparable Workplace Pension Plan test.14

Based on these classifications and, where necessary, examining the PA in relation to earned income,15 the Ministry extracted and summarized the tax data, excluding the T4 earnings data for tax filers that were assumed to be enrolled in a Comparable Workplace Pension Plan.16 As in the self-employment example above, if a member received two T4 slips in a year and one of them was classified as relating to employment that included membership in a Comparable Workplace Pension Plan, then that one T4 earnings amount was excluded.

Following the above adjustments, we had a point-in-time distribution of persons for each age and sex that were expected to be in the Ontario labour force and have ORPP-eligible earnings. For each age and sex, the tax data was used to develop a distribution of earnings within the ORPP membership.

While the absolute level of earnings is expected to increase over time, we assumed that the distribution of ORPP-eligible earnings for each age and sex will remain consistent from year to year.

The above process may not perfectly capture the ORPP-eligible population but we anticipate that the data collected is sufficient for the purposes of the ORPP projections. To ensure that the results were not unduly influenced by the selection of the 2012 tax year as the key source of data for the distributions of ORPP-eligible earnings, we collected from the Ministry an equivalent set of tax data for 2010 and 2011 and repeated certain steps of our analysis. From this additional analysis, we determined that the earnings distributions were not significantly different from year to year and concluded that the selection of an alternative tax year would not significantly impact the ORPP projections contained in this Actuarial Funding Report.

G. Contributor and Contribution Projection

In each year of the projection, we developed a projected Ontario labour force, based on the projected Ontario population and the assumed rates of labour force participation for each age and sex. As the Ontario population ages, the average labour force participation rate will naturally decline (since labour force participation rates are assumed to decline by age). To the extent the projected average labour force participation rates required adjustment to align with our assumptions, the initial labour force participation rates were increased or decreased by a calibration factor.17 18

The earnings distributions, initially developed based upon the 2012 tax data, were projected forward to reflect average increases in wages in order to project the total amount of ORPP-eligible earnings for each year. This projection of ORPP-eligible earnings was used to derive the amount of member and employer contributions in each future year.

H. Expenditures Projection

Future expenditures on retirement were developed through the projection of the total pensionable credits expected to be earned by each cohort of members, where a cohort is defined for this purpose to mean all the persons of the same sex born in a particular year. Pensionable credits were modeled to consider both the number of members and their earnings distributions. At each retirement age, a portion of each cohort was assumed to retire. Upon reaching a given retirement age, the amount of pensionable credits assigned to the subgroup of the cohort that is retiring was based on the number of years the cohort had contributed to the ORPP, the earnings progression for the cohort and the applicable retirement age. With the service and earnings history projected, the amount of pension benefits payable was calculated in accordance with the plan provisions and an assumption related to the proportion of retirees with eligible spouses who elect a joint life and survivor pension. A similar methodology was applied to the determination of death benefits for the portion of each cohort that is assumed to die prior to retirement.

The model was designed to ensure that all pensionable credits earned make their way into the total amount of retirement or death pension benefits paid to the cohort – the model ensures that all contributions made to the ORPP result in benefits payable (either as retirement benefits or as pre-retirement death benefits). Finally, once retirement benefits are assumed to commence, they are indexed annually with assumed price inflation. Upon the projected death of the pensioners, those assumed to have elected a joint life and survivor pension form have the applicable percentage of the benefits continue to their eligible spouse for the spouse’s lifetime and those assumed to have elected a single pension form receive payment for the remaining guarantee period, if any.

The ORPP is being rolled out in Implementation Waves with Ontarians being initially enrolled and starting to contribute over the years 2018 to 2020. For the projections, we assumed that 50% of the ORPP membership would be enrolled in 2018 (increasing to 75% in 2019 and reaching 100% thereafter), with each Implementation Wave having a homogeneous age, sex and earnings distribution. The estimated member and employer contributions and pensionable credits earned during the Implementation Waves were reduced to reflect the phase-in of contribution and accrual rates. Given that the ORPP projections extend to 2117, it is our view that the precise pattern by which members enter the ORPP during the Implementation Waves is immaterial to the determination of the Sustainability Rate and other projection results.

The amount of retirement benefits expected to be paid in respect of a given cohort in a year is determined as follows:19

  • the retirement benefits paid to members and eligible surviving spouses in the cohort in the previous year, less
  • the retirement benefits paid to members in the cohort who are assumed to die during the year, less
  • the retirement benefits paid to eligible surviving spouses in the cohort who are assumed to die during the year, plus
  • the retirement benefits payable to eligible surviving spouses of retired members in the cohort who are assumed to die during the year, plus
  • the benefits representing the remainder of guarantee periods payable to the estates of retired members in the cohort who are assumed to die during the year, plus
  • an adjustment to the retirement benefits in payment to reflect indexation of the pension amounts, plus
  • the retirement benefits that commence to be paid to new retirees in the cohort.

The retirement benefits that commence to be paid to new retirees in a cohort is determined by projecting the number of cohort members expected to retire in the year, multiplied by the average annual pension payable to the new retirees. As noted earlier, the pensionable credits earned by a cohort accumulate over their working career and then are allocated to each group of retirees, allowing for the determination of the pensions payable under the plan provisions.

The projected amount of pre-retirement death benefits to be paid in respect of a given cohort in a year is determined as follows:

  • the number of members in the cohort expected to die prior to retirement in the year, multiplied by
  • the average retirement pension accrued by the deceased members in the cohort, multiplied by
  • the projected actuarial present value factor20 used to convert the pension into a lump sum.

For ease of modeling, members and surviving spouses are assumed to retire or die on December 31 of each year and all pension payments, pre-retirement death benefits and operational costs are assumed to be evenly distributed over the year.

Future expenditures for operational costs were developed based on the projected per capita rates specified by the Ministry and modeled based on the projected number of Active Contributors and projected number of pensioners (including beneficiaries receiving a pension after the member’s death) in each year. The specified per capita rates allow for both the repayment of any initial loans to the ORPP AC and the interest on the outstanding balance. The per capita rates are assumed to increase with price inflation each year.

I. Assets Projection

The ORPP assets were developed by aggregating the contributions by members and their employers, reduced by expenditures for retirement benefits, death benefits and operational costs, with all ORPP assets increased annually by an assumed rate of fund return (net of investment management costs). The projected cash flows are assumed to arise evenly within each year.

The market value of ORPP assets is projected each year as follows:

  • the projected value of plan assets at the prior year end, increased by the assumed rate of investment return (net of investment management expenses), plus
  • the projected member and employer contributions into the ORPP, less
  • the projected expenditures (retirement benefits, pre-retirement death benefits and operational costs), plus
  • assumed investment return (net of investment management expenses) on the cash flows.

Section 5 : Data Collected

A. Introduction

There are three key segments to the data collected in order to develop the ORPP projections:

  • Population Data: a demographic projection of the Ontario population for the 75-year period from 2018 to 2092,
  • Covered Members: the portion of the Ontario population expected to make contributions to and receive benefits from the ORPP, and
  • Economic Outlook: the key economic variables over the projection period.

We collected population and economic data and projections from various branches of the Ministry. In order to assess the appropriateness of the information provided, we compared those data and projections, where possible, against external sources such as the projections prepared by the Office of the Chief Actuary, Statistics Canada, the Conference Board of Canada and the Centre for Spatial Economics. In particular, we examined the following projections:

  • an Ontario demographic projection from 2015 to 2090, building from the data and assumptions developed in July 2015 by the Ministry’s Economic Policy Branch – Income, Employment and Demographic Issues Unit (Ministry Demographic Projection),
  • an Ontario economic projection from 2015 to 2035, prepared in July 2015 by the Ministry’s Office of Economic Policy – Economic and Revenue Forecasting and Analysis Branch (Ministry Economic Projection),
  • The 26th Actuarial Report on the Canada Pension Plan as at December 31, 2012 (CPP Actuarial Report)21, published in November 2013 by the Office of the Chief Actuary,
  • Population Projections for Canada, Provinces and Territories – 2013 to 2038 (Statistics Canada Medium Projection)22, prepared in September 2014 by Statistics Canada,
  • the Provincial Outlook 2015 – Long Term Economic Forecast (CBoC Forecast), prepared in March 2015 by the Conference Board of Canada, and
  • the C4SE Provincial Economic Forecast (C4SE Forecast), prepared in January 2015 by the Centre for Spatial Economics.

B. Population Data

The Economic Policy Branch within the Ministry manages and maintains a sophisticated demographic model that can produce long-term projections of the Ontario population. The Ministry was the only source we identified which could produce the required projection for a 75-year period with the further requirement to provide a sufficiently detailed projection for each age and sex. In order to extend the projections beyond 75 years, we first successfully reproduced the Ministry’s projection using the data and assumptions provided and then extrapolated the population projection to 2117.

The Economic Policy Branch prepares demographic projections for the Government to support a variety of other analyses (e.g., projecting requirements for various ministries, municipalities, school boards and health units). Ministry staff confirmed that the 75-year Ministry Demographic Projection was prepared primarily for the ORPP projections but will also be used for other Ministry analyses. This provides us confirmation of the Ministry’s satisfaction that the projections are generally appropriate for the purposes of our work. A new long-term projection is developed every five years, with the most recent projection having been developed in 2014. The 2014 projection was updated and extended to 75 years to support our analysis of the ORPP.

Table 5-1 sets out the projection of the Ontario population at selected years, by age ranges and sex, based on the 2012 population data provided by the Ministry and the fertility, net migration into Ontario and mortality assumptions used for the projections. The population of Ontario is expected to grow from 13.8 million in 2015 to 25.2 million in 2090, an average growth rate of approximately 0.8% per year. The male population increases from 49.1% of the total population in 2015 to 49.5% of the total population by 2090. The rising proportion is due to male life expectancies being projected to continue their post-1970s catching-up to female life expectancies over the projection period.

Table 5-1: Ontario Population 2015-2090 (thousands)
Year Males
Under 15
Males
15 - 64
Males
65 & Over
Males
All Ages
Females
Under 15
Females
15 - 64
Females
65 & Over
Females
All Ages
Total
2015 1,130 4,654 996 6,781 1,074 4,731 1,224 7,029 13,810
2020 1,178 4,752 1,212 7,142 1,120 4,831 1,453 7,404 14,547
2025 1,238 4,822 1,474 7,534 1,174 4,909 1,726 7,809 15,343
2030 1,299 4,868 1,758 7,925 1,232 4,964 2,019 8,215 16,140
2035 1,334 5,015 1,952 8,301 1,265 5,110 2,229 8,604 16,906
2040 1,353 5,214 2,095 8,662 1,282 5,299 2,393 8,975 17,636
2045 1,375 5,433 2,204 9,013 1,304 5,502 2,524 9,331 18,343
2050 1,419 5,624 2,313 9,356 1,346 5,675 2,654 9,674 19,030
2055 1,480 5,792 2,430 9,702 1,404 5,825 2,785 10,014 19,715
2060 1,546 5,941 2,572 10,059 1,467 5,967 2,926 10,360 20,419
2065 1,606 6,135 2,693 10,434 1,523 6,158 3,039 10,721 21,154
2070 1,656 6,372 2,795 10,823 1,571 6,392 3,135 11,097 21,920
2075 1,703 6,614 2,907 11,223 1,615 6,628 3,243 11,486 22,710
2080 1,757 6,862 3,013 11,632 1,666 6,874 3,345 11,884 23,516
2085 1,821 7,100 3,128 12,050 1,727 7,109 3,456 12,292 24,342
2090 1,893 7,334 3,256 12,484 1,796 7,340 3,581 12,717 25,200

To assess the sufficiency and appropriateness of the population projection data provided, we compared the Ministry Demographic Projection, including the underlying assumptions, to a series of other sources, with the following findings:

  • the population projection for Ontario to 2035 contained in the CBoC Forecast – this forecast reported assumptions in aggregate (i.e., without differentiation between ages and sex), so we were not able to use this source to set or validate specific population projection assumptions, but we determined that the CBoC Forecast of the Ontario population to 2035 was reasonably similar to the projection from the Ministry;
  • the population projection for Ontario to 2040 contained in the C4SE Forecast – as with the CBoC Forecast, we were not able to obtain age- and sex-based population projection assumptions, but we determined that the C4SE Forecast of the Ontario population to 2040 was reasonably similar to the projection from the Ministry;
  • the Statistics Canada Medium Projection23 – this projection was reasonably consistent with the Ministry Demographic Projection across age bands and sexes; and
  • the CPP Actuarial Report – we were able to obtain the CPP’s detailed rates and assumptions for fertility and mortality but we observe that the CPP assumptions were developed for all of Canada and the Ministry projections are appropriately focused on Ontario, so differences are not unexpected. The composite CPP assumption generates an ultimate total fertility rate of approximately 1.65 children per female, slightly higher than the 1.60 children per female in the Ministry projections. The CPP assumptions show differences in the annual fertility rates at various ages (generally the CPP assumes higher rates of annual fertility at younger ages and lower rates of annual fertility at higher ages), but overall we determined the fertility assumptions developed in the Ministry Demographic Projection to be appropriate for the purposes of our projection.

Details of the analysis in respect of the mortality assumptions is contained in Appendix A.
Table 5-2 shows the number of projected Ontario births at selected years from 2015 to 2035 from each of our other sources that contained a comparable projection (the CPP Actuarial Report and the CBoC Forecast do not include projections of Ontario births):

Table 5-2: Births 2015-2035 (thousands) Across Selected Data Sources
Year Ministry Demographic Projection C4SE
Forecast
Statistics Canada
Medium Projection24
2015 148 146 146
2025 163 158 159
2035 163 145 155

Table 5-2 shows that the Ministry Demographic Projection generally has a higher number of assumed births for the selected years than the Statistics Canada Medium Projection and C4SE Forecast.

Table 5-3 shows the number of net migrants into Ontario at selected years from 2015 to 2035 from each of our other sources that contained a comparable projection (the CPP Actuarial Report does not include a projection of net migration into Ontario):

Table 5-3: Net Migration into Ontario 2015-2035 (thousands) Across Selected Data Sources
Year Ministry Demographic
Projection
CBoC
Forecast
C4SE
Forecast
Statistics Canada
Medium Projection25
2015 86 104 92 85
2025 111 145 108 84
2035 123 145 77 92

Table 5-3 shows that the Ministry Demographic Projection generally has a higher rate than the C4SE Forecast and the Statistics Canada Medium Projection and a lower rate than the CBoC Forecast.

Table 5-4 provides a comparison at selected years of the total projected population of Ontario across all comparable data sources, showing that the Ministry Demographic Projection is within the range of the other sources.

Table 5-4: Ontario Population 2015-2035 (thousands) Across Selected Data Sources
Year Ministry Demographic
Projection
CBoC
Forecast
C4SE
Forecast
Statistics Canada
Medium Projection26
2015 13,810 13,781 13,818 13,800
2025 15,343 15,509 15,266 15,079
2035 16,906 17,223 16,306 16,244

C. Covered Members and Tax Data

It was necessary to develop the profile of the population expected to be eligible to participate in the ORPP. These are the persons who are expected to contribute (and on whose behalf their employers will contribute) to the ORPP during their working lives and who will then receive pension payments from the ORPP following pension commencement (or for whom a death benefit will be paid if death occurs prior to retirement).

We worked with the Ministry’s Office of Economic Policy – Statistical and Quantitative Research Branch to specify the criteria for extracting and summarizing the appropriate tax data from the 2012 tax filings for all Ontarians. The tax data includes details from T1 (tax returns) and T4 (income slips from employers) filings in respect of 2012. We understand from the Ministry that, as of summer 2015 when the tax data extract was prepared, the 2012 tax data was the most recent year with a high enough level of stability in the data to support tax filer analysis for a projection such as required for the ORPP.

Based on the plan provisions, several classifications of people will not be eligible to participate in the ORPP. For each excluded group, the actions taken to address the restrictions are specified:

  • Employees of federally-regulated employers, including the Government of Canada – the Ministry was able to use the Business Numbers associated with each T4 slip along with other information to reasonably identify which T4 slips relate to federally-regulated employment. The income data on these T4 slips were excluded when extracting the tax data for the ORPP projections. The use of Business Numbers is not perfect for identifying employees working in federally-regulated employment, particularly for some large employers with both Federal and provincial employees, because the same Business Number may be used for all employees in the organization. However, until such time as better data becomes available to the Ministry, we believe the exclusions to be reasonable for the purposes of the projections.
  • Ontarians who have self-employment income reported on their tax return – the Ministry excluded self-employment income when extracting the tax data – only employment income was included.
  • Ontarians who will be otherwise exempt from the ORPP (due to special situations, such as in respect of on-reserve First Nations employment or religious beliefs) – there is insufficient data to identify these persons and it is our view that the inclusion of their tax data will not significantly affect the ORPP projections.

In addition, the Government has announced that Ontarians participating in Comparable Workplace Pension Plans will be excluded from the ORPP. In general, a workplace pension plan is a Comparable Workplace Pension Plan if it is a registered pension plan and meets one of the following conditions:

  • For a DB plan, the annual accrual rate must be at least 0.5% of pensionable earnings.27
  • For a DC plan, the annual required contribution rate must be at least 8% of pensionable earnings, of which at least 4% of pensionable earnings must be contributed by the employer.28

In particular, the Ministry (working in conjunction with FSCO) developed a list of registered pension plans and has classified each registration number (which appears on the T4 slip along with the PA) into one of the following categories:

  • DB registered pension plan;
  • DC registered pension plan;
  • Combination registered pension plan; or
  • Other plans (generally registered pension plans registered in a province other than Ontario and DPSPs).

Based on the above plan categories and the earned income and PA reported on each T4 slip, we provided criteria29 to the Ministry to enable the exclusion of tax data for persons who appear to belong to a Comparable Workplace Pension Plan. As in the case of the utilization of Business Numbers above, there is insufficient data to make perfect determinations of eligibility for each tax filer with a PA, but it is our view that this approach serves as a reasonable proxy until such time as more complete data is available to the Ministry.

Following consideration of alternatives, we determined that there were no other sources available which could provide the tabulated data, including the breakdowns required by earnings band and the analysis needed to exclude certain income amounts. Therefore, we developed our ORPP projection based on the tax data collected from the Ministry.

Tax filers with one or more of the applicable exclusions were still included in the extract, but only non-excluded income, if any, was reported. The ORPP covered population extract included only a portion of earnings where, for example, the tax filer had reported employment income from two employers in the year (and so had two T4 slips) and one of the employers was federally regulated or the tax filer was considered to be participating in a Comparable Workplace Pension Plan, or where the tax filer reported both employment and self-employment income in the year. Tax filers with only excluded sources of income were included in the $0 earnings category.

The tax data provided by the Ministry was grouped and summarized by age (based on year of birth), sex and earnings (24 sub-groupings). Table 5-5 sets out the distribution of tax filers in age ranges and by bands of 2012 Adjusted Eligible Earnings. In this Actuarial Funding Report, 2012 Adjusted Eligible Earnings are the earned income after excluding self-employment income and earned income from federally-regulated employment. Further, because of the $90,000 earnings limit applicable to the ORPP as originally announced by the Government, Table 5-5 does not reflect any 2012 Adjusted Eligible Earnings above $90,000.30

Table 5-5: Number of Tax Filers (thousands) by Age Range and 2012 Adjusted Eligible Earnings Range (thousands of dollars)
Age Range $031 $0 - $30 $30 - $60 $60 - $90 $90 Total Percentage
Above $0
18 – 24 288 762 74 6 1 1,131 76%
25 – 34 589 583 329 97 37 1,635 64%
35 – 44 767 410 299 132 103 1,711 55%
45 – 54 967 409 330 139 121 1,966 51%
55 – 64 972 306 199 74 64 1,615 40%
65 – 69 498 80 28 8 9 623 20%
Total Tax Filers 4,081 2,550 1,259 456 335 8,681 53%
% of Total 47% 29% 15% 5% 4% 100%  
Average 2012 Adjusted Eligible Earnings ($000) - $12 $43 $72 $90 $3232  

Table 5-6 shows the distribution of male and female tax filers, broken down between those that have 2012 Adjusted Eligible Earnings of $0 and those that have 2012 Adjusted Eligible Earnings greater than $0. Table 5-6 also does not reflect any 2012 Adjusted Eligible Earnings above $90,000.33

Table 5-6: Number of Tax Filers (thousands) by Sex
Age Range 2012 Adjusted Eligible
Earnings
= $034a
Male
2012
Adjusted Eligible
Earnings
= $034b
Female
2012 Adjusted Eligible
Earnings
> $0
Male
2012
Adjusted Eligible
Earnings
> $0
Female
Total
Male
Total
Female
18 – 24 148 140 420 423 568 563
25 – 34 258 331 534 512 792 843
35 – 44 341 426 484 460 825 886
45 – 54 461 506 507 492 968 998
55 – 64 452 520 336 307 788 827
65 – 69 231 267 70 55 301 322
Total tax filers 1,891 2,190 2,351 2,249 4,242 4,439
% of total 22% 25% 27% 26% 49% 51%
Average 2012 Adjusted
Eligible Earnings ($000)
35
- - $38 $27 $38 $27

We assumed that the overall earnings distribution summarized above would increase in line with nominal average wage increases. As the average earnings for the ORPP-eligible workforce is projected forward, this will result in the proportion of males and females earning an income (and the distribution of 2012 Adjusted Eligible Earnings around the projected average earnings) to remain consistent from year to year over the projection period.

Table 5-7 provides further detail of the tax data collected, showing for each age and sex the number of total tax filers, the number of tax filers with 2012 Adjusted Eligible Earnings (2012 AEE) greater than $0, and the average of the non-zero 2012 AEE.

Table 5-7: Number of Tax Filers (thousands) by Age and Sex and 2012 Adjusted Eligible Earnings36 (thousands of dollars)
Age Males
Number of
Tax Filers
Males
Number with
2012 AEE > $0
Males
Average
2012 AEE
Females
Number of
Tax Filers
Females
Number with
2012 AEE > $0
Females
Average
2012 AEE
18 69 46 $6 69 48 $6
19 78 57 $9 77 58 $8
20 83 62 $12 81 63 $9
21 84 64 $14 83 64 $11
22 87 65 $16 85 66 $13
23 85 63 $19 85 64 $16
24 83 61 $23 83 61 $18
25 81 59 $26 82 58 $21
26 81 58 $29 83 57 $23
27 81 57 $32 85 56 $24
28 81 56 $34 86 55 $25
29 80 54 $36 85 52 $26
30 80 53 $37 85 50 $27
31 78 51 $39 84 48 $27
32 78 50 $40 85 47 $28
33 76 48 $42 84 45 $28
34 76 47 $43 84 44 $29
35 77 47 $44 84 44 $30
36 78 47 $45 85 44 $30
37 79 48 $46 87 45 $31
38 80 48 $47 86 44 $31
39 80 47 $47 86 45 $32
40 83 48 $47 88 46 $33
41 85 50 $48 91 47 $33
42 88 50 $48 93 49 $33
43 87 49 $48 92 48 $33
44 87 49 $48 92 48 $34
45 87 48 $49 92 47 $34
46 91 50 $48 95 48 $34
47 97 52 $48 100 51 $34
48 103 55 $49 105 53 $34
49 103 55 $48 106 53 $34
50 102 54 $48 104 52 $34
51 99 51 $49 102 50 $34
52 99 50 $48 102 49 $33
53 95 48 $48 98 46 $33
54 93 46 $47 95 43 $33
55 91 44 $47 93 42 $32
56 88 42 $46 91 40 $32
57 85 39 $45 88 37 $32
58 83 37 $44 87 35 $31
59 79 34 $43 83 32 $30
60 77 32 $42 81 29 $29
61 73 30 $41 77 26 $28
62 71 27 $39 76 24 $27
63 71 25 $38 76 22 $27
64 71 24 $37 75 20 $26
65 73 22 $34 77 18 $23
66 67 17 $32 71 13 $22
67 54 12 $31 58 9 $22
68 54 10 $30 58 8 $21
69 52 9 $29 57 6 $20
Total37 4,242 2,351 $38 4,439 2,249 $27

The average 2012 AEE for males and females are less than the corresponding average earnings reported in the CPP Actuarial Report. In reviewing the extracted data, we have determined that the exclusion of certain income data for tax filers believed to have Comparable Workplace Pension Plans and/or periods of self-employment and/or periods of employment with a federally-regulated employer serves to reduce the overall average. For example, a member who works for half the year and earns $25,000 with a non-federal employer and is self-employed for the other half of the year and earns $20,000 would be considered as having $45,000 of pensionable earnings under the CPP but would only have $25,000 of Pensionable Earnings under the ORPP.

In our projections, we assumed that Active Contributors would form a distribution around the average earnings for each age and sex and further assumed that the overall earnings distribution summarized above would increase in line with nominal average wage increases. Therefore, as cohorts of Active Contributors age each year, they are projected to move from a distribution around the average earnings of their prior age to a distribution around the average earnings of their new age. For example, the cohort of 32 year-old males has an average 2012 earnings of $40,000 (after rounding). When projecting this cohort to age 33, the average earnings of the cohort is projected to increase to $42,000 (after rounding), prior to adjusting for assumed changes in the average wage since 2012. As a result, the average wages for some cohorts of members (generally the younger ages) are projected to grow faster than the average wage growth assumption and the average wages for other cohorts are projected to grow slower than the average wage growth assumption (and can potentially even decrease).

D. Economic Outlook

The financial strength and sustainability of the ORPP will be heavily influenced by the economic factors experienced over the projection period. While the population data is used to project the total number of Ontarians at any point in time and the tax data is used to develop a distribution of the earned income levels for Ontarians who are working over the projection period, the economic factors will be a key driver of the total benefits to be ultimately provided to eligible pensioners (including beneficiaries). As examples, the level of earnings growth over each ORPP member’s working lifetime will drive the amount of annual pension at retirement and the rate of price inflation will drive subsequent pension increases for the balance of such member’s lifetime.

Our projection system develops the overall level of earnings, earnings distributions and resulting credit accruals collectively for each age and sex cohort, rather than projecting the ORPP entitlements of each individual current and future ORPP-eligible Ontarian. As a result, movements into or out of the workforce as labour force participation rates change, or as subgroups of a given cohort exit or return to the workforce, are only modelled to the extent necessary to determine the total expected contributions and pension accruals for the cohort as a whole.38

For the purposes of the ORPP projection, we have developed the economic assumptions over the following three periods:

  • Period to 2015: our tax data was collected based on information from 2012 tax filings. To prepare our projections in 2015, it is necessary to extrapolate this prior data to 2015. We selected the assumptions for this period based on the actual experienced economic factors for 2012 to 2014 and the Ministry’s best estimate for 2015.
  • Short-term Budget Period: for the period 2016 to 2019, we have considered the perspective of our sources listed in the next section to develop the assumptions, but we have given higher weight to the outlook provided by the Government in its 2015 Budget.39
  • Long-term Projection Period: for the period starting in 2020, we have developed the economic assumptions based on our overall view of all the sources listed in the next section, with a view to establishing a long-term set of economic assumptions that progresses smoothly from the Short-term Budget Period to the Long-term Projection Period and continues to progress relatively smoothly over the Long-term Projection Period.

While the assumptions set out in this Actuarial Funding Report are presented as a series of separate assumptions, they are all linked to one another. We have reviewed the assumptions to ensure that they are internally consistent and collectively portray a plausible and appropriate economic outlook for the province, with the resulting assumptions intended to form a best estimate. Consistent with the objectives of the ORPP to minimize intergenerational inequity, there are no margins for uncertainty, adverse deviations or other contingencies.40

It should be pointed out that the economy will change over time and the various key metrics (e.g., price inflation, real wage growth) will not actually remain stable from year-to-year. However, for the purpose of developing a long-term model, it is more practical to develop the long-term assumptions by way of expected or average outcomes rather than trying to forecast specific periods when the province’s economy will grow or shrink more rapidly.

The initial economic assumptions for the ORPP projection have been developed based on information obtained from the aforementioned external sources. Other than the CPP Actuarial Report, each of these sources has developed their projections based on the past economic experience of Ontario, coupled with their perspective on the future of the Ontario economy until at least 2035, providing what we view to be a sound basis from which to build the ORPP economic assumptions. We determined that this broad assessment of views on the key indicators for the Ontario economy provided a sufficient basis from which to inform the setting of the economic assumptions.

Appendix A contains data tables showing the projection assumptions along with the comparable inputs from our sources.

Section 6 : Actuarial Assumptions

A. Introduction

In order to assess the sustainability of the ORPP, it is necessary to make a considerable number of assumptions in respect of demographic, economic and workforce trends. The projections in this Actuarial Funding Report have been prepared for a long period of time and the assumptions developed for this Actuarial Funding Report are intended to be a best estimate of the factors that will affect the ORPP over the entire projection period. The projections are intended to reflect a view of the long-term outlook, with greater consideration to long-term trends and without undue emphasis placed on recent economic or demographic developments.

The Government has expressed its desire that the cost of ORPP benefits should not be transferred between generations, to the extent possible. As a result, it is not appropriate to include margins in the projection assumptions since such margins would tend to increase the level of costs for current generations of members to the potential benefit of future generations of members.

The assumptions were developed to be reasonable best estimates, individually and in the aggregate. As the future unfolds, there will inevitably be differences between the assumptions and the outcomes each year, causing favourable or unfavourable experience. The objective of the best-estimate assumptions is not to predict the outcome for each year, but rather to develop a set of assumptions that are viewed to be equally likely to develop positive experience or negative experience over the life of the ORPP. As the ORPP matures and more data and experience is collected, the ORPP assumptions will be refined from time to time to reflect the additional knowledge and insight gained from the ORPP’s operation. Even with the accumulation of more information, some outcomes are inherently unknowable and will always remain subject to considerable conjecture and uncertainty.

The assumptions were developed with significant consideration of the assumption-setting process and the selected assumptions reported by the Office of the Chief Actuary in the CPP Actuarial Report. All ORPP members will contribute to and accrue benefits under the CPP. While many of the CPP assumptions were developed in respect of all of Canada excluding Quebec, given the relative size of Ontario the CPP assumptions provide a relevant reference point for establishing the ORPP assumptions. For certain assumptions, there is insufficient data from which to develop ORPP-specific assumptions, so the CPP assumptions were adopted. For example, the CPP assumption for rates of retirement incidence has been adopted on the premise that most members will elect to retire and commence their pension benefits from the ORPP and the CPP at the same time. Over time, the ORPP will collect data on its own experience and be in a position to develop its own assumptions.

Table 6-1 presents a summary of the actuarial assumptions used in this Actuarial Funding Report. Further details on the assumptions are provided in Appendix A.

Table 6-1: Summary of Actuarial Assumptions
Demographic Assumptions
Assumption Description
Total fertility 1.57 children per female in 2015, increasing to 1.60 children per female starting in 2030.41
105.5 male births per 100.0 female births.
Mortality

Developed based on the mortality rates in the Ministry Demographic Projection until 2090, and extrapolated for future improvements thereafter. Selected life expectancies at age 65, including future improvements after the years shown, are as follows:

  • Year 2015: male 21.2 years; female 23.4 years
  • Year 2030: male 23.4 years; female 25.0 years
  • Year 2060: male 25.2 years; female 26.3 years
  • Year 2090: male 26.1 years; female 26.9 years
Net migration into Ontario 0.7% of population per year.42
Table 6-1: Summary of Actuarial Assumptions
Workforce Assumptions
Assumption Description
Labour force participation 65.5% in 2018, declining to 58.0% in 2043.43
Retirement incidence distribution44
  • At age 60: male 34.0%; female 38.0%
  • Ages 61 to 64: male 19.0%; female 19.0%
  • At age 65: male 40.6%; female 39.2%
  • Ages 66 to 70: male 6.4%; female 3.8%
  • Total: male 100.0%; femaile 100.0%
Table 6-1: Summary of Actuarial Assumptions
Economic Assumptions (per year)
Assumption Description
Price inflation 2.0%.
Real wage growth Varies between 0.8% and 1.3% for years prior to 2032, remaining at 1.1% thereafter.
Investment returns

Real return:

  • 2018 to 2022:2.50%
  • 2023 to 2027:4.00%
  • 2028 and after:4.00%

Price inflation:

  • 2018 to 2022:2.00%
  • 2023 to 2027:2.00%
  • 2028 and after: 2.00%

Nominal return (before expenses):

  • 2018 to 2022:4.55%
  • 2023 to 2027:6.08%
  • 2028 and after: 6.08%

Investment management expenses:

  • 2018 to 2022:(1.00%)
  • 2023 to 2027:(1.00%)
  • 2028 and after: (0.50%)

Nominal return (after expenses):

  • 2018 to 2022:3.55%
  • 2023 to 2027:5.08%
  • 2028 and after: 5.58%
Table 6-1: Summary of Actuarial Assumptions
Other Assumptions
Assumption Description
Proportion of pensions paid in the 60% surviving spouse pension form at retirement 70%45
Operational costs46 Per Active Contributor: $150 per year for 2018-2027; $100 per year thereafter.
Per pensioner/beneficiary: $50 per year.

There are actuarial elements of the ORPP design that are not specified in the ORPP Act and are expected to be codified in the regulations under the ORPP Act. Following the Ministry’s independent due diligence in respect of prevailing pension practices in Canada, we were directed by the Ministry, for purposes of this Actuarial Funding Report, to make the plan design assumptions shown in Table 6-2.

Table 6-2: ORPP Design Assumptions
Assumption Description
Early retirement reduction

6.0% for each year, or fraction thereof, that the member’s retirement age is less than age 65
Postponed retirement increase

7.2% for each year, or fraction thereof, that the member’s retirement age is greater than age 65
Reduction for electing the joint life and survivor optional form of pension
8.0% reduction to the amount of pension otherwise payable

B. Demographic Assumptions

The projection of the future Ontario workforce, and ultimately the ORPP membership, is critical to the projection of future contributions into the ORPP and the projection of future benefits payable to retiring members. The projected mortality rates directly impact the number of years that pensioners and eligible surviving spouses are expected to receive their pensions.

The Ontario population projection to 2090 was prepared by the Ministry in the Ministry Demographic Projection. The projection data included the underlying rates of fertility, mortality and net migration into Ontario, as summarized in Appendix A. Based on the initial population data and these rates, our projection system matched the Ministry’s projection until 2090. For the years after 2090, the fertility, mortality and net migration assumptions were extrapolated based on a continuation of the respective trends for each assumption during the 10-year period ending in 2090.

The total fertility rate is a key element to projecting the future Ontario workforce. Approximately 80% of the future Ontario workforce (i.e., persons who first enter the workforce after 2018) consists of births and net migration of persons under the age of 18 (the other 20% consists of net migration of persons between ages 18 and 69). Total fertility rates in Ontario have been well below 2.1 children per female (the rate generally considered to be sufficient to maintain a population without positive net migration) since the 1980s. Similar to the forecasts in respect of other industrialized countries, the ORPP assumption is based on total fertility rates remaining substantially level. A total fertility rate below 2.1 children per female is a contributor to an aging population, absent significant net migration into Ontario at younger ages.

Numerous actuarial studies have shown that mortality rates have declined during the periods studied and are projected to continue declining into the future. Lower mortality rates continue to contribute to the aging of the Ontario population. The Ministry Demographic Projection postulates that male mortality rates will, over a very long period, decrease to the level of female mortality rates. For the purposes of this Actuarial Funding Report, we have also considered other published mortality tables. Additional information on the mortality tables and projected life expectancies is contained in Appendix A.

Net migration into Ontario (immigration into Ontario, less emigration from Ontario, inclusive of net changes in non-permanent residents) is assumed to remain as a fairly steady percentage of the population over the projection period. Net migration is not expected to counteract the aging of the Ontario population caused by fertility rates less than 2.1 children per woman and by declining mortality rates unless there is a substantial increase in the levels of net migration into Ontario and the average age of persons migrating to Ontario decreases significantly.

C. Workforce Assumptions

The projection of the ORPP contributions and expenditures requires assumptions in respect of the proportion of the workforce that is assumed to be eligible to participate in the ORPP each year, making contributions based on Contributory Earnings and accruing the right to future benefit payments. To develop the projection for the ORPP, data was collected for the 2012 tax year and used to evaluate the proportion of Ontario tax filers who would have contributed to the ORPP in 2012 had the ORPP been in operation. There are several considerations in developing the ORPP-eligible workforce from the Ontario population, including:

  • Member age – Ontarians below age 18 and over age 69 were excluded from the projected workforce.
  • Federally-regulated employment – Ontarians who are employed by a federally-regulated employer had that employment income excluded.
  • Self-employment – Ontarians who are self-employed had their self-employment income excluded.
  • Comparable Workplace Pension Plans – Ontarians who are deemed to be earning pension benefits in a Comparable Workplace Pension Plan had their employment income excluded due to the requirements of the ORPP Act and subsequent announcements.

There are also Ontarians who are not seeking active employment, are working part-time, or are unemployed from time to time. This creates a category of Ontarians who had no employment income or whose employment income was below the $3,500 threshold for participation in the ORPP. While these persons were otherwise eligible to participate in the ORPP, there are no contributions assumed to be made by these persons and no benefits will be earned for periods of annual earnings below $3,500. In some cases, since the $3,500 threshold will be applied on a pay period basis, some of these workers (and their employers) may make ORPP contributions and accrue ORPP benefits. The tax data is not sufficiently robust to allow for a finer analysis of these situations. However, the incremental contributions and benefits payable are not expected to significantly affect the ORPP projections in this Actuarial Funding Report.

There is no existing index or measure to enable the modeling of Ontarians with ORPP-eligible earnings above $3,500, so we based our projections on a modified version of labour force participation rates. Normally, the labour force participation rate is “the percentage of working-age persons who are employed or are unemployed but looking for a job”. This is a statistic that is tracked for the Ontario economy and is projected by the Government and other groups. The following bullets provide a simplified summary of the steps taken to modify this statistic for use in our projections:

  • Based on the 2012 tax data and the 2012 Ontario working-age population provided in the Ministry Demographic Projection, we determined a 2012 ORPP participation rate47 for each age and sex (where participation is deemed to occur if 2012 Adjusted Eligible Earnings is greater than $0).
  • An overall 2012 ORPP participation rate was developed as the average of the 2012 ORPP participation rates for each age and sex, weighted by the 2012 working-age population.
  • An ORPP participation factor was determined as the ratio of the overall 2012 ORPP participation rate over the 2012 labour force participation rate of 66.3%.
  • For each year of the projection, we determined a preliminary ORPP participation rate as the average of the 2012 ORPP participation rates for each age and sex, weighted by the projected working-age population in the particular year.
  • For each year of the projection, we determined a calibration factor based on the labour force participation rate for the particular year and the other calculations above, which satisfied the following equation:
    preliminary ORPP
    participation rate
    × calibration
    factor
    = labour force
    participation rate
    × ORPP participation
    factor
  • For each year of the projection, a final ORPP participation rate was determined for each age and sex as the 2012 ORPP participation rate for the particular age and sex, multiplied by the calibration factor.
  • For each year of the projection, the final ORPP participation rate for each age and sex was used to determine the number of Active Contributors and, along with the projected ORPP-eligible earnings, the amount of member and employer contributions and the pensionable credits earned.

Table 6-3 shows the preliminary ORPP participation rate, the calibration factor, the labour force participation rate and the ORPP participation rate, each as described above, for selected years during the projection period.

Table 6-3: ORPP Participation Rates and Calibration Factors
Year Preliminary ORPP Participation Rate Calibration
Factor
Labour Force Participation Rate ORPP
Participation Factor
2018 45.0% 1.013 65.5% 0.696
2019 44.8% 1.013 65.2% 0.696
2020 44.6% 1.013 64.9% 0.696
2021 44.4% 1.013 64.6% 0.696
2022 44.2% 1.013 64.3% 0.696
2023 44.0% 1.012 64.0% 0.696
2024 43.9% 1.010 63.7% 0.696
2025 43.7% 1.010 63.4% 0.696
2026 43.7% 1.005 63.1% 0.696
2027 43.6% 1.002 62.8% 0.696
2028 43.6% 0.998 62.5% 0.696
2029 43.6% 0.993 62.2% 0.696
2030 43.7% 0.986 61.9% 0.696
2031 43.7% 0.981 61.6% 0.696
2032 43.9% 0.972 61.3% 0.696
2033 44.0% 0.965 61.0% 0.696
2034 44.2% 0.956 60.7% 0.696
2035 44.3% 0.949 60.4% 0.696
2040 44.7% 0.917 58.9% 0.696
2045 44.7% 0.903 58.0% 0.696
2050 44.5% 0.907 58.0% 0.696
2055 44.2% 0.913 58.0% 0.696
2060 44.1% 0.915 58.0% 0.696
2065 44.5% 0.907 58.0% 0.696
2070 44.7% 0.903 58.0% 0.696
2075 44.7% 0.903 58.0% 0.696
2080 44.7% 0.903 58.0% 0.696
2085 44.6% 0.905 58.0% 0.696
2090 44.5% 0.907 58.0% 0.696
2095 44.5% 0.907 58.0% 0.696
2100 44.5% 0.907 58.0% 0.696
2105 44.5% 0.907 58.0% 0.696
2110 44.5% 0.907 58.0% 0.696
2115 44.5% 0.907 58.0% 0.696
2117 44.5% 0.907 58.0% 0.696

The calibration factors in Table 6-3 generally decline from a high of 1.013 when the projected labour force participation rates are assumed to be 65.5% to a low of 0.903 once the projected labour force participation rates decline to 58.0%.

Once the ORPP has been in operation for four to six years, we anticipate the ORPP AC will have collected a significant volume of data in respect of ORPP membership characteristics to allow for the refinement of these assumptions and the methodology to reflect the actual experience of the ORPP. Until such data is available, we believe that this approach serves as a reasonable proxy for the level of plan participation. To assess the significance of using 2012 tax data to develop this assumption, we developed preliminary projections using the 2010 and 2011 tax data from which we concluded that the findings reached in this Actuarial Funding Report were not expected to be significantly affected by the utilization of the 2012 tax data as the basis for the projections.

Another key workforce assumption is the distribution of retirement incidence – the pattern by which members elect to retire from the ORPP, thereby ceasing to make contributions and starting to collect an annual pension. While unreduced ORPP pension benefits are payable at age 65, members are permitted to retire as early as age 60 with a reduction in pension payable. Postponed retirement, to no later than age 70, is also permitted with an increase to the pension payable.

Similar to the ORPP participation rates discussed above, there is no available data from which to develop this assumption. We elected to make the assumption that members would retire from the ORPP concurrent with their retirement from the CPP. In the early years of the ORPP’s operation, the annual pension benefits payable from the ORPP will be fairly small in comparison to the benefits payable from the CPP and other sources of income. Therefore, we assumed that few, if any, members will retire from the CPP but keep working simply to continue accruing benefits under the ORPP. As the ORPP matures and the ORPP benefits grow to become as large as or larger than the CPP benefits, experience might unfold such that members under one plan elect to retire earlier or later than under the other plan, but we still believe the retirement dates selected by members under both plans will be highly correlated. The effect of any potential differences between the assumed and actual retirement incidence patterns is mitigated by the early and postponed retirement adjustments to the pensions payable.

Unlike the CPP, it is understood that ORPP members will not be permitted to continue to make contributions and earn benefits while they are receiving their ORPP pension. This variation may, over time, cause the rates of retirement to diverge slightly between the ORPP and CPP. Notwithstanding this difference in plan provisions, we assumed that the retirement patterns assumed in the CPP Actuarial Report would be a reasonable best estimate.

D. Economic Assumptions

The primary economic assumptions for the ORPP projections are price inflation, real wage growth, the rate of investment return on the ORPP assets net of investment management expenses, and the Ontario labour force participation rates discussed in the previous subsection.

Generally, the financial parameters for the ORPP increase over time reflecting the experience of the economy. The Maximum Annual Earnings Threshold, for example, has been announced to be $90,000 (in 2017 dollars), and is assumed to increase at 100% of annual Canadian average wage increases. Pensions in payment are assumed to increase at 100% of Canadian price inflation.

Price inflation, as measured by changes in the Consumer Price Index for Canada, varies from year to year. The Bank of Canada has indicated that the Government of Canada has targeted a Canadian inflation rate of 2% per year for the foreseeable future. We have assumed that price inflation will increase, on average, at 2% per year for the projection period.

Real wage increases are the growth in nominal wages over and above the changes in price inflation. There are several factors that affect the level of real wage increases, including general productivity in the workforce, technological developments, changes in working arrangements (e.g., numbers of hours worked, compensation package structure) and broader economic trends. Technological and other economic trends can affect the degree to which productivity changes are shared between capital and labour. Broader economic trends include the strength of the Canadian currency, which has a significant effect on the economy where the impacts can vary by sector.

Real wage increases affect the ORPP projections in three ways. First, higher (lower) wages for members serve to increase (decrease) the amount of contributions made to the ORPP by members and their employers. Second, higher (lower) wages provide members with greater (lesser) pension entitlements upon retirement or death. Third, based on the average earnings mechanism in the plan provisions, increases in the Maximum Annual Earnings Threshold (which is indexed to average wage growth) serve to increase the accrued pension entitlements for each member between the year in which the wages are earned and the year of pension commencement.

The ORPP assets will be invested by the ORPP AC. The investment strategy for ORPP assets is to be developed by the ORPP AC. The expected investment returns (and related investment management expenses) will be dependent on the asset mix selected and the strategy deployed. In the interim, in the absence of these decisions, the Ministry directed that the ORPP projections should be prepared assuming real rates of investment return of 2.5% per year for the first five years of the ORPP operation and 4.0% per year thereafter, prior to investment management expenses. The rates are tiered to allow for the investment strategy to move from an initial state to a long-term state as the size of plan assets increases. Investment management expenses are assumed to be 1.0% per year for the first ten years and 0.5% per year thereafter.

Since the ORPP has been established with a framework to help ensure that all future expenditures are provided by the contributions made by members and their employers as the benefits are earned, along with the net investment return thereon, the rate of net investment return is a critical assumption in assessing the sustainability of the ORPP. Higher or lower levels of net investment return could be significant drivers of future Funding Excesses or Funding Shortfalls, as defined in the ORPP Act and summarized in Section 3.

E. Other Assumptions

The normal form of pension payment is for the member’s life with a guarantee of 120 monthly payments. However, the plan provisions allow for members who are married (or in a common-law relationship) at the time of retirement to receive their ORPP pension in a form of payment which will provide for a 60% surviving spouse benefit that becomes payable should the member pre-decease the spouse. Members and spouses who elect this option receive an actuarially reduced pension. Based on our experience with other pension plans, we have assumed that 70% of retiring members and their spouses would receive such form of pension payment.

In addition to the benefits payable to members and their eligible surviving spouses, a significant expenditure of the ORPP relates to the operational costs. The ORPP AC is currently developing the administration model and there are a number of decisions to be made prior to the finalization of the model and the determination of the cost structure.

Therefore, for the purposes of this Actuarial Funding Report, based on its independent due diligence, the Ministry developed an initial estimate of the operational costs to manage the ORPP, inclusive of the repayment of any initial loans to the ORPP AC and the interest on the outstanding loan balance. The Ministry specified per capita rates for each Active Contributor and a per capita rate for each pensioner and eligible surviving spouse, with such per capita rates assumed to increase annually in line with price inflation.

Section 7 : Key Results

A. Overview

This section provides the key projections of the membership, contributions and expenditures and asset values for the ORPP from 2018 to 2117, including a determination of the Sustainability Rate. The tables in this section show year-by-year projections from 2018 to 2035 inclusive and then show the projections at five-year intervals thereafter, with a final projection to 2117.

B. Projection of Population

Table 7-1 summarizes the projection of the Ontario population, the working-age population and the Active Contributors to the ORPP from 2018 to 2117. The ratio of ORPP Active Contributors to the working-age population is projected to increase sharply over the first three years as workers in each Implementation Wave are enrolled as members in the ORPP. The percentage of the working-age population contributing to the ORPP is dependent on the age and sex composition of the workforce and labour force participation rates, with consideration of the portion of the population that is not expected to participate in the ORPP as a result of their participation in Comparable Workplace Pension Plans and/or the nature of their employment.

Table 7-1: Population and Active Contributor Projection (thousands)
Year Ontario
Population
Working-Age
Population48
ORPP Active Contributors49
Number
ORPP Active Contributors49
% of Working
Age Population
2018 14,241 9,818 2,272 23.1%
2019 14,393 9,876 3,412 34.5%
2020 14,547 9,932 4,555 45.9%
2021 14,703 9,988 4,560 45.7%
2022 14,861 10,045 4,566 45.5%
2023 15,021 10,098 4,571 45.3%
2024 15,182 10,147 4,575 45.1%
2025 15,343 10,193 4,577 44.9%
2026 15,503 10,240 4,577 44.7%
2027 15,664 10,281 4,576 44.5%
2028 15,824 10,319 4,573 44.3%
2029 15,982 10,352 4,567 44.1%
2030 16,140 10,381 4,561 43.9%
2031 16,296 10,407 4,552 43.7%
2032 16,451 10,438 4,543 43.5%
2033 16,604 10,466 4,535 43.3%
2034 16,755 10,497 4,526 43.1%
2035 16,906 10,536 4,519 42.9%
2040 17,636 10,877 4,539 41.7%
2045 18,346 11,302 4,640 41.1%
2050 19,032 11,744 4,822 41.1%
2055 19,717 12,127 4,984 41.1%
2060 20,421 12,474 5,132 41.1%
2065 21,156 12,803 5,268 41.1%
2070 21,922 13,226 5,434 41.1%
2075 22,712 13,733 5,640 41.1%
2080 23,518 14,245 5,851 41.1%
2085 24,344 14,769 6,067 41.1%
2090 25,202 15,275 6,277 41.1%
2095 26,103 15,778 6,490 41.1%
2100 27,048 16,308 6,721 41.2%
2105 28,027 16,884 6,966 41.3%
2110 29,032 17,496 7,218 41.3%
2115 30,063 18,122 7,469 41.2%
2117 30,483 18,374 7,570 41.2%

C. Projection of Contributions

Table 7-2 summarizes the projection of contributions to the ORPP based on the Total Contribution Rate of 3.80% of Contributory Earnings.

Table 7-2: Projection of Contributions (Active Contributors in thousands; dollars in millions)
Year ORPP Active
Contributors50
Contributory
Earnings51
Member
Contributions
Employer
Contributions
Total
Contributions
2018 2,272 $76,000 $608 $608 $1,216
2019 3,412 117,900 1,572 1,572 3,144
2020 4,555 162,685 2,969 2,969 5,938
2021 4,560 168,211 3,196 3,196 6,392
2022 4,566 173,947 3,305 3,305 6,610
2023 4,571 180,000 3,420 3,420 6,840
2024 4,575 186,158 3,537 3,537 7,074
2025 4,577 192,632 3,660 3,660 7,320
2026 4,577 199,263 3,786 3,786 7,572
2027 4,576 206,211 3,918 3,918 7,836
2028 4,573 213,368 4,054 4,054 8,108
2029 4,567 220,684 4,193 4,193 8,386
2030 4,561 227,947 4,331 4,331 8,662
2031 4,552 235,368 4,472 4,472 8,944
2032 4,543 242,895 4,615 4,615 9,230
2033 4,535 250,526 4,760 4,760 9,520
2034 4,526 258,263 4,907 4,907 9,814
2035 4,519 266,316 5,060 5,060 10,120
2040 4,539 314,263 5,971 5,971 11,942
2045 4,640 377,211 7,167 7,167 14,334
2050 4,822 460,000 8,740 8,740 17,480
2055 4,984 557,421 10,591 10,591 21,182
2060 5,132 672,263 12,773 12,773 25,546
2065 5,268 807,789 15,348 15,348 30,696
2070 5,434 974,789 18,521 18,521 37,042
2075 5,640 1,183,105 22,479 22,479 44,958
2080 5,851 1,434,632 27,258 27,258 54,516
2085 6,067 1,738,316 33,028 33,028 66,056
2090 6,277 2,101,421 39,927 39,927 79,854
2095 6,490 2,539,737 48,255 48,255 96,510
2100 6,721 3,071,684 58,362 58,362 116,724
2105 6,966 3,714,737 70,580 70,580 141,160
2110 7,218 4,489,474 85,300 85,300 170,600
2115 7,469 5,420,684 102,993 102,993 205,986
2117 7,570 5,843,789 111,032 111,032 222,064

D. Projection of Expenditures.

Table 7-3 sets out the projection of the expenditures of the ORPP.

Table 7-3: Projection of Expenditures (pensioners in thousands; dollars in millions)
Year Projected
Pensioners52
Ratio of Active Contributors to Pensioners Benefit
Payments53
Operational Costs
(Dollars)
Operational Costs
(% of Contributory Earnings)
Total
Expenditures
2018 15 151.5 $0 $359 0.47% $359
2019 34 100.4 2 551 0.47% 553
2020 56 81.3 7 751 0.46% 758
2021 83 54.9 22 768 0.46% 790
2022 113 40.4 46 786 0.45% 832
2023 148 30.9 83 804 0.45% 887
2024 186 24.6 134 823 0.44% 957
2025 228 20.1 198 842 0.44% 1,040
2026 274 16.7 277 862 0.43% 1,139
2027 324 14.1 371 882 0.43% 1,253
2028 411 11.1 482 60954 0.29% 1,091
2029 505 9.0 613 626 0.28% 1,239
2030 605 7.5 764 644 0.28% 1,408
2031 712 6.4 934 663 0.28% 1,597
2032 823 5.5 1,121 683 0.28% 1,804
2033 939 4.8 1,331 703 0.28% 2,034
2034 1,061 4.3 1,566 724 0.28% 2,290
2035 1,188 3.8 1,832 747 0.28% 2,579
2040 2,035 2.2 3,638 892 0.28% 4,530
2045 3,103 1.5 6,558 1,097 0.29% 7,655
2050 4,317 1.1 11,045 1,365 0.30% 12,410
2055 5,227 1.0 17,610 1,664 0.30% 19,274
2060 5,485 0.9 26,516 1,905 0.28% 28,421
2065 5,699 0.9 37,549 2,168 0.27% 39,717
2070 5,917 0.9 50,681 2,474 0.25% 53,155
2075 6,151 0.9 66,013 2,837 0.24% 68,850
2080 6,391 0.9 83,865 3,251 0.23% 87,116
2085 6,635 0.9 104,767 3,724 0.21% 108,491
2090 6,883 0.9 129,069 4,274 0.20% 133,343
2095 7,132 0.9 157,269 4,975 0.20% 162,244
2100 7,393 0.9 190,417 5,786 0.19% 196,203
2105 7,670 0.9 230,156 6,717 0.18% 236,873
2110 7,963 0.9 278,352 7,780 0.17% 286,132
2115 8,271 0.9 336,995 8,986 0.17% 345,981
2117 8,398 0.9 363,854 9,512 0.16% 373,366

E. Projection of Plan Assets

Table 7-4 sets out the projection of ORPP assets and the ratio of Assets at December 31 of each year to Expenditures for the year just ended, based on the Total Contribution Rate of 3.80% of Contributory Earnings.

Table 7-4: Projection of Plan Assets – Contributions at Total Contribution Rate of 3.80% (dollars in millions)
Year Total
Contributions
Total
Expenditures55
Investment
Income
Assets at
December 31
A / E
Ratio
2018 $1,216 $359 $14 $871 2.4
2019 3,144 553 78 3,540 6.4
2020 5,938 758 216 8,936 11.8
2021 6,392 790 417 14,955 18.9
2022 6,610 832 633 21,366 25.7
2023 6,840 887 1,233 28,552 32.2
2024 7,074 957 1,604 36,273 37.9
2025 7,320 1,040 1,998 44,551 42.8
2026 7,572 1,139 2,424 53,408 46.9
2027 7,836 1,253 2,879 62,870 50.2
2028 8,108 1,091 3,701 73,588 67.556
2029 8,386 1,239 4,302 85,037 68.6
2030 8,662 1,408 4,945 97,236 69.1
2031 8,944 1,597 5,627 110,210 69.0
2032 9,230 1,804 6,354 123,990 68.7
2033 9,520 2,034 7,124 138,600 68.1
2034 9,814 2,290 7,940 154,064 67.3
2035 10,120 2,579 8,804 170,409 66.1
2040 11,942 4,530 13,895 266,674 58.9
2045 14,334 7,655 20,442 390,170 51.0
2050 17,480 12,410 28,695 545,503 44.0
2055 21,182 19,274 38,798 735,074 38.1
2060 25,546 28,421 50,823 960,170 33.8
2065 30,696 39,717 64,892 1,223,257 30.8
2070 37,042 53,155 81,282 1,529,774 28.8
2075 44,958 68,850 100,472 1,888,938 27.4
2080 54,516 87,116 123,092 2,312,529 26.5
2085 66,056 108,491 149,885 2,814,491 25.9
2090 79,854 133,343 181,787 3,412,512 25.6
2095 96,510 162,244 220,013 4,129,591 25.5
2100 116,724 196,203 266,140 4,995,398 25.5
2105 141,160 236,873 322,025 6,044,571 25.5
2110 170,600 286,132 389,770 7,316,350 25.6
2115 205,986 345,981 471,800 8,856,053 25.6
2117 222,064 373,366 509,234 9,558,618 25.6

Table 7-5 shows the projection of ORPP contributions, expenditures, investment income and assets at December 31 of each year in constant 2016 dollars, based on the Total Contribution Rate of 3.80% of Contributory Earnings.

Table 7-5: Projection of Plan Assets – Contributions at Total Contribution Rate of 3.80% (constant 2016 dollars in millions)
Year Total
Contributions
Total
Expenditures57
Investment
Income
Assets at
December 31
A / E
Ratio
2018 $1,157 $342 $6 $821 2.4
2019 2,933 516 32 3,270 6.3
2020 5,432 693 85 8,094 11.7
2021 5,732 708 163 13,280 18.8
2022 5,812 732 241 18,600 25.4
2023 5,896 765 638 24,369 31.9
2024 5,978 809 814 30,352 37.5
2025 6,065 862 993 36,547 42.4
2026 6,150 925 1,181 42,954 46.4
2027 6,240 998 1,377 49,573 49.7
2028 6,330 852 1,836 56,886 66.8
2029 6,419 948 2,090 64,447 68.0
2030 6,500 1,057 2,358 72,248 68.4
2031 6,580 1,175 2,629 80,282 68.3
2032 6,657 1,301 2,911 88,549 68.1
2033 6,732 1,438 3,199 97,042 67.5
2034 6,804 1,588 3,496 105,754 66.6
2035 6,878 1,753 3,801 114,680 65.4
2040 7,351 2,789 5,435 162,546 58.3
2045 7,992 4,268 7,239 215,401 50.5
2050 8,827 6,267 9,206 272,767 43.5
2055 9,689 8,816 11,273 332,908 37.8
2060 10,583 11,774 13,376 393,859 33.5
2065 11,518 14,903 15,468 454,474 30.5
2070 12,589 18,065 17,548 514,775 28.5
2075 13,839 21,193 19,646 575,715 27.2
2080 15,199 24,288 21,801 638,375 26.3
2085 16,680 27,396 24,044 703,700 25.7
2090 18,263 30,497 26,413 772,790 25.3
2095 19,992 33,609 28,953 847,019 25.2
2100 21,900 36,812 31,722 928,016 25.2
2105 23,988 40,253 34,765 1,017,068 25.3
2110 26,258 44,040 38,111 1,115,008 25.3
2115 28,716 48,232 41,783 1,222,427 25.3
2117 29,755 50,028 43,347 1,268,170 25.3

F. Sustainability Metrics / Sustainability Rate Determination

The ORPP Act defines the Sustainability Rate as the lowest contribution rate for which the criteria in Section 3 of this Actuarial Funding Report are met. Our projections show the ORPP would meet these tests if the Total Contribution Rate were to be reduced to no less than 3.784% of Contributory Earnings, before rounding. Therefore, the Sustainability Rate, prior to rounding, would be 3.784% of Contributory Earnings. Table 7-6 shows the projection of the ORPP’s cash flows, asset values and Assets to Expenditures Ratio assuming that the Total Contribution Rate is the Sustainability Rate prior to rounding.

Table 7-6: Projection of Plan Assets – Contributions at Sustainability Rate Prior to Rounding (dollars in millions)
Year Total
Contributions
Total
Expenditures
Investment
Income
Assets at
December 31
A / E
Ratio
2018 $1,210 $359 $15 $866 2.4
2019 3,131 553 77 3,521 6.4
2020 5,912 758 216 8,891 11.7
2021 6,366 790 414 14,881 18.8
2022 6,583 832 629 21,261 25.6
2023 6,810 887 1,228 28,412 32.0
2024 7,044 957 1,596 36,095 37.7
2025 7,288 1,040 1,990 44,333 42.6
2026 7,540 1,139 2,412 53,146 46.7
2027 7,803 1,253 2,865 62,561 49.9
2028 8,074 1,091 3,683 73,227 67.1
2029 8,350 1,239 4,281 84,619 68.3
2030 8,626 1,408 4,921 96,758 68.7
2031 8,905 1,597 5,600 109,666 68.7
2032 9,190 1,804 6,324 123,376 68.4
2033 9,479 2,034 7,090 137,911 67.8
2034 9,772 2,290 7,901 153,294 66.9
2035 10,077 2,579 8,760 169,552 65.7
2040 11,892 4,530 13,823 265,280 58.6
2045 14,273 7,655 20,330 388,022 50.7
2050 17,406 12,410 28,527 542,294 43.7
2055 21,093 19,274 38,553 730,391 37.9
2060 25,439 28,421 50,471 953,455 33.5
2065 30,567 39,717 64,393 1,213,760 30.6
2070 36,886 53,155 80,583 1,516,486 28.5
2075 44,768 68,850 99,503 1,870,502 27.2
2080 54,286 87,116 121,756 2,287,124 26.3
2085 65,778 108,491 148,053 2,779,686 25.6
2090 79,518 133,343 179,288 3,365,065 25.2
2095 96,105 162,244 216,620 4,065,187 25.1
2100 116,232 196,203 261,550 4,908,295 25.0
2105 140,566 236,873 315,834 5,927,143 25.0
2110 169,881 286,132 381,446 7,158,479 25.0
2115 205,119 345,981 460,634 8,644,331 25.0
2117 221,130 373,366 496,683 9,320,670 25.0

For the purposes of determining the degree to which the ORPP is sustainable, and based on the projections using the Sustainability Rate prior to rounding:

  • The Initial Stability Test Year could be selected as 2100.
  • The Second Stability Test Year could be selected as 2110.
  • Based on these selections, the projected Assets to Expenditures Ratio would be 25.0 in both of these years.

Table 7-7 shows the projection of the ORPP’s cash flows, asset values and Assets to Expenditures Ratio in constant 2016 dollars assuming that the Total Contribution Rate is the Sustainability Rate prior to rounding.

Table 7-7: Projection of Plan Assets – Contributions at Sustainability Rate Prior to Rounding (constant 2016 dollars in millions)
Year Total
Contributions
Total
Expenditures
Investment
Income
Assets at
December 31
A / E
Ratio
2018 $1,152 $342 $6 $816 2.4
2019 2,921 516 32 3,253 6.3
2020 5,408 693 85 8,053 11.6
2021 5,709 708 160 13,214 18.7
2022 5,788 732 239 18,509 25.3
2023 5,870 765 635 24,249 31.7
2024 5,953 809 809 30,203 37.3
2025 6,038 862 990 36,369 42.2
2026 6,124 925 1,175 42,743 46.2
2027 6,214 998 1,369 49,329 49.4
2028 6,304 852 1,826 56,607 66.4
2029 6,391 948 2,081 64,131 67.6
2030 6,473 1,057 2,346 71,893 68.0
2031 6,551 1,175 2,618 79,886 68.0
2032 6,628 1,301 2,898 88,111 67.7
2033 6,703 1,438 3,185 96,560 67.1
2034 6,775 1,588 3,480 105,226 66.3
2035 6,849 1,753 3,782 114,104 65.1
2040 7,321 2,789 5,405 161,696 58.0
2045 7,958 4,268 7,201 214,216 50.2
2050 8,790 6,267 9,152 271,162 43.3
2055 9,648 8,816 11,201 330,787 37.5
2060 10,539 11,774 13,282 391,104 33.2
2065 11,469 14,903 15,350 450,946 30.3
2070 12,536 18,065 17,398 510,304 28.2
2075 13,780 21,193 19,458 570,096 26.9
2080 15,135 24,288 21,565 631,362 26.0
2085 16,610 27,396 23,750 694,998 25.4
2090 18,187 30,497 26,049 762,045 25.0
2095 19,908 33,609 28,507 833,809 24.8
2100 21,808 36,812 31,175 911,835 24.8
2105 23,887 40,253 34,096 997,309 24.8
2110 26,147 44,040 37,298 1,090,949 24.8
2115 28,595 48,232 40,795 1,193,203 24.7
2117 29,630 50,028 42,279 1,236,601 24.7

Chart 7-8 shows the progression of the Assets to Expenditures Ratio from 2018 to 2117 using both the Total Contribution Rate of 3.80% of Contributory Earnings and the Sustainability Rate prior to rounding.

Chart 7-8: Projection of Assets to Expenditures

Following consultation with the Ministry, the Sustainability Rate is rounded to a precision level of 0.01% of Contributory Earnings. Based on the foregoing projections and tables, the Sustainability Rate is 3.78% of Contributory Earnings. Based on the criteria summarized in Section 3 of this Actuarial Funding Report and the years selected above, the ORPP would meet the definition of sustainable, as set out in the ORPP Act, if the Total Contribution Rate were 3.78% of Contributory Earnings (1.89% of Contributory Earnings for each for members and employers).

G. Balance Sheet

Table 7-9 presents the projected balance sheet of the ORPP measured at its inception date (January 1, 2018) and ten years after inception (January 1, 2028). Assets have been determined as the sum of the expected market value of invested assets at the measurement date and the present value of future expected contributions, at the Total Contribution Rate of 3.80% of Contributory Earnings, for current and future members (and their employers) until 2117. Liabilities represent the present value of future expected expenditures to 2117, including operational costs. In order to ensure that there is an appropriate provision for expenditures in respect of member and employer contributions up to 2117 but expected to be paid after 2117, liabilities include the present value of 25.058 times the 2117 expenditures as if such amount were to be paid at January 1, 2118. All present values were determined using the nominal investment return (net of investment management expenses) assumption shown in Table 6-1.

Table 7-9: Balance Sheet at Total Contribution Rate of 3.80% (dollars in millions)
  January 1, 2018 January 1, 2028
Assets - Market Value of Assets $0 $ 62,870
Assets - Present Value of Future Contributions 279,541 353,027
Total Assets $279,541 $415,897
Liabilities 278,431 414,203
Asset Excess (Shortfall) $1,110 $1,694
Assets as Percentage of Liabilities 100.4% 100.4%

The resulting assets as a percentage of liabilities at both measurement dates is greater than 100%, demonstrating that based on the Total Contribution Rate of 3.80% of Contributory Earnings, the ORPP is projected to be able to meet its financial obligations and is sustainable over the long term based on the ORPP Act. If the Total Contribution Rate was equal to the Sustainability Rate of 3.78% of Contributory Earnings instead of 3.80% of Contributory Earnings, the assets as a percentage of liabilities in Table 7-9 would have been approximately 99.9%.

H. Intergenerational and Intragenerational Equity Metrics

The Internal Rate of Return for the whole plan membership over the entire projection period to 2117 is 5.33% per year, based on the Total Contribution Rate of 3.80% of Contributory Earnings. That is, if one were to accumulate all member and employer contributions in an asset pool that earns exactly 5.33% per year, there would be just enough money to pay all expected benefits and for the ORPP to have just enough assets for it to be sustainable, as defined by the Ministry, at the end of the projection period. To assess the degree of intergenerational equity, we divided the ORPP into two groups and determined the IRR for each group. The two groups developed for this purpose are:

  • 2018 Cohort – all persons in Ontario between 18 and 69 years of age on January 1, 2018 who are projected to enter the ORPP during their working life (ignoring Implementation Waves), and
  • Future Cohorts – all persons who will attain age 18 of age after 2018 or who will immigrate to Ontario between 18 and 69 years of age after 2018 and are then projected to enter the ORPP.

A person’s ORPP-eligible earnings in 2018 (or any subsequent year) does not affect the cohort classification. Similarly, the classification of cohort is not affected by the Implementation Waves.

Table 7-10 shows the IRR for each of these groups using the actuarial assumptions described in Section 6 of this Actuarial Funding Report.

Table 7-10: Internal Rates of Return by Group
Group Internal Rate
of Return
2018 Cohort 5.59%
Future Cohorts 5.25%
Total All Cohorts 5.33%

The IRR for the 2018 Cohort is 26 basis points higher than the overall plan membership and the IRR for the Future Cohorts is 8 basis points lower than the overall plan membership. This outcome arises because a proportion of the people in the 2018 Cohort will contribute only for the latter part of their working lives before retiring, while the people in the Future Cohorts will contribute, on average, for much of their working lives.59 Although the 2018 Cohort who begin making contributions at later ages will get smaller benefit amounts (commensurate with their shorter period of participation), they will still enjoy a relatively higher IRR in respect of their contributions (and the contributions of their employers).

In respect of intragenerational equity, Table 7-11 summarizes the IRRs and pension replacement ratios for members who enter the ORPP at each specified age and participate each year until they retire.

Table 7-11: Internal Rates of Return by Entry Age60
Entry Age
Range
Internal Rate
of Return61
Pension
Replacement Ratio62
Proportion of
2018 Cohort
Proportion of
Future Cohorts
18 – 22 5.11% 16.1% 9% 79%
23 – 27 5.27% 14.2% 10% 3%
28 – 32 5.47% 12.3% 10% 5%
33 – 37 5.70% 10.5% 10% 4%
38 – 42 5.99% 8.6% 9% 3%
43 – 47 6.35% 6.7% 9% 2%
48 – 52 6.83% 4.8% 10% 1%
53 – 57 7.49% 3.0% 11% 1%
58 – 62 8.92% 1.7% 10% 1%
63 – 67 11.34% 1.2% 8% 1%
68 – 69 13.84% 0.3% 4% ~ 0%
      100% 100%

While the IRR increases with entry age into the ORPP, Table 7-11 shows that once the initial Ontario population enters the ORPP, very few members enter at the higher ages, since this will generally occur through net migration.63 Members who first enter the ORPP at older ages tend to have smaller pensions payable (as a percentage of average earnings).

For ease of calculation, the IRRs determined in Table 7-11 were developed using simplified assumptions64 compared to those described in this Actuarial Funding Report, with the differences being as follows:

  • Pensionable Earnings are assumed to be $50,000 in 2018;
  • Pensionable Earnings and the Maximum Annual Earnings Threshold are assumed to increase at 3.12% per year;
  • no pre-retirement mortality is assumed, and therefore no pre-retirement death benefits are assumed payable; and
  • members are assumed to be unmarried at retirement (or, equivalently, the member and eligible spouse are assumed to elect the 10 year guarantee form of pension payment).

The “Proportion of 2018 Cohort” in Table 7-11 shows the distribution, by age range, of the 2018 Cohort (ignoring the Implementation Waves). The “Proportion of Future Cohorts” in Table 7-11 shows the distribution, by age range, of the Future Cohorts for the first age when each member could enter the ORPP. The vast majority of the Future Cohorts will be able to join the ORPP once they attain age 18 (assuming they have ORPP-eligible earnings), with the balance being able to join the ORPP at the age when they immigrate to Ontario. When comparing the IRRs at different entry ages in Table 7-11 to the IRRs determined for the overall plan in Table 7-10, we note that the weighted average IRR over the life of the ORPP is heavily weighted towards the younger ages.

As a result, for context, we observe that the IRR for the members who enter at the youngest ages (5.11% per year) is approximately 22 basis points lower than the overall average for the ORPP (5.33% per year). However, these are the members that are expected to receive the largest number of dollars in pension payments from the ORPP. The members who are expected to get the higher IRRs will get lower benefits because of their shorter periods of participation.

As noted in Section 2, it is not possible in a defined benefit plan to ensure that all members achieve the same IRR. The differences in IRRs that are shown in the foregoing analysis are reasonably similar to those produced upon the adoption and the continued operation of a defined benefit pension plan. If anything, the differences are relatively short-lived because most future participants will enter the ORPP at a relatively young age, which is not necessarily the case for a typical defined benefit pension plan.

As noted earlier, the IRRs shown in Table 7-11 have been determined using simplified assumptions, including an assumption of no mortality before retirement. If Table 7-11 had been determined instead using the projection assumptions for mortality (as was the case for Table 7-10), the calculated IRRs would be slightly lower. This is because a small proportion of members would then be expected to die before retirement and receive less valuable benefits.

I. Summary of Key Projection Results

Based on the data, assumptions and methodologies described in this Actuarial Funding Report, the projections show that the Total Contribution Rate of 3.80% of Contributory Earnings (1.90% of Contributory Earnings for each of members and their employers) is greater than the Sustainability Rate of 3.78% of Contributory Earnings necessary to meet the tests specified to maintain sustainability of the ORPP.

Section 8 : Risks

A. Introduction

As a new social security program, there are a considerable number of risks in respect of the ORPP that could have a significant effect on the projections contained in this Actuarial Funding Report. This Actuarial Funding Report is based on a particular set of best-estimate demographic and economic assumptions and projection methodologies. It provides a non-exhaustive overview of several of the risks related to the ORPP and reviews some of the characteristics of the ORPP to mitigate the effects of these risks.

There is insufficient information or data available to refine the projection assumptions or methodology further. Over time, the ORPP AC will be able to collect information in respect of the employment, earnings and accrual patterns for ORPP members. This data will be critical to understanding the dynamics that affect participating employers and their employees who are enrolled in the ORPP. The fact remains that the future is inherently unknowable so that, even with a significant volume of historical data, there will always be uncertainty due to evolving trends in the economy, employment practices, technology and other factors that will undoubtedly present themselves over the period from 2018 to 2117.

The sensitivity analysis in Section 9 provides further insight into the effect that certain assumptions (and potential plan experience) would have on the projection of the Sustainability Rate and the projected Assets to Expenditures Ratio.

B. Projection System

Readers of this Actuarial Funding Report should be aware that a projection system does not predict what will occur. Rather, a projection system is a tool used to develop one or more possible outcomes, to facilitate decision-making. The 100 year projections of the ORPP financial status contained in this Actuarial Funding Report have been based on the current data available in respect of anticipated ORPP members and beneficiaries and the sources of information available for setting the projection assumptions. As the ORPP unfolds, there will undoubtedly be newer and more-refined data available, changes to assumptions and methodologies to reflect new information and insights into the operation of the ORPP and evolving economic and demographic conditions. There will also be improvements in the projection system used to project the ORPP financial status. Such refinements over time are a normal aspect of social security program projections. Future changes to data, assumptions or methodologies should not be considered an indication that the current projections, which are based on the current best-estimate view of the operation of the ORPP, are flawed.

Section 4 provides further information on the construction of the actuarial model and the projection system used to complete the 100-year projections of the ORPP financial status contained in this Actuarial Funding Report. In particular, Section 4-B reviews the challenges in creating a projection system to represent a complex model and several of the steps taken to ensure that the projection system is actuarially sound.

C. Data

The tax data upon which the projections in this Actuarial Funding Report are based do not have a level of detail to allow explicit determination as to which Ontarians will have ORPP-eligible earnings, and the amount of those earnings, and which Ontarians will not have ORPP-eligible earnings due to any of the exclusions. To perform the projections, we have assumed that the tax data for 2012 are representative of the earnings distributions across each age and sex for future years. Further, we have assumed that the breakdown between ORPP-eligible and non-ORPP-eligible earnings will remain as derived using the business numbers, registration numbers and PAs. Finally, we have assumed that the Implementation Waves will consist of three homogeneous subsets of the Ontario population projected to participate in the ORPP (50%, 25% and 25% in 2018, 2019 and 2020, respectively).

As the ORPP collects contributions and other data on the members in each Implementation Wave and their earnings distributions, these assumptions can be replaced based on the information collected. While annual data collection can assist in the refinement of these assumptions, it will likely take at least four to six years after the ORPP implementation for the data to be truly representative of the earnings and accrual patterns of the ORPP. Continued data collection thereafter will allow for subsequent ORPP projections to reflect evolving trends in employment, earnings and membership.

D. Employer and Plan Member Behaviours

Unlike the CPP, the ORPP is not a universal pension program. The Comparable Workplace Pension Plan exclusion effectively allows employers of Ontarians the option to make changes to their registered pension plans to affect whether or not they (and their employees) participate in the ORPP. Over time, and particularly between now and 2020, some employers may choose to transition to or from a Comparable Workplace Pension Plan (including, possibly, the creation of new registered pension plans). For example, an employer with optional elements in a DC plan (which do not get considered in the Comparable Workplace Pension Plan tests) may choose to make the required contributions higher in order to become exempt from the ORPP. Other plans (including pension plans established by collective bargaining agreements) could be amended to reduce their future defined benefit accrual rates or defined contribution rates (or make certain required contributions voluntary) in order to allow their employees to participate in the ORPP instead of or in coordination with the employer-sponsored plan.

Further, the ORPP Act allows employers to opt in to the ORPP from 2020 in respect of all employees of the employer who are in Comparable Workplace Pension Plans. The details of the requirements or conditions for employers to make such an election are not yet available. There are many factors that may affect the decision of an employer in respect of whether it will opt in to the ORPP.

There is no information on which to develop an assumption on possible trends in respect of these potential changes to employer workplace pension plans, particularly as to whether the total number of ORPP members will increase or decrease. For the purposes of this Actuarial Funding Report, we have assumed that the increases or decreases in ORPP members in respect of the foregoing will not significantly change the age, sex and earnings distribution of the ORPP membership from that used to develop the projections. However, to the extent the opt-in feature results in an increase in the average age of the ORPP-eligible workforce, the Sustainability Rate may increase.

Unlike the CPP,65 ORPP members may not make further contributions and earn additional benefits under the ORPP while receiving their ORPP pensions. This prospect of selecting a single retirement date for the ORPP could result in members who are still working to some extent after retiring from the CPP to effectively defer their pension commencement in the ORPP in order to accrue greater benefits. This could, therefore, affect retirement incidence rates, which will evolve as the ORPP matures. There is no available data to support an alternative assumption at this time.

E. Economic Cycles

The future economy of Ontario will also have a significant effect on the number of persons in the workforce and the proportion who are employed (and therefore making contributions to the ORPP) and their level of employment income. There are numerous factors that will affect Ontario’s economy. The assumptions used for the projections in this Actuarial Funding Report reflect our view of future economic outcomes, taking into account the views of several independent sources. However, a significant change in the economy, especially if it is sharp or long-lasting, could have a pronounced effect on the sustainability of the ORPP.

F. Investment Returns

The Government has indicated that the ORPP benefits (and operational costs) are to be funded from member and employer contributions and the ORPP is intended to be funded without significant subsidies between generations of plan members. This will entail the collection of a significant amount of contributions annually and the investment of a pension fund that is projected to grow to $100 billion (in constant 2016 dollars) within 15 years, with continued growth thereafter, reaching $1.3 trillion (in constant 2016 dollars) in 2117. As a result, the performance of the financial markets and the ability for the ORPP AC to earn an appropriate return from investing therein will be critical to the future of the ORPP. The ORPP AC will be responsible for setting an investment strategy and then moving forward to implement that strategy once the ORPP starts to receive contributions.

Given the objectives of the ORPP in respect of intergenerational equity, particularly in comparison to other social security programs, such as the CPP, whose partial funding approach is intended to lead to a much lower Assets to Expenditures Ratio than the ORPP, a significant proportion of future ORPP benefits will be paid from investment returns, rather than from member and employer contributions. This makes the ORPP’s projections very sensitive to the actual rate of return earned each year and to the rates of return assumed over the projection period. If, over an extended period, the average rate of actual investment return (net of investment management expenses) is below the rate of return assumed in the actuarial projections, the ORPP will have difficulty in remaining sustainable, all else being equal. Adverse investment experience is the biggest risk to maintaining the plan’s funding equation equilibrium.

As the ORPP assets continue to grow, particularly as the fund reaches trillions of dollars, there may be additional challenges in securing appropriate investment opportunities to generate the levels of returns necessary to meet the objectives of the ORPP, while ensuring the investment risks taken are appropriate. However, the ORPP AC will have decades during which to develop the infrastructure necessary to invest assets of this magnitude.

G. Operational Costs

The ORPP AC is responsible for many plan administration tasks, including, but not limited to, the following:

  • determining, for each employer, which Implementation Wave the employer belongs to and ensuring that the employer is ready for the applicable effective date;
  • determining, for each employer, whether one or more Comparable Workplace Pension Plans exist and which employees, if any, will be entering the ORPP;
  • collecting, from each employer, remittances of member and employer contributions;
  • collecting, from each employer, sufficient information in respect of each ORPP member to enable the tracking of contributions and pension credits in the ORPP;
  • maintaining, for all members, records of ORPP contributions and accrued benefit entitlements;
  • communicating with members and their spouses or beneficiaries about their individual benefit entitlements;
  • performing the annual tax reporting required for registered pension plans under the ITA, including the responsibility to ensure that employers have all the necessary instructions and information to allow them to comply with their legal reporting requirements;
  • developing, implementing and monitoring an appropriate investment policy for the ORPP;
  • administering pension payments to members who elect to retire, or to the spouse/beneficiary of a member who has died; and
  • communicating with the Government, the CRA, ORPP members and the general public about the performance of the ORPP as a whole, including the preparation of annual reports.

The ORPP AC is in the midst of selecting one or more administration partners, but has not finalized the scoping and pricing of the operational costs to run the ORPP. For the purposes of this Actuarial Funding Report, the Ministry has provided initial parameters for estimating the operational costs. As the Ministry finalizes the arrangements for plan administration, these cost parameters may need to be updated in future projections.

H. Sensitivity Testing

As noted earlier in this Actuarial Funding Report, there are numerous assumptions being made in respect of economic, demographic and other factors that will have an impact on the sustainability of the ORPP. To illustrate the effect that some of these factors could have on the ORPP projections, sensitivity analysis has been performed. However, sensitivity analysis has a significant limitation in that it does not show the likelihood of a particular scenario – it only shows the impact. It is also not practical to assess the sensitivity to all factors which could affect the ORPP.

Readers of this Actuarial Funding Report should not, therefore, assume that the adverse sensitivities shown herein are the worst possible scenarios for the selected assumptions – worse scenarios are certainly possible. The converse is also true. Similarly, readers should not assume that each sensitivity has the same likelihood – each was constructed to show a meaningful variation from the corresponding best-estimate assumption used for the projection.

Finally, readers should not conclude that an adverse scenario will only affect the experience of one particular assumption – it is quite possible for several factors to produce adverse experience at the same time. Again, the converse is also true.

I. Risk Mitigation

Many of the risks described in this section cannot be eliminated and are generally beyond the control of the ORPP AC. However, there are characteristics of the funding mechanisms in the ORPP Act that can mitigate the impact of these risks on contribution rates and the benefits provided to members and beneficiaries, as follows:

  • Automatic plan provision changes – the mechanism to automatically adjust the plan provisions when the SCRD is outside ±0.10% of Contributory Earnings provides added security for all plan members in that there are actions to be taken by the ORPP AC when needed;
  • 100-year projections – the use of 100-year projections in each actuarial valuation provides a significant period over which to spread any adverse experience. That is, a small change to the level of indexation applied to pensions in payment, the Maximum Annual Earnings Threshold or the Total Contribution Rate has a large effect; and
  • Open-group projections – ORPP experience, favourable or not, is being spread over the working lives of several generations of plan members, contributing to long-term stability in the plan provisions, including contribution rates.

Section 9 : Sensitivity and Scenario Analysis

A. Description of Sensitivity Analysis

The projection of future cash flows and assets of the ORPP depends on a large number of demographic and economic assumptions. The experience of the ORPP could be different than assumed in any or all of these assumptions, affecting the number of contributing members and future pensioners, the earnings and contributions for the membership, the level of retirement and death benefits, and the number of years for which members and eligible surviving spouses collect their pensions. All of these factors, along with the projected ORPP operational costs and the net investment returns earned on ORPP assets, could significantly impact the ORPP’s sustainability, positively or negatively.

To supplement the best-estimate projections contained in this Actuarial Funding Report, we have examined several assumptions and provided the key findings of the projection for a variety of sensitivities. Each of the sensitivities has been projected in isolation. Section 9-C examines projections where several assumptions are changed concurrently for the 100-year projection period.

Table 9-1 shows the best-estimate assumptions selected for scenario testing and the alternative assumptions that were tested over the 100-year projection period. For each assumption, we examined a low-cost alternative and a high-cost alternative on either side of the best-estimate assumption. Each low-cost and high-cost alternative has been established based on our judgment as appropriate variations from the best-estimate assumption for illustration purposes. Users should not interpret each low-cost or high-cost alternative to be equally likely, nor should users assume that the alternatives shown are upper or lower bounds on the range of possible outcomes.

Table 9-1: Sensitivity Analysis Assumptions
# Assumption Low-Cost
Alternative
Best-Estimate
Assumption
High-Cost
Alternative
1 Total fertility66 1.90 children per female 1.60 children per female 1.30 children per female
2 Mortality67 Age 65 life expectancy in 2060:
Males: 23.2 years
Females: 24.3 years
Age 65 life expectancy in 2060:
Males: 25.2 years
Females: 26.3 years
Age 65 life expectancy in 2060:
Males: 27.2 years
Females: 28.3 years
3 Net migration
into Ontario
125% of Best-Estimate
Assumption
Average of 0.7% of
population per year
75% of Best-Estimate
Assumption
4 Labour force
participation
Grade from 65.5% in 2018
to 60.0% at 0.25% per year
Grade from 65.5% in 2018
to 58.0% at 0.30% per year
Grade from 65.5% in 2018
to 55.0% at 0.35% per year
5 Price inflation
2.5% per year 2.0% per year
1.5% per year
6 Real wage
growth
0.50% per year less than
Best-Estimate Assumption
Varies between 0.8% to 1.3% for years prior to 2032, remaining at 1.1% per year thereafter 0.50% per year more than
Best-Estimate Assumption
7 Real investment
return68
3.5% per year for five years;
5.0% per year thereafter
2.5% per year for five years;
4.0% per year thereafter
1.5% per year for five years;
3.0% per year thereafter
8 Operational costs
(in 2015 dollars, indexed to price inflation)

75% of Best-Estimate
Assumption
$150 per Active Contributor for 10 years; $100 per Active Contributor thereafter;
$50 per pensioner/spouse
150% of Best-Estimate
Assumption

B. Results of Sensitivity Analysis

To illustrate the effect of each alternative assumption, Table 9-2 shows the effect that these alternatives have on the projected Assets to Expenditures Ratio in 2050, 2075 and 2100 if the Total Contribution Rate of 3.80% of Contributory Earnings were maintained throughout the projection period, as well as showing the hypothetical Sustainability Rates that would be determined under the ORPP Act if the alternative assumption were instead adopted for this Actuarial Funding Report.69


Table 9-2: Sensitivity Analysis Results
# Assumption Sensitivity Hypothetical Sustainability
Rate
A / E Ratio at Total Contribution Rate of 3.80%
2050
A / E Ratio at Total Contribution Rate of 3.80%
2075
A / E Ratio at Total Contribution Rate of 3.80%
2100
    Best-Estimate 3.78% 44.0 27.4 25.5
1 Total Fertility Low-Cost Alternative 3.75% 44.6 29.4 27.3
1 Total Fertility High-Cost Alternative 3.81% 43.4 25.5 23.6
2 Mortality Low-Cost Alternative 3.57% 45.3 30.1 31.1
2 Mortality High-Cost Alternative 3.99% 42.8 25.2 20.8
3 Net migration
into Ontario
Low-Cost Alternative 3.78% 45.1 28.5 26.6
3 Net migration
into Ontario
High-Cost Alternative 3.80% 42.8 26.3 24.1
4 Labour force
participation
Low-Cost Alternative 3.78% 44.2 27.7 25.6
4 Labour force
participation
High-Cost Alternative 3.78% 43.7 27.0 25.2
5 Price inflation Low-Cost Alternative 3.73% 45.1 28.5 27.2
5 Price inflation High-Cost Alternative 3.85% 42.8 26.3 23.6
6 Real wage
growth
Low-Cost Alternative 3.54% 44.7 30.1 31.8
6 Real wage
growth
High-Cost Alternative 4.07% 43.1 25.1 20.6
7 Real investment
returns
Low-Cost Alternative 2.90% 53.2 44.0 62.7
7 Real investment
returns
High-Cost Alternative 5.09% 36.5 16.8 7.4
8 Operational
costs
Low-Cost Alternative 3.72% 46.7 29.1 27.8
8 Operational
costs
High-Cost Alternative 3.92% 39.0 24.2 20.9

The effect that each sensitivity has on the sustainability of the ORPP varies greatly. Less sensitive assumptions include fertility, migration and labour force participation (since both contributions and benefits are eliminated if a worker is not in the workforce), price inflation (since this assumption flows through to both nominal average wage increases and nominal investment returns, which have offsetting effects) and operational costs (which affect only a small fraction of total expenditures). The assumptions of mortality and real wage increases have moderate sensitivity while, by far, the most sensitive assumption is the real rate of investment returns (net of investment management expenses).

There is a significant variation between the effects of the high-cost alternative and the low-cost alternative on the Sustainability Rate and the projected Assets to Expenditures Ratio at 2050, 2075 and 2100 for each of the assumptions reviewed.

C. Results of Combined Sensitivity Analysis

The sensitivity analysis thus far in Section 9 provides insight to the potential effect of selecting different key assumptions than the current best-estimates for the 100-year projection period. However, the analysis focuses on the effect of each assumption being changed in isolation. To assess the impact of simultaneously changing several different assumptions, Table 9-3 sets out two additional sensitivities in which the three most impactful assumptions – net investment returns, wage growth and mortality – are all simultaneously changed to the low-cost or high-cost alternatives analyzed earlier.

Table 9-3: Combined Sensitivity Assumptions
Assumption Low-Cost
Alternative
Best-Estimate
Assumption
High-Cost
Alternative
Mortality70 Age 65 life expectancy in 2060:
Males: 23.2 years
Females: 24.3 years
Age 65 life expectancy in 2060:
Males: 25.2 years
Females: 26.3 years
Age 65 life expectancy in 2060:
Males: 27.2 years
Females: 28.3 years
Real wage
growth
0.50% per year less than
Best-Estimate Assumption
Varies between 0.8% to 1.3% for years prior to 2032, remaining at 1.1% per year thereafter 0.50% per year more than
Best-Estimate Assumption
Real investment
returns71
3.5% per year for five years;
5.0% per year thereafter
2.5% per year for five years;
4.0% per year thereafter
1.5% per year for five years;
3.0% per year thereafter
All other
assumptions
Same as
Best-Estimate Assumption
Best-Estimate Assumptions
as shown in Section 6
Same as
Best-Estimate Assumption

Table 9-4 shows the combined effect of simultaneously changing all three assumptions from the best-estimate assumptions if the Total Contribution Rate of 3.80% of Contributory Earnings were maintained throughout the projection period. Table 9-4 shows the hypothetical Sustainability Rates and the projected Assets to Expenditures Ratios that would be determined under the ORPP Act if this set of alternative assumptions were instead adopted for this Actuarial Funding Report.72

Table 9-4: Combined Sensitivity Results
Sensitivity Hypothetical
Sustainability Rate
A / E Ratio at
Total Contribution
Rate of 3.80%
2050
A / E Ratio at
Total Contribution
Rate of 3.80%
2075
A / E Ratio at
Total Contribution
Rate of 3.80%
2100
Best-Estimate 3.78% 44.0 27.4 25.5
Low-Cost Alternative 2.61% 56.1 53.0 90.4
High-Cost Alternative 5.90% 34.9 14.1 3.6

Naturally, the combination of the three most impactful assumptions results in a much wider range of potential results. Similar to the results in Table 9-2, users should not assume that the sensitivities are equally likely. Even with this wider range of results relative to the projections based on best-estimate assumptions, it is not correct to infer that these sensitivities form the upper or lower bounds on the range of possible outcomes.

D. Investment Experience Scenario Analysis

The previous sensitivity and scenario analyses were developed based on the notion that it is possible to know at the outset what the plan experience will be and establish the projection assumptions in line with such knowledge. In practice, the projection assumptions are best estimates based on the data and other information available at the time of the projection. To the extent experience varies from the assumptions, changes in the Sustainability Rate (and, therefore, the SCRD) will be identified in the periodic actuarial valuations. In fact, future actuarial projections may entail changes to the assumptions to reflect the latest data, experience and other information collected in respect of the ORPP at that time.

Therefore, let us examine the impact of favourable and unfavourable experience on the ORPP in order to better understand how the actions specified in the ORPP Act could apply to such experience and potentially affect the ORPP plan provisions.

To do so, we have developed scenarios that examine the effect of net investment returns in 2050 (the 33rd year of the ORPP’s operation) which are substantially higher or lower than the best-estimate assumptions. In the scenarios, we have assumed that the 2050 net investment return is 25 percentage points higher or lower than the best-estimate assumptions. For simplicity, we have assumed that only the 2050 returns are affected and that the ORPP assets earn the best-estimate assumption in all previous and subsequent years.73

The investment returns were selected for the scenario analysis because this is the assumption that is expected to have the greatest year-to-year volatility over the projection period. Wage growth can have a significant impact on the long-term sustainability of the ORPP, but is less likely to have sudden shifts in plan experience. Mortality can also have a large impact on the long-term sustainability, but the experience will unfold slowly. Like mortality, fertility changes tend to take place over a long period of time, but fertility changes have a low impact on the long-term sustainability of the ORPP. Finally, while net migration can go through high and low periods, its effect on the long-term sustainability of the ORPP is more modest.

Table 9-5 summarizes the low-cost and high-cost investment experience scenarios.

Table 9-5: Investment Experience Scenarios
  Low-Cost
Scenario
Best-Estimate
Scenario
High-Cost
Scenario
Real rates of
investment return74
(except 2050)
Experience matches
Best-Estimate Scenario
2.5% per year for five years;
4.0% per year thereafter
Experience matches
Best-Estimate Scenario
Real rate of
investment return75
(2050)
29.0% 4.0% -21.0%
All other
assumptions
Experience matches
Best-Estimate Scenario
Experience matches
Best-Estimate assumptions
Experience matches
Best-Estimate Scenario

Chart 9-6 shows the projection of the Assets to Expenditures Ratio for each of these investment experience scenarios.

Chart 9-6: Projection of Assets to Expenditures Ratio for Investment Experience Scenarios at Total Contribution Rate of 3.80%

All three projections are identical until 2050, when the investment experience diverges. The High-Cost Scenario shows an abrupt drop in the Assets to Expenditures Ratio in 2050, followed by a continued decline in the Assets to Expenditures Ratio thereafter. Conversely, the Low-Cost Experience Scenario shows a sharp jump in the Assets to Expenditures Ratio in 2050, followed by significant growth in the Assets to Expenditures Ratio towards the end of the projection period.

As noted in Section 3, the funding mechanisms used to maintain sustainability specified in the ORPP Act outline the necessary changes to be made, where applicable, to the plan provisions to address a funding excess or funding shortfall.76 Following the funding mechanisms used to maintain sustainability as specified in the ORPP Act, Table 9-7 shows the projected changes to plan provisions resulting from the funding excess or funding shortfall derived from the 2050 investment return scenarios:

Table 9-7: Projected Impact on Plan Provisions Due to Investment Experience Scenarios
Plan Provision Best-Estimate
Assumptions
(All Years)
Low-Cost
Scenario
(2055 and After)
High-Cost
Scenario
(2055 and After)
Total Contribution Rate
3.80% 3.80% 3.80%
Increases in Maximum Annual Earnings Threshold
100% of the change
in average wage
100% of the change
in average wage
94% of the change
in average wage
Increases in
Pensions in Payment
100% of the change
in price inflation
100% of the change
in price inflation
85% of the change
in price inflation

In the Low-Cost Scenario, the hypothetical Sustainability Rate projected to be revealed in the December 31, 2051 Actuarial Valuation is 3.30% of Contributory Earnings, resulting in an SCRD of +0.50% of Contributory Earnings. Since the SCRD is projected to be less than +1.00% of Contributory Earnings, the ORPP AC would make recommendations to the Government in respect of possible plan changes, but no action in respect of the funding of the ORPP would be required based on the ORPP Act.

However, in the High-Cost Scenario, the hypothetical Sustainability Rate projected to be revealed in the December 31, 2051 Actuarial Valuation is 4.26% of Contributory Earnings, resulting in an SCRD of -0.46% of Contributory Earnings. Since the SCRD is projected to be less than -0.10% of Contributory Earnings, the ORPP AC would be required to apply the actions specified in the ORPP Act and summarized in Section 3. In accordance with the requirements of the ORPP Act, based on our projections, this could result in a change to the percentage of average wage increases used to increase the Maximum Annual Earnings Threshold from 100% of average wage increases to 94% of average wage increases, and a change to the percentage of price inflation to be used to increase pensions in payment from 100% of price inflation to 85% of price inflation. Following these changes, and assuming the decision is made that the smallest changes be made to the plan provisions such that the ORPP would be considered Funded on a Sustainable Basis, the SCRD becomes approximately -0.09% of Contributory Earnings, and, therefore, there is no requirement to increase the Total Contribution Rate. Chart 9-8 also shows the projection of the Assets to Expenditures Ratio after 2055 with these changes.77

E. Conclusions

The range of projected outcomes of the nine sets of assumption sensitivities and the set of investment experience scenarios, both in respect of the Sustainability Rate and the Assets to Expenditures Ratios, demonstrate the significance of the selected assumptions and experience to the long-term projection of financial status. The selected factors are not the only assumptions that could have favourable or unfavourable experience as the ORPP evolves. The collection of a significant amount of data on the operation of the ORPP over time will allow these projections to be refined as part of future actuarial valuations. However, improved data will only allow a more-refined projection to be developed and will not change the fact that the ORPP will always be subject to the risks listed above, and others not listed, that could have a significant financial effect on the ORPP.

Appendix A : Actuarial Assumption Details

A. Overview

This Appendix sets out additional details in respect of the actuarial assumptions selected for the projections contained in this Actuarial Funding Report. As noted in Section 6 of this Actuarial Funding Report, the future ORPP cash flows are heavily dependent on the demographic projection of the Ontario population, the ORPP-eligible workforce and the economic factors within the Ontario economy that will affect the ORPP. While these assumptions are presented separately for ease of reporting, many of the assumptions are interrelated and the experience for each assumption can be affected by a variety of factors. The assumptions presented herein are intended to allow the Ministry and other ORPP stakeholders to assess the projections of the ORPP.

Several assumptions were developed based on information collected from external sources or by reference to assumptions used by the Office of the Chief Actuary in the CPP Actuarial Report. This Appendix includes a high-level summary of some of the other sources of information used to develop the actuarial assumptions.

There are a significant number of assumptions used in this Actuarial Funding Report. While these assumptions (and the projections derived from them) are intended to be a best estimate of the future of the ORPP, they are not intended as predictions. Within accepted actuarial practice, there are ranges of assumptions which can be considered as best estimates. Alternative best-estimate assumptions could have been developed for the projections, with results that differ significantly. From time to time, the actuarial assumptions will be reviewed in conjunction with the ORPP experience and the evolving demographic, economic and other trends, and updated best-estimate assumptions will be selected for future actuarial valuations by the designated actuary.

B. Demographic Assumptions

The demographic projections for the ORPP were developed using the Ontario population in 2012 as a starting point. The overall population is projected by adding births, subtracting deaths and adjusting for net migration. The population is projected separately for each age and sex. The projected number of members is developed based on the Ontarians between ages 18 and 69 years old who are eligible to participate in the ORPP, which in turns impacts the number of pensioners expected to collect a pension from the ORPP. The mortality projection for ORPP pensioners impacts the number of years each member is expected to receive benefits.

Fertility

Table A-1 summarizes the fertility rates assumed in the projection. The annual fertility rates represent the projected number of live births per female of the given ages in a particular year. The total fertility rate for a particular year represents the projected total number of children that would be born to a woman assuming that she experienced, over her lifetime, the annual fertility rates in that year.

Table A-1: Annual and Total Fertility Rates
Year Annual Fertility Rates (live births per 1,000 females)
15 - 19
Annual Fertility Rates (live births per 1,000 females)
20 - 24
Annual Fertility Rates (live births per 1,000 females)
25 - 29
Annual Fertility Rates (live births per 1,000 females)
30 - 34
Annual Fertility Rates (live births per 1,000 females)
35 - 39
Annual Fertility Rates (live births per 1,000 females)
40 - 44
Annual Fertility Rates (live births per 1,000 females)
45 - 49
Total Fertility Rate
Per Female
2015 7.6 32.8 82.8 113.1 63.1 13.4 0.9 1.57
2020 6.0 27.9 78.9 116.8 69.9 15.6 1.2 1.58
2025 4.7 24.1 75.8 118.9 75.4 17.7 1.4 1.59
2030 4.2 22.6 74.5 119.2 78.1 19.4 1.6 1.60
2035 4.2 22.6 74.5 119.2 78.3 20.1 1.8 1.60
2040+ 4.2 22.6 74.5 119.2 78.3 20.1 1.9 1.60

We assume total fertility rates will increase very slightly between 2015 and 2040, with a trend towards deferral of childbirth, lowering the annual fertility rates below age 30 and increasing the annual fertility rates after age 29. We also assume that there will be 105.5 male births per 100.0 female births.

Canadian total fertility rates decreased significantly between the 1950s and the 1980s, when the rates first dropped to around 1.6 children per woman. Total fertility rates have generally ranged between 1.5 and 1.7 children per woman since then. Consistent with the Ministry Demographic Projection, we believe that a long-term assumption of 1.6 children per woman is a best estimate for the purposes of this Actuarial Funding Report.

Mortality

Table A-2 summarizes the assumed mortality rates at selected ages and selected years between 2015 and 2090. For periods after 2090, further mortality improvement was assumed at an improvement rate equal to the average mortality improvement rate between 2080 and 2090. Over time, the effect of mortality improvement is significant. For example, a 65-year old male in 2090 is subject to roughly one-third the likelihood of dying before age 66 than a corresponding 65-year old male in 2015 (3.07 deaths per 1,000 in 2090 compared to 10.94 deaths per 1,000 in 2015).

Table A-2: Annual Mortality Rates (deaths per 1,000 persons)
Age Male
2015
Male
2030
Male
2060
Male
2090
Female
2015
Female
2030
Female
2060
Female
2090
20 0.49 0.30 0.16 0.13 0.20 0.14 0.09 0.08
30 0.58 0.45 0.28 0.23 0.31 0.23 0.16 0.14
40 1.10 0.77 0.45 0.37 0.74 0.55 0.38 0.34
50 2.62 1.79 1.09 0.91 1.77 1.34 0.93 0.83
60 6.84 4.57 2.72 2.29 4.34 3.08 1.95 1.66
65 10.94 7.01 3.83 3.07 7.15 5.29 3.48 3.00
70 17.87 11.63 6.44 5.16 11.76 8.62 5.62 4.85
75 29.48 19.93 11.88 9.96 19.91 14.88 9.98 8.71
80 49.42 36.18 22.87 19.17 34.57 26.89 18.56 16.19
85 83.43 67.26 49.33 44.28 61.13 49.53 37.37 34.21
90 137.32 113.79 85.58 77.12 110.19 93.72 73.59 67.57
95 209.71 179.50 141.69 130.18 185.98 162.66 132.99 123.99
100 297.57 263.09 217.84 203.78 283.97 255.39 217.37 205.57

Table A-3 illustrates the mortality improvement projection assumptions used in the Ministry Demographic Projection and the CPP Actuarial Report. At selected ages for each sex, the table shows the mortality rates at selected years between 2015 and 2090.

Table A-3: Mortality Rates: Ministry Demographic Projection vs. CPP Actuarial Report 2015-2090 (rates per thousand)
Ministry Demographic Projection
Age Males
2015
Males
2030
Males
2060
Males
2090
Females
2015
Females
2030
Females
2060
Females
2090
45 1.67 1.16 0.71 0.60 1.16 0.90 0.64 0.57
55 4.28 2.96 1.80 1.52 2.76 2.04 1.33 1.14
65 10.94 7.01 3.83 3.07 7.15 5.29 3.48 3.00
75 29.48 19.93 11.88 9.96 19.91 14.88 9.98 8.71
85 83.43 67.26 49.33 44.28 61.13 49.53 37.37 34.21
95 209.71 179.50 141.69 130.18 185.98 162.66 132.99 123.99
Table A-3: Mortality Rates: Ministry Demographic Projection vs. CPP Actuarial Report 2015-2090 (rates per thousand)
CPP Actuarial Report78
Age Males
2015
Males
2030
Males
2060
Males
2090
Females
2015
Females
2030
Females
2060
Females
2090
45 1.92 1.61 1.26 0.99 1.31 1.14 0.89 0.70
55 4.75 3.96 3.11 2.45 2.96 2.52 1.98 1.56
65 11.02 9.03 7.10 5.58 7.16 6.03 4.74 3.73
75 27.61 21.81 17.16 13.49 18.84 15.84 12.46 9.79
85 81.48 67.62 55.24 45.08 59.33 50.95 41.64 33.96
95 220.42 202.55 182.90 165.15 182.61 167.69 151.48 136.81
Table A-3: Mortality Rates: Ministry Demographic Projection vs. CPP Actuarial Report 2015-2090 (rates per thousand)
Ratio of Ministry Demographic Projection to CPP Actuarial Report
Age Males
2015
Males
2030
Males
2060
Males
2090
Females
2015
Females
2030
Females
2060
Females
2090
45 0.87 0.72 0.56 0.61 0.89 0.79 0.72 0.81
55 0.90 0.75 0.58 0.62 0.93 0.81 0.67 0.73
65 0.99 0.78 0.54 0.55 1.00 0.88 0.73 0.80
75 1.07 0.91 0.69 0.74 1.06 0.94 0.80 0.89
85 1.02 0.99 0.89 0.98 1.03 0.97 0.90 1.01
95 0.95 0.89 0.77 0.79 1.02 0.97 0.88 0.91

For the ages shown, after 2030 the projected mortality rates under the Ministry Demographic Projection are generally lower than the corresponding projected mortality rates used for the CPP Actuarial Report. The ratio of the Ministry Demographic Projection mortality rates to the CPP Actuarial Report mortality rates ranges from 0.54 to 1.01, and the ratios generally decline between 2030 and 2060, and then increase between 2060 and 2090.

Table A-4 shows the ratio of each male mortality rate to the corresponding female mortality rate for both the Ministry Demographic Projection and the CPP Actuarial Report assumptions. Based on the change in the ratios between 2015 and 2090, we observe that the Ministry Demographic Projection postulates that male and female mortality rates will continue to converge (i.e., the ratio of male to female mortality rates is gradually declining towards 1.00), while for the CPP Actuarial Report, the male and female mortality rates are improving at the same rates (i.e., the ratio of male to female rates stays constant at each age after 2030).

Table A-4: Mortality Improvement Ratios: Ministry Demographic Projection vs. CPP Actuarial Report 2015-2090
Ratio of Male Mortality Rate / Female Mortality Rate
Age Ministry Demographic Projection
2015
Ministry Demographic Projection
2030
Ministry Demographic Projection
2060
Ministry Demographic Projection
2090
CPP Actuarial Report79a
2015
CPP Actuarial Report79b
2030
CPP Actuarial Report79c
2060
CPP Actuarial Report79d
2090
45 1.44 1.29 1.11 1.05 1.47 1.41 1.42 1.41
55 1.55 1.45 1.35 1.33 1.60 1.57 1.57 1.57
65 1.53 1.33 1.10 1.02 1.54 1.50 1.50 1.50
75 1.48 1.34 1.19 1.14 1.47 1.38 1.38 1.38
85 1.36 1.36 1.32 1.29 1.37 1.33 1.33 1.33
95 1.13 1.10 1.07 1.05 1.21 1.21 1.21 1.21

The projected improvements to mortality rates have the effect of significantly increasing life expectancies and, by extension, significantly increasing both the numbers of workers who survive to retirement and the number of years that such pensioners will collect their pensions. In support of the approach to mortality improvement taken in the Ministry Demographic Projection, the Ministry provided us with a summary of its research into changes in life expectancies and the narrowing of the gap between males and females since the end of the 1970s.

In addition to the above-noted mortality tables, the Canadian Institute of Actuaries (CIA) released its February 2014 Final Report on Canadian Pensioners’ Mortality (CIA Mortality Report) which provided the results of a study in respect of mortality experience for participating Canadian registered pension plans from 1999 to 2008. The CIA Mortality Report specified mortality and mortality improvement tables (CPM Mortality Tables) for use by Canadian pension plans, including tables developed solely from private sector experience, public sector experience and the private and public sector experience combined.

Over a long projection period, there is high uncertainty in the evolution of future improvements in mortality rates, influenced by the onset of diseases, medical advances and societal changes and so on. For the purposes of this Actuarial Funding Report we considered the mortality assumptions contained in the Ministry Demographic Projection, the CPP Actuarial Report and the CIA Mortality Report. We observed several differences in the underlying basis for each mortality table as follows:

  • the CPM Mortality Tables are based on Canadian pension plan membership data and, therefore, do not consider the mortality experience of workers without pension plan coverage, and
  • the CPP Actuarial Report tables and CPM Mortality Tables are based on pension plan mortality experience across Canada, as opposed to being an Ontario-based projection as developed for the Ministry Demographic Projection.

Given the myriad unpredictable factors affecting mortality rates, we believe that each set of tables would fall within the range of an acceptable assumption, and we selected the mortality assumption underlying the Ministry Demographic Projection as the basis for this Actuarial Funding Report.

Table A-5 shows the life expectancy at selected ages between 2015 and 2090 under the assumptions adopted for this Actuarial Funding Report. For example, in 2015, the average 65-year old male is projected to live 21.2 more years, while the average 65-year old male in 2090 is expected to live 26.1 more years, an increase of 4.9 years over the intervening 75-year period. The average 65-year old female is projected to live 23.4 more years in 2015 and 26.9 more years in 2090, an increase of 3.5 years over the intervening 75-year period.

Table A-5: Cohort Life Expectancies, Including Subsequent Improvements (years)
Age Male
2015
Male
2030
Male
2060
Male
2090
Female
2015
Female
2030
Female
2060
Female
2090
20 68.2 69.0 70.2 71.2 69.8 70.3 71.1 71.8
30 57.8 58.8 59.9 61.0 59.4 60.1 60.9 61.6
40 47.2 48.5 49.8 50.8 49.0 49.9 50.8 51.5
50 36.5 38.3 39.7 40.7 38.6 39.8 40.8 41.5
60 26.1 28.3 30.0 30.9 28.3 29.8 31.0 31.7
65 21.2 23.4 25.2 26.1 23.4 25.0 26.3 26.9
70 16.7 18.8 20.6 21.4 18.8 20.3 21.7 22.2
75 12.7 14.4 16.2 16.9 14.5 15.9 17.2 17.8
80 9.3 10.6 12.2 12.8 10.8 11.9 13.1 13.6
85 6.5 7.5 8.7 9.2 7.6 8.4 9.4 9.8
90 4.4 5.1 6.2 6.5 5.0 5.7 6.5 6.8
95 3.0 3.5 4.2 4.5 3.3 3.7 4.3 4.5
100 2.0 2.4 2.8 3.0 2.1 2.4 2.8 2.9

Table A-6 compares the cohort life expectancies for males and females at ages 65 and 85 between the Ministry Demographic Projection and the CPP Actuarial Report at selected years.

Table A-6 Cohort Life Expectancies, Including Subsequent Improvements: Ministry Demographic Projection vs. CPP Actuarial Report 2015-2090 (years)
Sex, Age Ministry Demographic Projection
2015
Ministry Demographic Projection
2030
Ministry Demographic Projection
2060
Ministry Demographic Projection
2090
CPP Actuarial Report80a
2015
CPP Actuarial Report80b
2030
CPP Actuarial Report80c
2060
CPP Actuarial Report80d
2090
M, 65 21.2 23.4 25.2 26.1 21.1 22.0 23.6 25.1
F, 65 23.4 25.0 26.3 26.9 23.5 24.3 25.8 27.2
M, 85 6.5 7.5 8.7 9.2 6.9 7.4 8.2 8.9
F, 85 7.6 8.4 9.4 9.8 8.1 8.6 9.3 10.0

For males, the life expectancies at ages 65 and 85 under the Ministry Demographic Projection are generally higher than under the CPP Actuarial Report assumptions. For females, the age 65 life expectancies under the Ministry Demographic Projection are the same or slightly lower in 2015 and 2090 and slightly higher in 2030 and 2060. The female age 85 life expectancies are slightly lower than the CPP Actuarial Report assumptions except at 2060. The relative difference between the male and female life expectancies results from the differing patterns of assumed future mortality improvements.

Migration

Table A-7 sets out the assumed levels of net migration into Ontario (immigration into Ontario less migration out of Ontario, inclusive of net changes in non-permanent residents) by age band at selected years. The resultant rate of net migration into Ontario averages approximately 0.7% of the population per year throughout the projection period. Given the assumption of long-term total fertility rates below 2.1 births per female, positive net migration is a major driver in the projected growth in the population of Ontario. In practice, actual levels of migration are dependent on many factors, both Canadian and worldwide, and can therefore vary significantly from period to period.

Table A-7: Net Migration into Ontario 2015-2090 (thousands)
Year Males
Under 15
Males
15 - 64
Males
Over 64
Males
All Ages
Females
Under 15
Females
15 - 64
Females
Over 64
Females
All Ages
Total
2015 10 28 2 40 9 35 3 47 86
2020 11 34 2 48 11 42 3 55 103
2025 12 37 3 52 11 45 3 60 111
2030 13 39 3 54 12 47 4 63 117
2035 14 40 3 57 13 49 4 66 123
2040 14 42 3 59 13 51 4 69 128
2045 15 44 3 62 14 53 4 71 133
2050 16 46 3 64 15 55 4 74 138
2055 16 47 3 66 15 57 4 76 142
2060 17 49 3 68 16 59 4 79 147
2065 17 50 3 71 16 61 4 81 152
2070 18 52 3 73 17 63 4 84 158
2075 19 54 3 76 18 65 4 87 163
2080 20 56 3 78 18 67 5 90 169
2085 20 57 3 81 19 70 5 93 174
2090 21 59 4 84 20 72 5 96 180

C. Workforce Assumptions

Labour Force Participation

Table A-8 shows the comparison data we collected to support the assumption related to the total Ontario labour force participation rates (ages 15 and over), which is used to develop the overall size of the Ontario workforce based upon the projection of the Ontario population. The use of the tax data described in Section 4 implicitly addresses variations in labour force participation rates across ages (e.g., between students and older workers) and sexes.

Table A-8: Labour Force Participation Rates81a
Short-term Budget Period
Year C4SE
Forecast
CBoC
Forecast
CPP
Actuarial
Report
Best-Estimate
Assumption
2016 - - - -
2017 - - - -
2018 65.5% 66.2% 66.1% 65.5%
2019 65.2% 66.2% 65.9% 65.2%
Table A-8: Labour Force Participation Rates81b
Long-term Projection Period
Year C4SE
Forecast
CBoC
Forecast
CPP
Actuarial
Report
Best-Estimate
Assumption
2020 64.9% 66.2% 65.7% 64.9%
2021 64.6% 66.0% 65.5% 64.6%
2022 64.2% 65.8% 65.3% 64.3%
2023 63.9% 65.6% 65.0% 64.0%
2024 63.7% 65.2% 64.8% 63.7%
2025 63.4% 64.9% 64.6% 63.4%
2026 63.2% 64.6% 64.4% 63.1%
2027 63.0% 64.3% 64.3% 62.8%
2028 62.8% 64.1% 64.2% 62.5%
2029 62.5% 63.8% 64.1% 62.2%
2030 62.3% 63.6% 64.0% 61.9%
2031 62.1% 63.4% 63.7% 61.6%
2032 62.0% 63.1% 63.6% 61.3%
2033 61.8% 63.0% 63.4% 61.0%
2034 61.5% 62.8% 63.2% 60.7%
2035 61.3% 62.7% 63.1% 60.4%
2036 - - - 60.1%
2037 - - - 59.8%
2038 - - - 59.5%
2039 - - - 59.2%
2040 - - - 58.9%
2041 - - - 58.6%
2042 - - - 58.3%
2043+ - - - 58.0%

Retirement

Unreduced ORPP pension benefits are payable at age 65. ORPP members are permitted to commence receipt of their pension from the ORPP as early as age 60 and as late as age 70. Members retiring early are subject to a pension reduction, while postponed retirement causes an increase to the pension payable. The projection of the ORPP requires an assumption as to the rates at which members will elect to retire. As married members (including those with common-law spouses) may also elect, in conjunction with their spouses, to receive their pension in a surviving spouse optional form of payment, an assumption is necessary in respect of the number of retirees that select this option. Table A-9 summarizes the assumptions used in respect of retirement incidence, the reduction/increase factor applied to the pension, the percentage of members electing the surviving spouse option and the reduction in pension for electing the spousal pension option. Male spouses are assumed to be three years older than female spouses.

Table A-9: Retirement Assumptions
Age Retirement Incidence Probability
Males
Retirement Incidence Probability
Females
Early/
Postponed
Factor
Election
of Spousal
Pension
Reduction for Spousal
Pension
60 34.0% 38.0% 70.0% 70.0% 8.0%
61 6.0% 6.0% 76.0% 70.0% 8.0%
62 5.0% 5.0% 82.0% 70.0% 8.0%
63 4.0% 4.0% 88.0% 70.0% 8.0%
64 4.0% 4.0% 94.0% 70.0% 8.0%
65 40.6% 39.2% 100.0% 70.0% 8.0%
66 1.2% 0.9% 107.2% 70.0% 8.0%
67 1.1% 0.6% 114.4% 70.0% 8.0%
68 1.1% 0.6% 121.6% 70.0% 8.0%
69 1.0% 0.6% 128.8% 70.0% 8.0%
70 2.0% 1.1% 136.0% 70.0% 8.0%
  100.0% 100.0%      

D. Economic Assumptions

A projection of key economic indicators is necessary to develop the financial elements of the ORPP, including future inflationary increases in pensions and changes in the levels of ORPP-eligible earnings. The total amounts of Pensionable Earnings and Contributory Earnings are naturally dependent on the size of the Ontario population projection and the level of labour force participation, as summarized in previous subsections, as the economic and demographic factors do not evolve separately in a vacuum.

Inflation

Table A-10 shows the comparison data we collected to support the price inflation assumption. The inflation assumption for the years 2012 to 2017 (along with the corresponding average wage increase assumptions) are used to project the tax data collected as of 2012 forward to 2018, the year in which the ORPP will become effective.

Table A-10: Price Inflation82a
Period to 2015
Year Ending Ministry
Economic
Projection
C4SE
Forecast
CBoC
Forecast
CPP
Actuarial
Report
Projection
Assumption
2012 1.4% (D) 1.4% (D) 1.4% (D) 1.5% (D) 1.4%
2013 1.0% (D) 1.1% (D) 1.1% (D) 1.5% (E) 1.0%
2014 2.4% (D) 2.4% (D) 2.5% (D) 2.0% (E) 2.4%
2015 1.2% 1.7% 2.0% 2.0% 1.2%
(D) Rates were reported based on actual Ontario experience data as opposed to future expectations. Slight differences between sources are believed to be due to differences in methodology.
(E) Rates were projected for 2013 and 2014 for the December 31, 2012 CPP Actuarial Report and were not based on actual Ontario experience.
Table A-10: Price Inflation82b
Short-term Budget Period
Year Ending Ministry
Economic
Projection
C4SE
Forecast
CBoC
Forecast
CPP
Actuarial
Report
Projection
Assumption
2016 2.0% 2.5% 2.1% 2.0% 2.0%
2017 2.0% 1.8% 2.1% 2.0% 2.0%
2018 2.0% 2.0% 2.1% 2.0% 2.0%
2019 2.0% 1.8% 2.1% 2.0% 2.0%
Table A-10: Price Inflation82c
Long-term Projection Period
Year Ending Ministry
Economic
Projection
C4SE
Forecast
CBoC
Forecast
CPP
Actuarial
Report
Projection
Assumption
2020 2.0% 1.8% 2.1% 2.1% 2.0%
2021 2.1% 1.8% 2.1% 2.2% 2.0%
2022 2.1% 1.8% 2.1% 2.2% 2.0%
2023 2.1% 1.8% 2.1% 2.2% 2.0%
2024 2.0% 2.1% 2.1% 2.2% 2.0%
2025 2.1% 2.1% 2.1% 2.2% 2.0%
2026 2.0% 2.2% 2.1% 2.2% 2.0%
2027 1.9% 2.3% 2.1% 2.2% 2.0%
2028 1.9% 2.3% 2.1% 2.2% 2.0%
2029 2.0% 2.5% 2.1% 2.2% 2.0%
2030 2.1% 2.3% 2.1% 2.2% 2.0%
2031 2.0% 2.3% 2.1% 2.2% 2.0%
2032 2.0% 2.4% 2.1% 2.2% 2.0%
2033 2.0% 2.3% 2.1% 2.2% 2.0%
2034 2.0% 2.3% 2.1% 2.2% 2.0%
2035 2.0% 2.3% 2.1% 2.2% 2.0%
2036+  - - - 2.2% 2.0%

Table A-11 shows the comparison data we collected to support the assumption related to the real rates of wage increases. This assumption is comprised of several factors including general productivity and the degree to which changes in productivity result from changes in the amount of labour used, changes in the average number of hours worked, and changes in the compensation structure for workers. The years 2012 to 2017 are used to project the tax data collected as of 2012 forward to 2018, the year in which the ORPP will become effective.

Table A-11: Real Wage Growth83a
Period to 2015
Year Ending Ministry
Economic
Projection
C4SE
Forecast
CBoC
Forecast
CPP
Actuarial
Report
Best Estimate Assumption
2012 1.0% (D) 1.1% (D) 0.9% (D) (E) 1.0%
2013 -0.5% (D) -0.2% (D) 0.2% (D) 0.5% (E) -0.5%
2014 1.4% (D) 2.9% (D) 0.1% (D) 0.6% (E) 1.4%
2015 1.6% 1.5% 0.5% 0.7% 1.6%
(D) Rates were reported based on actual Ontario experience data as opposed to future expectations. Slight differences between sources are believed to be due to differences in methodology.
(E) The CPP Actuarial Report did not require this assumption for 2012. Rates shown for 2013 and 2014 from the December 31, 2012 CPP Actuarial Report were projections for all of Canada and not based on actual or projected Ontario experience.
Table A-11: Real Wage Growth83b
Short-term Budget Period
Year Ending Ministry
Economic
Projection
C4SE
Forecast
CBoC
Forecast
CPP
Actuarial
Report
Best Estimate Assumption
2016 1.1% 1.2% 0.5% 0.8% 1.1%
2017 0.8% 1.2% 0.6% 0.9% 0.8%
2018 0.7% 1.1% 0.3% 1.0% 0.8%
2019 1.2% 1.3% 0.6% 1.1% 1.1%
Table A-11: Real Wage Growth83c
Long-term Projection Period
Year Ending Ministry
Economic
Projection
C4SE
Forecast
CBoC
Forecast
CPP
Actuarial
Report
Best Estimate Assumption
2020 0.9% 1.2% 0.6% 1.2% 1.0%
2021 0.9% 1.2% 0.5% 1.2% 1.0%
2022 1.1% 1.0% 0.6% 1.2% 1.0%
2023 0.9% 1.0% 0.6% 1.2% 1.1%
2024 0.9% 1.0% 0.5% 1.2% 1.1%
2025 1.2% 1.0% 0.7% 1.2% 1.2%
2026 1.1% 1.1% 0.7% 1.2% 1.2%
2027 1.3% 1.2% 0.7% 1.2% 1.3%
2028 1.3% 1.2% 0.7% 1.2% 1.3%
2029 1.3% 1.3% 0.7% 1.2% 1.3%
2030 1.3% 1.3% 0.6% 1.2% 1.2%
2031 1.2% 1.3% 0.8% 1.2% 1.2%
2032 1.1% 1.2% 0.7% 1.2% 1.2%
2033 1.1% 1.1% 0.8% 1.2% 1.1%
2034 1.1% 1.0% 0.8% 1.2% 1.1%
2035 1.1% 1.0% 0.8% 1.2% 1.1%
2036+ - - - 1.2% 1.1%

For the purposes of the ORPP projections, we assumed that the average rate of real wage growth (and the average rate of real wage growth for each age and sex cohort) will be in line with Table A-11. However, as noted in Section 5, the rate of real wage growth for any particular cohort may differ from the above assumptions, since we assumed that the average Pensionable Earnings of the cohort will increase (or decrease) in line with the 2012 tax data summarized in Table 5-7, in addition to changes in the average wage.

Appendix B : Plan Provisions

This Appendix summarizes the plan provisions used for the projections in this Actuarial Funding Report based on the ORPP Act, as directed by the Ministry. The plan provisions remain subject to change. In the event that the plan provisions are changed, the projections in the Actuarial Funding Report may be updated to reflect such updated plan provisions.

Certain plan provisions may be amended to address a funding shortfall or funding excess determined in an actuarial valuation, as specified in the ORPP Act.

A. Definitions

  • Comparable Workplace Pension Plan – a registered pension plan that meets one of the following tests: (a) for a DB plan, an accrual rate of at least 0.5% of pensionable earnings per year (with equivalent rules for flat dollar plans); (b) for a DC plan, a mandatory contribution rate of at least 8% of pensionable earnings, with a mandatory employer contribution rate of at least 4% of pensionable earnings, or (c) for a combination or hybrid plan with both DB and DC provisions, the minimum comparability threshold will be based on an assessment of the total rating of both the DB and DC plan benefit provisions. For a Multi-Employer Pension Plan, participating employers will have the option to assess benefit comparability using either the minimum DB accrual or DC contribution rate thresholds.

    The Comparable Workplace Pension Plan tests may be administered in respect of each subset of members within the pension plan, where subsets of members must be clearly and objectively distinguishable based on the terms of the pension plan.
  • Contributory Earnings – for a member in a given year, the portion of Pensionable Earnings which exceeds the Minimum Earnings Threshold and is less than or equal to the Maximum Annual Earnings Threshold.
  • Earliest Retirement Age – age 60.
  • Excluded Employment – (a) employment outside Ontario, (b) self-employment, (c) employment with the Government of Canada or a non-Crown federally-regulated employer, (d) employment while participating in a Comparable Workplace Pension Plan (unless the employer has elected to opt in to the ORPP), or (e) tax-exempt First Nations employment (unless the employer and employee elect to contribute), (f) employment where earnings are exempt under a tax treaty, or (g) employment prescribed in regulations under the ORPP Act.
  • Indexed Pension Benefits – for a member in respect of a particular year, the Pension Benefits for that member, multiplied by the average of the annual Maximum Annual Earnings Thresholds in the year of retirement and the preceding four years, and divided by the Maximum Annual Earnings Threshold in the particular year.
  • Latest Retirement Age – age 70.
  • Maximum Annual Earnings Threshold – the upper limit of Pensionable Earnings for purposes of determining member and employer contributions and for determining retirement benefits payable from the ORPP. The Maximum Annual Earnings Threshold will be $90,000 (in 2017 dollars) and indexed to prescribed changes in average wage thereafter.84
  • Minimum Earnings Threshold – $3,500, the lower limit of Pensionable Earnings for purposes of determining member and employer contributions. The Minimum Earnings Threshold is not indexed.
  • Opt-in – an employer with a Comparable Workplace Pension Plan will have the option, effective January 1, 2020, to make an election in prescribed form to include all of its eligible employees in the ORPP. Further, on-reserve First Nations employers are permitted to make an election to allow their employees to voluntarily participate in the ORPP.
  • Pension Benefits – the benefits that a member accrues in a year during which the member contributes to the ORPP, determined by multiplying a benefit accrual rate by the member’s Pensionable Earnings for the year. The benefit accrual rate is 0.375% for periods when the member contributes 1.9% of the member’s Contributory Earnings; the benefit accrual rate is reduced pro rata for periods when the member contributes at a rate less than 1.9% of the member’s Contributory Earnings.
  • Pensionable Earnings – for a member, all employment income that would be considered pensionable earnings under the CPP (assuming no limits on CPP pensionable earnings), other than income from Excluded Employment, plus prescribed compensation (i.e., for eligible periods during a period of leave under Part XIV of the Employment Standards Act, 2000).

B. Membership

  • Ontarians will enter the ORPP in Implementation Waves, in respect of their Pensionable Earnings other than Excluded Employment Income, based on their employer’s size and whether or not any Ontario employees of the employer participate in a registered pension plan on August 11, 2015.
  • The Implementation Waves are defined as follows:
    • Wave 1 is comprised of large employers (500 or more Ontario employees) who did not sponsor a registered pension plan on August 11, 2015;
    • Wave 2 is comprised of medium employers (50 to 499 Ontario employees) who did not sponsor a registered pension plan on August 11, 2015;
    • Wave 3 is comprised of small employers (fewer than 50 Ontario employees) who did not sponsor a registered pension plan on August 11, 2015; and
    • Wave 4 is comprised of all other employers with Ontario employees not in a Comparable Workplace Pension Plan.85
  • Implementation Wave Start Date, the date at which an employer will have its employees eligible for entry into the ORPP, is defined as follows:
    • Wave 1 – January 1, 2018;
    • Wave 2 – January 1, 2018;
    • Wave 3 – January 1, 2019; and
    • Wave 4 – January 1, 2020.
  • Members must be at least 18 years old and not have reached the age of 70 years to be eligible to make contributions to and accrue benefits under the ORPP.

C. Contributions

  • Generally, members will make contributions equal to 1.9% of Contributory Earnings. However, for 2018 to 2020, certain contribution rates are reduced as follows:
    • Wave 1: in 2018 and 2019, the contribution rates will be 0.8% and 1.6% of Contributory Earnings respectively;
    • Wave 2: in 2018 and 2019, the contribution rates will be 0.8% and 1.6% of Contributory Earnings respectively; and
    • Wave 3: in 2019 and 2020, the contribution rates will be 0.8% and 1.6% of Contributory Earnings respectively.
  • Employers make contributions equal to the member contributions.
  • After a member has retired from the ORPP, the member no longer remits contributions to the ORPP and their employer no longer remits contributions in respect of the member.
  • Retired members receiving an ORPP pension who return to employment other than Excluded Employment would be eligible, but not required, to suspend their ORPP pension and resume making ORPP contributions.

D. Pension Benefits

  • Upon cessation of employment, members are permitted to retire and commence receiving a pension at any age between the Earliest Retirement Age and the Latest Retirement Age.
  • Upon retirement, a member is entitled to receive the sum of his/her Indexed Pension Benefits, with an early retirement reduction applied if retirement occurs before age 65, and a postponed retirement increase applied if retirement occurs after age 65.86
  • The normal form of pension payment is a lifetime pension for a member with no eligible spouse at retirement, with a minimum of at least 120 monthly payments. If a member has an eligible spouse at retirement (and the member and eligible spouse do not waive in prescribed form), the member’s pension shall be the actuarial equivalent of the member’s pension without a spouse in the form of a joint life and survivor pension with 60% of the reduced pension payable to the member’s surviving spouse after the member’s death.87
  • The member’s (or surviving spouse’s, if the joint life and survivor pension was elected and the member is deceased) pension will be adjusted annually to reflect prescribed increases in the Consumer Price Index for Canada.88

E. Pre-retirement Death Benefit

  • Upon the death of a member before retirement, the member’s spouse (or beneficiary or personal representative, as applicable) shall receive a lump sum in an amount that is actuarially equivalent to the value of the member’s accrued pension at the date of death or an amount equal to the total of the member’s contributions to the ORPP plus interest, whichever is greater, in lieu of the member’s accrued Pension Benefits.

Appendix C : Applicable Actuarial Standards

A. Overview

Many countries have their own set of actuarial standards for work undertaken by actuaries in that country. However, the work for social security funding is so specialized that the actuarial governing bodies in many countries, including the CIA, do not yet have specialized standards in place. Instead, and until country-specific actuarial standards are adopted, actuaries may voluntarily elect to comply with international actuarial standards of practice and guidelines.

B. International Standards of Actuarial Practice

The International Actuarial Association (IAA) has adopted two International Standards of Actuarial Practice (ISAP) relevant to social security funding, as follows:

  • International Standard of Actuarial Practice 1 – General Actuarial Practice (ISAP1), which sets out general standards of practice for all types of actuarial work, and
  • International Standard of Actuarial Practice 2 – Financial Analysis of Social Security Programs (ISAP2), which sets out specific standards of practice for actuaries performing financial analyses of social security programs (SSP).

The ISAPs form a model for actuarial standard-setting bodies to consider. The IAA encourages local actuarial standard-setting bodies to study the ISAPs and to consider taking one of the following courses of action, if it has been determined that a particular ISAP is relevant for actuaries in their jurisdiction:

  • adopting the ISAP as a standard with only the minor wording modifications set out in the Drafting Notes to the ISAP,
  • customizing the ISAP by revising the text to the extent deemed necessary by the local standard-setting body while ensuring that the resulting standard or set of standards is substantially consistent with the ISAP,
  • endorsing the ISAP by declaring that it is appropriate for use in certain clearly defined circumstances,
  • modifying existing local standards of practice to obtain substantial consistency with the ISAP, or
  • confirming that existing local standards of practice are already substantially consistent with the ISAP.

ISAP1 and ISAP2 allow for voluntary compliance. They are not binding upon an actuary unless the actuary states that some or all of the work has been performed in compliance with the ISAP. Any actuary who asserts compliance with ISAP2 (as a model standard) must also comply with ISAP1, except where ISAP1 is overridden by ISAP2 or has been incorporated into the applicable local actuarial standards of practice.

ISAP2 states that its purpose is to provide guidance to actuaries performing financial analyses of SSPs and to give intended users of the work confidence that:

  • actuarial services are carried out professionally and with due care,
  • the results are relevant to their needs, are presented clearly and understandably, and are complete, and
  • the assumptions and methodology (including, but not limited to, models and modeling techniques) used are disclosed appropriately.

The actuary’s financial analysis in respect of the SSP must consider the circumstances of the work, which would include:

  • the terms of the relevant statutes, regulations and other binding authorities,
  • accounting standards and policies to the extent they are relevant, and
  • the terms of an appropriate engagement under which the work is being performed,

and the circumstances of the work may include consideration of the funding policy of the SSP.

Under ISAP2, the actuary is required to use a projection methodology for the assets and benefit liabilities that is consistent with the financing methodology used for the SSP. For example, for a fully funded SSP, the projection would typically use a closed group methodology, under which only current participants are considered, with or without their assumed future benefit accruals and contributions. However, based on the circumstances of the work, the actuary may judge an alternative approach for projecting the assets and benefit liabilities and/or determining the cost of future service to be more appropriate and that approach would be used with justification communicated in the report. Fully funded is defined to mean “where accrued liabilities are intended to be funded over participants’ working years”. However, with the ORPP there are no members or accrued liabilities at inception.

Based on the funding mechanisms used to maintain sustainability as specified by the ORPP Act, it is our view that the use of a closed group methodology (which presumably would consider only the initial members of the ORPP) would not be appropriate. We are of the view that an open group methodology (which considers both the initial and future members of the ORPP) is an appropriate methodology in order to ensure intergenerational equity. This methodology is consistent with our understanding of the necessary calculations of the Sustainability Rate and SCRD in the ORPP Act. An open group methodology is also consistent with the methodology selected by the Office of the Chief Actuary in its determination of the permanent full funding rate in respect of recent changes to the CPP that increased or added new benefits. The assumptions and methodology in this Actuarial Funding Report have therefore been developed on the basis of an open group projection methodology.

With respect to the use of margins in the assumptions, excluding assumptions specified as part of the engagement, ISAP2 directs that the actuary should select neutral (or best-estimate) assumptions, but contemplates that margins may need to be included based on the circumstances of the work. If margins are used, the actuary should disclose the basis and rationale for the margins. Consistent with our understanding of the Government’s desire to minimize intergenerational transfers between cohorts of members based on consultation with the Ministry, the projections have been prepared using best-estimate assumptions (i.e., without margins).

C. Canadian Standards of Actuarial Practice

In 2014, the Actuarial Standards Board (ASB) of the CIA modified its Standards of Practice to be consistent with ISAP1, effective in March 2015.

Section 1610 of the CIA Standards of Practice permits the actuary to use another person’s work. For the purposes of the assumptions specified by the Ministry, we understand that the Ministry developed these assumptions based on its own analysis and assessment of the potential investment returns, investment management expenses and operational costs for the ORPP.

The CIA Standards of Practice permit an actuary to use assumptions that have been specified under the terms of an appropriate engagement. The Ministry has specified the assumptions we should use for real rates of investment return, investment management expenses and operational costs. There is insufficient information on the ORPP’s investment policy, its implementation, and on the administration structure to fully assess the Ministry’s specified assumptions. However, we have compared the Ministry-specified investment return assumptions against the investment return assumptions (net of investment expenses) employed by several large Ontario pension plans, as well as modeled the potential range of real investment returns achievable from some customary investment strategies used by Canadian pension plan sponsors, and identified no evident shortcomings in the Ministry-specified assumptions. Accordingly, we have used these assumptions in this Actuarial Funding Report but do not take responsibility for them.

In October 2015, the CIA released an exposure draft of proposed modifications to Canadian actuarial standards in respect of social security programs (proposed Section 7000 of the CIA Standards of Practice, with the necessary modifications to the definitions under Section 1000 of the CIA Standards of Practice) that are substantially consistent with ISAP2. The ASB provided a period for comment in respect of the exposure draft. Following consideration of the comments received and the requirements for due process, it is expected that Section 7000 will be finalized and adopted later in 2016. In the event Section 7000 is finalized prior to the completion of the Actuarial Funding Report, such report will be prepared in accordance with Section 7000, as adopted.

D. Actuarial Standards Applied for Actuarial Funding Report

Based on the foregoing, this Actuarial Funding Report has been prepared in compliance with Section 1000 of the CIA Standards of Practice and ISAP2, with the use of an open group projection methodology. The actuarial assumptions we have selected are best-estimate assumptions and we do not take responsibility for the assumptions specified by the Ministry.

Footnotes:

[1] In this Actuarial Funding Report, expenditures are defined as pensions and other amounts payable to eligible ORPP pensioners, including beneficiaries, plus ORPP operational costs.

[2] In this Actuarial Funding Report, Active Contributors, for a given year, are defined to mean the ORPP members expected to contribute at least one dollar during the year.

[3] The Sustainability Rate is the lowest contribution rate (members and employers combined) to sustain the ORPP as defined by the funding mechanisms used to maintain sustainability. A more detailed description is provided in Section 3-C of this report.

[4] Refer to Subsection 5(3) of the ORPP Act.

[5] Quebec workers instead participate in the Quebec Pension Plan, which provides very similar benefits to the CPP. Saskatchewan residents also have the option to contribute to the Saskatchewan Pension Plan (with no matching or other contributions from their employers or by the Saskatchewan Government).

[6] Tax-assisted savings plans include Registered Retirement Savings Plans, Tax-Free Savings Accounts and Deferred Profit Sharing Plans.

[7] The Sustainability Rate is assumed to take effect at the end of the Actuarial Review Period and, following consultation with the Ministry, is assumed to be rounded to the nearest 0.01% of Contributory Earnings.

[8] The reductions in the specified proportions are determined arithmetically and apply to all years following the Actuarial Review Period. The limits for changes are applied independently at each actuarial valuation. The cumulative reductions in the specified proportions over a series of actuarial valuations may exceed 10% and 25%, respectively.

[9] Source: Statistics Canada. Table 052-0005 Projected Population, by Projection Scenario, Age and Sex, as of July 1, Canada, Provinces and Territories, Annual (table) and Table 052-0006 Components of Projected Population Growth, by Projection Scenario, Canada, Provinces and Territories, Annual (table). CANSIM. September 2014.

[10] The data provided to Willis Towers Watson did not include any individual tax records. The data was tabulated by sex, age and ranges of earnings, ensuring that the privacy of all Ontarians was protected. Further, in the data provided, all earnings used for the distributions were limited to the range of earnings necessary for determining ORPP contributions and benefits (i.e., tax filers with higher earnings had their earnings limited for reporting purposes).

[11] The approach described above is only intended to support an extraction of 2012 tax data in respect of tax filers anticipated to be eligible for the ORPP. The ORPP AC will be responsible to establish the detailed procedures and reporting requirements to ensure that all Ontarians eligible for the ORPP are appropriately enrolled and have the necessary contributions withheld and remitted to the ORPP.

[12] In this Actuarial Funding Report, combination plans also include hybrid or other complex pension plan designs.

[13] In the absence of available registration numbers for federally-regulated pension plans, the Ministry was only able to identify federally-regulated employers by the reported employer Business Number, Business name and NAICS code on a best-estimate basis. In the absence of DPSP registration numbers, since DPSPs do not meet the requirements of a Comparable Workplace Pension Plan, it is possible that some DPSPs have been classified as Comparable Workplace Pension Plans.

[14] The criteria provided to the Ministry for purposes of extracting the 2012 tax data is summarized as follows: (a) for each T4 slip with a non-zero employment income, determine the PA Ratio as the PA divided by employment income, where the T4 slip employment income is limited to $135,000; (b) if, based on the plan registration number, the Ministry believes the employer sponsors a DB pension plan, exclude the T4 slip if the PA Ratio is greater than 4.00%; (c) if, based on the plan registration number, the Ministry believes the employer sponsors a DC pension plan or a combination pension plan, or if the Ministry has no information in respect of the plan registration number, exclude the T4 slip if the PA Ratio is greater than or equal to 8.00%; and (d) in all other cases, include the T4 slip. Potentially there are pension plan designs for which the foregoing criteria will not perfectly categorize some people for purposes of the Comparable Workplace Pension Plan test, particularly for persons with very high or very low employment income, but the effect on contributions and pension accruals is expected to be minimal.

[15] A DC plan PA is developed as the sum of the required contributions and any voluntary contributions by the member and employer. Based on the tax data it is not possible to conclusively determine whether the worker is enrolled in a Comparable Workplace Pension Plan, so there may be cases where the income for some workers was excluded as a result of a high level of voluntary contributions. This shortcoming is mitigated to the extent that some employers will modify their pension plans before 2020 to meet the definition of Comparable Workplace Pension Plans. We believe that refinement of the data to address these issues would not significantly affect the projections in this Actuarial Funding Report.

[16] The Comparable Workplace Pension Plan tests will be conducted on a subset-by-subset basis where a subset is a clearly defined group in a registered pension plan. Each subset will be determined to either be in a Comparable Workplace Pension Plan or not. The available tax data only had sufficient detailed information on each worker to permit the analysis to be performed on a person-by-person basis. Therefore, the extracted tax data may include information on workers who had a relatively low PA but who were actually enrolled in a Comparable Workplace Pension Plan and may exclude workers who had a relatively large PA but who were enrolled in a non-Comparable Workplace Pension Plan. We believe that this shortcoming in the available data had an inconsequential effect on the projections in this Actuarial Funding Report.

[17] Further details on the methodology, including the development of the calibration factor, are provided in Section 6-C.

[18] There are many factors that will impact whether the ORPP-eligible workforce remains a constant, decreasing or increasing percentage of the Ontario workforce. This percentage will increase to the extent that plan sponsors opt-in to the ORPP or reduce or eliminate their Comparable Workplace Pension Plans, and it will decrease to the extent that plan sponsors adopt or adjust their registered pension plans to meet the Comparable Workplace Pension Plan test for all, or an increased number, of their members. Changes in the size of the workforce employed by federally-regulated employers and the number of self-employed workers will also affect this relationship. Section 9 contains a sensitivity analysis in respect of labour force participation rates that can also be used to assess the sensitivity of changes in the ORPP-eligible workforce in relation to the Ontario workforce.

[19] Certain benefits, such as small pensions or benefits paid to a beneficiary in lieu of the remainder of a guarantee periods in respect of a deceased pensioner, will be paid as a lump sum. For the purposes of this Actuarial Funding Report, such pensions are projected to be paid as a pension, with no significant effect on the projections.

[20] The calculation of lump sum benefits is to be determined on an actuarially equivalent basis. For the purposes of this Actuarial Funding Report, we have assumed that the actuarial basis corresponds to our projection assumptions.

[21] This Actuarial Funding Report makes several references to the CPP Actuarial Report since the latter allows a degree of insight into the factors that can impact a social security program such as the ORPP. However, an item of information in the CPP Actuarial Report may pertain to all of Canada, to Quebec alone, or to Canada excluding Quebec. There are many situations where the economic and demographic experience of Ontario has differed in the past, and is expected to differ in the future, from that of Canada, Quebec or Canada excluding Quebec. As examples, economic differences can arise because of the varying industrial composition of each province, and differences in fertility rates have been observed between provinces for many years. Therefore, the comparisons herein to the CPP Actuarial Report should be used with careful consideration given to the potential for differences between Ontario and Canada as a whole, Quebec or Canada excluding Quebec.

[22] Ibid. 9.

[23] Ibid. 9.

[24] Source: Statistics Canada. Table 052-0006 Components of Projected Population Growth, by Projection Scenario, Canada, Provinces and Territories, Projection Scenario M1: Medium-Growth, 1991/1992 to 2010/2011 Trends (table). CANSIM. September 2014.

[25] Ibid.

[26] Ibid.

[27] An equivalent rule is applicable to flat dollar plans.

[28] Voluntary and/or optional contributions are not included.

[29] Vida supra, 14 .

[30] Table 5-5 shows the 2012 Adjusted Eligible Earnings reflecting earnings up to $90,000. Subsequent to the extract of the tax data and related analysis, the Government announced that the $90,000 threshold will be established in 2017 dollars and indexed thereafter. In our projections, for years prior to 2017, the $90,000 limit is deflated by average wage increases and, for years after 2017, the $90,000 limit is inflated by average wage increases. However, Table 5-5 shows earnings bands up to $90,000 of 2012 earnings for ease of reference.

[31] Includes tax filers with earned income greater than $0, but for whom all earned income was excluded from 2012 Adjusted Eligible Earnings.

[32] The averages exclude persons with $0 of 2012 Adjusted Eligible Earnings.

[33] Table 5-6 shows the 2012 Adjusted Eligible Earnings reflecting earnings up to $90,000. Subsequent to the extract of the tax data and related analysis, the Government announced that the $90,000 threshold will be established in 2017 dollars and indexed thereafter. In our projections, for years prior to 2017, the $90,000 limit is deflated by average wage increases and, for years after 2017, the $90,000 limit is inflated by average wage increases.

[34a] [34b] Vida supra, 31.

[35] Vida supra, 32.

[36] In Table 5-7, 2012 AEE for each tax filer is limited to $90,000. Average 2012 AEE reflects only Tax Filers with 2012 AEE greater than $0.

[37] Totals of headcounts may not add, due to rounding.

[38] In its simplest form, if we assume that 50% of a particular cohort earns ORPP credits in two consecutive years, there is no difference in our model whether it is the same 50% of the people who earn ORPP credits in each year or if there is a subgroup of people in the cohort who enter and another subgroup who leave the workforce from the first to the second year.

[39] Ontario Ministry of Finance – Ontario Budget 2015: Building Ontario Up.

[40] More conservative assumptions could have been selected, resulting in a higher Sustainability Rate, and possibly an increase in the employer and member contribution rates or a reduction in ORPP benefits. However, if, for example, this resulted in higher contribution rates, there would have been an increased likelihood of future funding excesses, advantaging future plan members to the detriment of the initial plan members. Similarly, more aggressive assumptions could have been selected, resulting in a lower Sustainability Rate. If contribution rates were then lowered, this would increase the likelihood of future funding deficits, potentially transferring costs and risks to future generations. The best-estimate assumptions are intended to develop a fair and balanced assessment of the future expenditures of the ORPP, with equally likely favourable or unfavourable experience unfolding in the future.

[41] Average assumed fertility rates shown; assumed fertility rates vary by year and age.

[42] Overall net migration assumption averages approximately 0.7% of population per year; net migration rates vary by year, age and sex.

[43] The 2012 labour force participation rate was 66.3%.

[44] This is a summary for selected ages and ranges of ages. The detailed age-by-age assumptions are shown in Table A-9 in Appendix A.

[45] Male spouses are assumed to be three years older than female spouses.

[46] Operational cost dollar amounts are shown in 2015 dollars and indexed to price inflation thereafter.

[47] For purposes of this Actuarial Funding Report, the term ORPP participation rate is intended to represent, in aggregate and for each age and sex, the proportion of Ontarians who are projected to be Active Contributors to the ORPP. The 2012 ORPP participation rates were developed from the 2012 tax data on the assumption that the ORPP was effective in 2012.

[48] Working-age population is defined for this table as all Ontarians between the ages of 18 and 69, inclusive.

[49a], [49b] Ontarians are being enrolled in the ORPP in four Implementation Waves (over three years), depending on employer size and whether or not the employer sponsored a registered pension plan on August 11, 2015. For purposes of the projections, eligible Ontarians are projected to enter in three homogenous groups, with the groups comprising 50%, 25%, and 25%, respectively, of the ORPP-eligible members.

[50] The projections have been performed on a cohort-based approach with an important objective being to project the total amounts of contributions remitted by members and their employers. For ease of calculation, the number of Active Contributors, used primarily to determine the operational costs, has been developed on a best-estimate basis assuming that members who are projected to have ORPP-eligible earnings less than the Minimum Earnings Threshold will still make a contribution to the ORPP, since the Minimum Earnings Threshold is determined on a pay-period by pay-period basis. That is, for the purposes of projecting operational costs, we have assumed that all persons with ORPP-eligible earnings will have at least one pay period in the year where their earnings are greater than the Minimum Earnings Threshold. The effect of this simplification on projected operational costs is expected to be minimal.

[51] Contributory Earnings includes Pensionable Earnings above the Minimum Earnings Threshold and up to the Maximum Annual Earnings Threshold. For the determination of the member contributions and employer contributions, the Minimum Earnings Threshold has been applied as though all earnings were earned uniformly over the year.

[52] The projections have been performed on a cohort-based approach with an important objective being to project the total amounts of pensions payable. The number of pensioners has been developed on a best-estimate basis. The same amount of pensions could be projected with a higher average pension amount and lower number of pensioners (and vice versa). Therefore, the projected numbers of pensioners should be considered a broad estimate based on average pension amounts.

[53] The Government has announced that no pension payments are to be made until 2022. For the purposes of this Actuarial Funding Report, the number of pensioners and benefit payments have been projected without any such deferral on the assumption that any deferred payments will become payable at a later date. This simplification does not affect the projections of expenditures, assets or the Assets to Expenditures Ratio for the period after 2021.

[54] A significant reduction in operational costs is projected to occur in 2028 as a result of the assumed decrease in the per capita operational costs per Active Contributor, as specified by the Ministry.

[55] Vida supra, 53.

[56] Vida supra, 54.

[57] Vida supra, 53.

[58] A factor of 25.0 was applied based on the projections in Table 7-6, which showed that, based on a Total Contribution Rate of 3.784% of Contributory Earnings, the Assets to Expenditures Ratio was 25.0 at the end of the projection period.

[59] Since people can immigrate to Ontario at any age, there will be a small percentage of people classified in the Future Cohort who will contribute only for the latter part of their working lives.

[60] The IRRs by entry age are weighted 60% to males and 40% to females, reflecting differences in projected employment patterns and earnings levels between male and female members.

[61] The IRR for each entry age range has been determined at the midpoint of the range.

[62] The pension replacement ratio for each entry age range has been determined, at the midpoint of the range, as the ratio of accrued Pension Benefits (prior to early retirement reductions or postponed retirement increases) over the projected 5-year final average Pensionable Earnings.

[63] The distributions are based on the assumption that a person enters the ORPP in the first year in Ontario after reaching age 18. In practice, some people may be employed in Ontario at age 18 but will not immediately enter the ORPP until a later age because they do not yet have ORPP-eligible income (e.g., because they are self-employed or participate in a Comparable Workplace Pension Plan).

[64] Simplified assumptions are needed since the assumptions used in this Actuarial Funding Report evolve over the course of the projection period. For example, different projection assumptions are applied to a member who enters the plan in 2018 as compared to one who enters in 2028. To allow a consistent assessment of intergenerational equity across all age groups, we adopted simplified assumptions.

[65] Workers who commence their CPP pensions and subsequently have eligible employment income prior to age 65 must make, and after age 65 may elect to make, along with their employers, CPP contributions and the additional pension benefits earned during a year are automatically added to the worker’s CPP pension the following year.

[66] For the purposes of the sensitivity analysis, all fertility rates were decreased or increased by a common factor to achieve the specified change in the total fertility rate.

[67] For the purposes of the sensitivity analysis, all mortality improvement rates were decreased or increased by a common factor (separately for males and females) to achieve the specified change in 2060 life expectancies.

[68] The real rates of investment returns are shown prior to the deduction of assumed investment management expenses.

[69] For the sensitivity analysis, the funding mechanisms to maintain sustainability specified in the ORPP Act have not been reflected. When an actuarial valuation of the ORPP reveals an SCRD outside the ±0.10% of Contributory Earnings threshold, the actions specified in the ORPP Act would be applied to bring the ORPP into balance. Therefore, in the high-cost alternatives, changes could be made to the level of indexation applied to pensions in payment and the Maximum Annual Earnings Threshold and contribution rates could increase. Similarly, in the low-cost alternatives, the contribution rates could decrease and reductions made to the level of indexation applied to pensions in payment and the Maximum Annual Earnings Threshold could be reversed.

[70] Vida supra, 67.

[71] Vida supra, 68.

[72] Vida supra, 69 .

[73] Some would contend that a year with a significantly higher rate of investment return is more likely to be followed by one or more years of lower returns (and vice versa). For the purposes of these scenarios, we assumed for simplicity that any such market corrections occurred within 2050 and the ORPP assets continued to earn the best-estimate rates of return in subsequent years.

[74] Vida supra, 68.

[75] Vida supra, 68.

[76] We have assumed that the ORPP will have its first actuarial valuation effective as at December 31, 2018 and subsequent reviews will occur every three years thereafter. Therefore, the investment experience of 2050 will form part of the actuarial valuation at December 31, 2051, which will have an Actuarial Review Period until December 31, 2054. For purposes of these scenarios, we have assumed that changes to plan provisions, if any, would take effect at January 1, 2055.

[77] The Assets to Expenditures Ratio reflecting the changes to plan provisions does not completely level off because the SCRD is -0.09% of Contributory Earnings after the changes to plan provisions.

[78] Mortality rates at the selected ages and years were not displayed in the CPP Actuarial Report, but the amounts were available in the supporting data tables for Table 38 of the CPP Actuarial Report.

[79a], [79b], [79c], [79d] Vida supra, 78.

[80a], [80b], [80c], [80d] Life expectancies at the selected years were not displayed in the CPP Actuarial Report, but the amounts were available in the supporting data tables for Table 40 of the CPP Actuarial Report.

[81a], [81b] The workforce participation assumption is only required starting from January 1, 2018, the effective date of the ORPP.

[82a], [82b], [82c] Table A-10 compares Ontario price inflation in the Ministry Economic Projection, the C4SE Forecast and the CBoC Forecast and Canadian price inflation in the CPP Actuarial Report. For purposes of this Actuarial Funding Report, the projection assumption for price inflation is assumed to be the same for Ontario and Canada.

[83a], [83b], [83c] Table A-11 compares Ontario real wage growth rates in the Ministry Economic Projection, the C4SE Forecast and the CBoC Forecast and Canadian real wage growth rates in the CPP Actuarial Report. For purposes of this Actuarial Funding Report, the projection assumption for real wage growth is assumed to be the same for Ontario and Canada.

[84] Following consultation with the Ministry, for purposes of this Actuarial Funding Report, the Maximum Annual Earnings Threshold is assumed to increase at 100% of changes in average wage.

[85] Employers that had initiated steps to sponsor a registered pension plan by August 11, 2015 are included in Wave 4 instead of Wave 1, Wave 2 or Wave 3.

[86] Following consultation with the Ministry, for purposes of this Actuarial Funding Report, the early retirement reduction is assumed to be 6.0% for each year, or fraction thereof, that the member’s retirement age is less than age 65 and the postponed retirement increase is assumed to be 7.2% for each year, or fraction thereof, that the member’s retirement age is greater than age 65.

[87] Following consultation with the Ministry, for purposes of this Actuarial Funding Report, the reduction for electing the joint life and survivor optional form of pension is assumed to be 8.0%.

[88] Following consultation with the Ministry, for purposes of this Actuarial Funding Report, the annual increase in pensions is assumed to be 100% of changes in the Consumers Price Index for Canada.