In a nutshell: The combination CPPIB investment strategy changes from passive to active, potentially higher effective future taxes, less transparency in CPP asset valuation due to growing proportion of private (company and real estate) vs. public investments, uncertainty of actuarial forecasts and, should circumstances demand it, government’s ability to change CPP (target) benefits, drove my decision to take CPP at 65, rather than 70. Too many unknown factors all potentially exposing one to downside risk, with very limited upside possibilities. And, those who doubt that government pension benefits can be reduced should reflect upon the recently announced OAS changes or discuss this possibility with the citizens of Greece!

The details

For healthy individuals, I’ve been arguing for delaying the start of CPP as long as feasible financially since this is one of the only available inflation indexed longevity insurance options available for Canadians. Last night, I was having beer and pizza with ex-Nortel friends, and one of them asked if I am still advocating delaying CPP as late as possible, and I realized that I didn’t update my blog readers about my change of heart on the subject and that I received this month my first CPP deposit.

So you might reasonably ask, why did I decide to take CPP at 65? The decision was based on series of individual qualitative and quantitative considerations, none of which by itself sufficient to drive the decision, but altogether they pushed me over the top.

In May we heard in “CPP Fund reports 6.6% return, record assets despite volatile markets” that “CPPIB’s assets are projected to reach $275-billion by 2020, and almost $500-billion two decades later”, “fiscal 2012 performance of the fund benefitted from our active management programs and private market holdings, which are less sensitive to the excessive volatility experienced by the public equity markets”, “CPPIB participated in 60 private transactions during the year, which included deals in private equity, infrastructure, real estate and private debt”, “The CPP fund’s 10-year annualized nominal rate of return, at 6.2%, is above the 4% prospective real rate of return that the Chief Actuary has incorporated in his latest report confirming the sustainability of the CPP” and  “it will be nine years before a portion of the fund’s investment income will be needed to help pay pensions”. As a confirmation of the growing private vs.public investment strategy, this week the Globe and Mail’s “CPPIB in deal for U.S. cable company” reported that the CPPIB was doing another private buyout with partners of a US cable company for $6.6B from a consortium led by Goldman Sachs.

So let me count the considerations that, cumulatively drove me to this personal decision (may not apply to your circumstances or risk assessment):

-CPP size is getting to be quite large and Canadians have a lot of eggs in this one basket ($275B in 2020, $500B in2040)

-CPPIB switched from passive to active investing (which has higher investment management costs and an unkind history of being unable to sustainably even cover additional trading and management fees). By the way, CPP all-in-costs of over 1%, are not low, considering that one can run one’s own passive portfolio comfortably for about 0.3% (see Is the CPP low cost? No it’s not, but its existence can enable ultra-low-cost expanded-CPP or PRPP)

-over that past years CPPIB appears to have switched from essentially public to a growing percentage of private investments (which are not only less liquid, but more importantly, have lower transparency and more discretion in valuing assets compared to investments traded in public markets)

-the CPPIB assumes a 4% real return (after all-in-costs, I assume) on investment in support of its argument that it is fully capable of meeting future obligations (but 4% real return after over 1% all-in-costs is not a cakewalk for a large and growing fund given current low return environment for fixed income and equity investments)

-CPP is really a target benefit rather than a defined benefit plan: it is not pre-funded plan but pay-as-you-go plan where benefits are paid from a combination of in-year CPP contributions and accumulated plan assets (current forecast is that CPP payouts will exceed new contributions in 2021, and once that happens, in case of a market swoon, the pressure to reduce benefits to reflect lower asset base might become irresistible)

-as a target benefit plan, the government has the right to change (increase) CPP contribution rates (already done so in the past when it increased contribution rate from just over 6% to 9.9%) and/or change (reduce) benefits at any time, much the same way as it has recently done so for OAS by delaying start from age 65 to 67 (Note: I am not arguing that, in order to preserve some semblance of cross-generational equity, it is inappropriate to increase pension eligibility age with increasing longevity)

-actuaries won’t take it as a sign of disrespect if I indicate some skepticism about actuarial assumption/forecasts/assurances given that I am a Nortel pensioner who suffered the consequences ‘unexpected’ appearance of a 41% hole in the funded status of my pension. Furthermore, there was the ‘unexpected’ discovery that the demographics driven OAS costs are rising dramatically (you’d think the Boomer demographics would have been known for a few years). Then hearing that the CPPIB actuary assumes 4% real return after expenses in excess of 1% and that CPP contributions will exceed benefits until 2021, while the government is trying to encourage Canadians to delay start of CPP with a combination of incentives/disincentives for later/earlier than 65 CPP start, makes me even more uneasy. So put me down as cautious and skeptical on any actuarial declarations.

-Canadian taxes, while not low compared to many other jurisdictions, are lower now than in the 90s, so there is no guarantee that future taxes will not return to or exceed previous highs by changes to tax rates, brackets, and/or (OAS or other) claw-backs. For example, despite the announced delay in OAS start age, there has been no corresponding announcement on delaying required RRSP-to-RRIF conversion age or reducing required compulsory minimum RRIF withdrawals; yet there has been discussion about potential reduction income level where OAS claw-backs kick in.

All in all, there are far too many unknown factors all potentially exposing one to downside risk, with very limited upside possibilities. The combination CPPIB investment strategy changes from passive to active, potentially higher effective future taxes, less transparency in CPP asset valuation due to growing proportion of private (corporate and real estate) rather than public investments, the inherent uncertainty of actuarial forecasts and government’s ability to change CPP (target) benefits should circumstances demand it, all drove my decision to take CPP at 65, rather than 70. Those who doubt that government pension benefits can be reduced should consider the recently announced OAS changes or discuss it with the citizens of Greece!

P.S. (Added August 9, 2012): Another reason was the non-transferability of enhanced benefit, resulting from delayed start of CPP beyond age 65,to surving spouse.