5 things Canadians need to know about relying on CPP

#1. Current performance and reliance on CPP

With $632.3 billion in assets as of its 2024 fiscal year-end, the CPP achieved an 8% annual return, driven primarily by gains in private equity and global equities. This growth exceeded initial projections, offering a sense of stability to Canadians who depend on the CPP for part or all of their retirement income. According to recent data, released on October 30 by CPP Investments, 73% of Canadians rely on the CPP to supplement their retirement income, underscoring the plan's role as a critical safety net for a large portion of the population.

As a result, investment professionals and pension experts have criticized the CPP’s active management approach — stating it may actually be generating suboptimal returns. A comparison to passive investment strategies, such as index-linked exchange-traded funds (ETFs), suggests that a different strategy could potentially result in higher returns. Some analysts have pointed out that a passive benchmark portfolio of global equities and bonds achieved nearly double the CPP’s annual return, highlighting a missed opportunity that may contribute to Canadians’ anxiety about the plan’s ability to support them throughout retirement.

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#2. Asset allocation and performance challenges

The CPP’s returns largely come from private equity investments, which provided a 13.9% return, with substantial contributions from US technology stocks. Public equities returned 8.4%, while infrastructure investments yielded 5.9%. However, government bonds, an asset class traditionally viewed as secure, contributed only a marginal 0.3% to the portfolio’s returns. In terms of geographic performance, the United States provided the highest regional returns at 8.9%, followed by Latin America at 7.7%, while Canadian investments returned a modest 4.2%.

While this diversified strategy has helped the fund achieve notable growth, the relatively low returns from Canadian assets and certain other asset classes raise concerns about the CPP’s effectiveness in generating robust, consistent returns for Canadian retirees. Given that most Canadians rely on the CPP as a core component of their retirement income, underperformance in certain asset classes could directly impact their financial security.

#3. Underwhelming results and missed opportunities

Despite its solid 8% return, the CPP’s active management strategy has faced criticism for its missed potential. Since adopting an active management approach in 2006, the CPP’s returns have resulted in a negative 0.1% annualized “opportunity loss,” amounting to approximately $42.7 billion in unrealized gains. This shortfall fuels concerns about the fund’s management approach and the potential benefits of a shift to a passive, index-based strategy that may yield higher returns with lower fees and risk.

This underperformance has substantial implications for the 73% of Canadians relying on the CPP, especially those without other significant sources of retirement income. With life expectancy in Canada now averaging around 82 years, the need for sustainable and dependable retirement income has never been greater. Many Canadians fear that an 8% return, while positive, may not be enough to cover escalating retirement costs over several decades.

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#4. Retirement anxiety and public sentiment

The reliance on the CPP among Canadian retirees highlights a significant issue: With many Canadians lacking private pensions or robust personal savings, they are particularly dependent on the CPP to maintain their standard of living in retirement. A recent survey shows that 61% of Canadians worry about outliving their retirement savings, with the highest levels of concern reported among younger adults and women. This anxiety reflects broader uncertainties about the CPP’s ability to continue generating returns that meet the evolving needs of retirees.

Public sentiment on CPP is mixed. Many Canadians recognize its role in providing financial stability but also feel apprehensive about whether it will be sufficient in the face of rising costs and a potentially volatile global market. These fears are exacerbated by the perception that more stable, passive investment strategies could have led to stronger returns and better long-term results.

#5. Strengthening retirement security beyond the CPP

For Canadians heavily reliant on the CPP, diversifying retirement income sources can help mitigate the risks associated with fluctuating investment returns. Experts recommend building additional savings through Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs), which can provide supplementary income in retirement. A balanced approach that combines CPP with personal investments and savings can help reduce over-reliance on any single source of income.

Some financial analysts advocate for the CPP Investment Board to reconsider its strategy and consider passive investment models, which have consistently higher returns in comparable benchmarks. Shifting to a passive model could help Canadians achieve stronger growth from their contributions, providing a more reliable foundation for retirement security.

Bottom line

The Canada Pension Plan remains a critical element of retirement income for 73% of Canadians. However, its active management approach and an 8% annual return raise questions about its sufficiency in securing Canadians’ financial futures. As living costs and life expectancy rise, enhancing financial security will require a combination of prudent savings strategies, diversified investment portfolios and potentially a reevaluation of the CPP’s investment approach to better align with Canadians’ long-term retirement needs.

Sources

1. CPP Investments: Canadians fear running out of money in retirement, but there are ways to ease that anxiety (October 30, 2024)