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THE CONTEXT OF THE EVALUATION

The CPP was designed to complement other components of the public and private pension system. Its role and objectives, and the issues involved, cannot be isolated from those of the overall system. Annex A gives further explanation.

THE SCOPE OF THE EVALUATION

The system-related issues and socio-economic environment issues surrounding the CPP are too broad and complex for the evaluation to address them all adequately. Consequently it will focus on a sub-set of questions chosen to reflect major concerns raised in the literature, in discussions with Health and Welfare officials, and in the legislative process for Bill C-39.

To give quicker access to the evaluation's analysis and conclusions, and to give flexibility for including other issues which may arise during the analysis, it is proposed that the evaluation be conducted in three Phases. Phase I will deal with Pensions and Funding, Phase II with Ancillary Benefits and with any other issues which emerge during Phase I and Phase III will deal with Communications. Phase III will be conducted separate from but not necessarily subsequent to Phase I and II.

Phase I: Pensions and Funding

Part A: The Pen CPP Retirement Pension

1. What proportion of the gross and net income of retirees comes from CPP?
2. What earnings replacement rates are provided by CPP retirement pensions alone, and by the public pension system as a whole?

Part B: Contributions and Funding

1. Is a compulsory and contributory CPP still warranted in the changes and changing system of public and private pensions?
2. Does the CPP fund fulfil its intended role? Is it important or desirable for the CPP fund to maximize interest income in the same manner as private pension funds?
3. Are inter-generational transfers through CPP justifiable?
4. Do projected future increases in contribution rates and benefit payouts threaten the affordability of CPP in its current form?
5. Do demographic, fiscal and economic concerns about the future argue for changing the manner in which CPP is funded? What messages need be sent to Canadians about the role and viability of CPP?

Phase II: Ancillary Benefits and Other Issues

1. Should CPP provide disability benefits? If so, are current eligibility criteria appropriate? Is the definition of disability applied in a consistent and equitable manner? Do current provisions support rehabilitation and return to the labour force?
2. Should CPP provide survivor benefits? If so, are current provisions appropriate?
3. How do credit-splitting provisions, child-rearing and other drop-out provisions, and interactions among them affect benefits and earnings replacement rates? What are the implications of mandatory credit-splitting for retirement pensions, and for survivor and disability benefits?
4. Other specific issues which may emerge during Phase I.

Phase III: Communications

1. To what degree are people adequately informed about CPP's ancillary benefits?

METHODOLOGY

The evaluation will make use of the following general methodologies:

1. review of professional journals; departmental and other analyses, policy documents and reports, and Parliamentary debates;
2. consultations with departmental staff, and staff of other federal departments and agencies;
3. analysis of currently available data and statistics on cost, contributors and beneficiaries, and the economic and demographic assumptions on which they are based;
4. initiation and analysis of additional statistical estimates which are necessary to address the evaluation questions, and which can be readily provided by federal departments and agencies;
5. analysis of linkages among CPP, seniors transfer programs, the tax system facing contributors and pensioners, the private pension system, and other savings vehicles;
6. comparative analysis of current and alternative funding methods.

Further details on evaluation questions and methodology are attached as Annex B.

EVALUATION TEAM

The evaluation will be conducted by Program Audit and Review Directorate (PARD) with input from Income Security Programs (ISP) Branch and the Office of the Superintendent of Financial Institutions (OSFI), in consultation with the Program Policy and Information (PPI) Branch (and the Departments of Finance, Revenue and Statistics Canada if and as necessary). The evaluation team will be assisted by contracted expertise as necessary. The team will report to the Director of Program Evaluation. The evaluation will be guided by a Steering Committee made up of the Director-General of PARD, the Director-General of Income Security Policy and the Director-General of the CPP.

WORKPLAN

Assuming easy access to necessary data and statistics, it is proposed that a Draft Report on Phase I will be completed in ten months or less from approval of Terms of Reference and contracting of necessary expertise. Any amendments to these Terms of Reference needed for Phase II will be submitted to the Steering Committee on (or before) completion of the Draft Report for Phase I.

Assuming no amendments to these Terms of Reference for Phase II, a Draft Report on Phase II will be completed in eight months or less from submission of the Phase I Draft Report.

The Methodology for Phase III will be developed in consultation with the Program Branch. A detailed Methodology and projected costs for Phase III will be presented to the Steering Committee in six weeks or less from approval of this Terms of Reference.

Phase I will require eight person-months from PARD, two from ISP, one from OSFI, $20,000 for administrative costs, $1,000 to $10,000 for possible data runs by Statistics Canada (depending on input available from PPI), and $100,000 to $160,000 for contracted expertise (total $121,000 to $190,000). Assuming no major 'other issues' emerge for Question 4 of Phase II, Phase II will require six person-months from PARD, one person-month from ISP, one person-month from OSFI, $20,000 for administrative cost, $1,000 to $6,000 for possible data runs by Statistics Canada, and $80,000 to $128,000 for contracted expertise (total $101,000 to $154,000).

PROGRESS REPORTS

The evaluation team will submit written progress reports to the Steering Committee on a bi-monthly basis.

APPROVAL

_______________________________ Date
R.J. Allen
Director-General, PARD

_______________________________ Date
Monique Plante
Assistant Deputy Minister, ISP

_______________________________ Date
Francois Pouliot
Senior Assistant Deputy Minister, NHW

ANNEX A: CONTEXT AND PERSPECTIVE

The CPP has its own highly specific objectives, such as earnings replacement equal to 25% of average career earnings to the Years Maximum Pensionable earnings (YMPE). Most of these objectives are automatically fulfilled because they are embedded in the very design of the Plan.

But the CPP originally was designed to complement the OAS program as it then existed; not unduly to encroach upon the role of private pension vehicles as they then existed, and to leave room for future expansion of private pension vehicles. These identify the Plan's intended role in the overall retirement income system, and link that role to how the combination of pension and saving vehicles satisfy the broader objectives of the system as a whole. The role and appropriate design of the CPP, of its component benefits, and of the funding mechanism, are 'objectives' of CPP which depend upon the functioning of the system within which it operates. They may alter or their relative importance may change if other parts of the system change, and if the other parts surpass or fall short of what was anticipated or intended.

Furthermore, the anticipations and intentions for the CPP specifically and the retirement system in general were developed within economic, social and fiscal environments prevailing at the time. These environments too have changed. The global economic environments may have created more uncertainty about what the future holds in store. The role of women and their numbers in the work force have changed the social environment. The Charter of Rights and Freedoms has changed the legal environment. These environmental changes may impact directly on the role and objectives of the CPP, or indirectly via their effect on the performance of other parts of the retirement system. The implications of the indirect impacts for CPP's role and objectives may support the implications of the indirect impacts, or may counter them.

Last but not least, fiscal and economic and demographic factors seem to have created an underlying uncertainty in society about whether CPP's 'pension promise' will be honoured when current contributors reach retirement. For it to be honoured, at least under the current funding arrangements, future generations must be willing and able to pay the promised benefits. Willingness and ability depend not simply on the number of CPP dollars to be collected from and paid out to future generations, but also on the total socio-economic legacy they inherit. If major CPP changes were to be considered, a broad question is whether alternative arrangements would leave future generations with a better or worse legacy. This involves complex issues such as how the alternatives would affect economic growth, other transfer payments, and total government debt.

ANNEX B : DATAILS ON METHODOLOGY

Meetings with Officials

The evaluation will solicit views and information pertinent to the evaluation questions from interviews with officials in:

- NHW: ISP, PPI, Seniors' Secretariat

- OSFI

- The Regie des Rentes

- Other departments (e.g. Finance, National Revenue and Statistics Canada) and other organisations as necessary and advisable

Collecting Data and Information

To supplement the data and information now readily available within NHW, in the literature, and in government studies and publications, the evaluation as necessary will seek the cooperation of:

- ISP for additional program data

- PPI for tabulations using the Survey of Consumer Finances (SCF) and other surveys

- PPI for system structural analysis using the Modular Analysis Package for Systems of Income Transfer (MAPSIT) and the Lifetime Pension Policy Simulation model (LIPPS)

- OSFI for benefits and contribution rates under alternative economic and demographic and program design assumptions and sensitivities

Analytical Methodology by Evaluation Question (Phase I: Pensions and Funding)

A: The CPP Retirement Pension

1. Analysis of Program data, data from SCF and other surveys, data on private pensions and RRSPs, and supplementary data in the literature.
2. Analysis of the literature, survey data, system structure (MAPSIT) and behavioral life-cycle sensitivities (LIPPS)

B: Contributions and Funding

1. Consolidation and integration of A.1 and A.2, and located in broader economic and public/private pension system contexts.
2. Analysis of actual/potential perceptions (or misperceptions) about the nature and purpose of the fund and funding mechanism and their implications; of the sensitivity of costs and contributions to interest rates, and of differences in the nature and role of the public sector and private sector pension systems.
3. Analysis of the sensitivity of projected gross CPP contribution rates to alternative assumptions about economic and demographic variables and private savings/pension plans; the implications for net (post-tax and post-transfer) benefits and contributions, and relative to broader criteria such as GNP and economic growth.
4. Consoliation and integration of B.2, B.3 and B.4, with comparative analysis of the financial, fiscal, economic and intergovernmental implications of alternative funding formulas and methods.

Methodological details for the analysis of evaluation questions in Phase II (Ancillary Benefits and Other Issues) and Phase III (Communications) will be developed during Phase I and submitted to the Steering Committee.