Actuarial report of the Québec Pension Plan as at 31 December 2003
Summary
1. Presentation of the actuarial report
The Régie des rentes du Québec must cause to be prepared at least once every three years an actuarial report on the Québec Pension Plan. The actuarial report contains projections of the Plan's cash inflows and outflows and their effect on the long-term accumulation of the Plan's reserve. Based on the methodology and assumptions made, the projection of the reserve over 50 years that is contained in this report enables us to assess the long-term sufficiency of the Plan's fund and the stability of Plan funding.
This report, as at 31 December 2003 is the third regular report since the 1998 Plan reform. The reform brought in a rapid increase of the contribution rate, which has increased from 6,0 in 1997 to 9,9% in 2003. In accordance with the Act respecting the Québec Pension Plan, this rate will remain constant in the years to come.
2. Principal results
a) Population projection
The Québec population will grow from 7,5 million in 2004 to 8,2 million in 2030 and decline thereafter to 7,9 million in 2055. The ratio of the population aged 20 to 64 to the population aged 65 and over is an approximate indication of the ratio of the number of workers to retirees, which is an important factor in Plan funding. Because of population aging, the ratio changes quickly, from 4,7 in 2004 to 2,2 in 2030. It decreases more slowly thereafter, reaching 1,9 in 2055.
b) Projection of cash inflows and outflows
Contributions and investment income make up the Plan's cash inflows. Cash outflows are made up of the benefits paid out and administration costs. The projection of contributions and benefits is summarized below.
The number of contributors will increase from 3,6 million in 2004 to almost 4,0 million in 2020 and drop slightly thereafter. Total contributions will increase from 8,3 billion $ in 2004 to 11,0 billion $ in 2020 (in 2004 constant dollars). Thereafter, the pace of increase in contributions will slow, reaching 16,0 billion $ in 2055.
From 1,1 million in 2004,the number of people receiving a retirement pension will double between now and 2025 because of population aging and the rapid growth in the number of women entitled to a retirement pension. Thereafter, the number of beneficiaries will increase more slowly, levelling off at2,5 million as of 2040. Total benefits (including disability and survivors' benefits) will grow from 7,5 billion $ in 2004 to 13,3 billion $ in 2025 and to 20,1 billion $ in 2055 (in 2004 constant dollars).
c) Projection of the reserve
The ratio of the reserve at the end of one year to the cash outflows for the following year, serves to monitor the relative size of the reserve. As at 31 December 2003, the reserve represents 2,5 times the cash outflows of the following year. Based on the assumptions used for this report, contributions are greater than cash outflows between 2004 and 2014, which will make it possible to rapidly increase the reserve. As of 2015, investment income from the reserve will be used to fund the expected cash outflows, after all contribution income has been applied.
In 2020, the reserve will reach a level of 3,9 times the cash outflows of the following year. Thereafter, due primarily to the growing number of retirees, this ratio will decrease, because the reserve increases less rapidly than the cash outflows. Investment income will be used to bridge the gap between income from contributions and cash outflows until 2042.
At that time, the investment income added to contributions becomes insufficient to fund cash outflows, and therefore the reserve begins to gradually decline. Beginning in 2043, these withdrawals from the reserve accelerate the narrowing of the ratio between the reserve and cash outflows. At the end of the projection period, the reserve falls to 0,8 times the annual cash outflows.
d) Monitoring the Plan financial situation
As indicated in the October 2003 working paper, Adapting the Pension Plan to Québec's New Realities, two indicators help to monitor the Plan's funding situation. The first, which is the ratio of the reserve at the end of one year to the cash outflows for the following year, indicates if the Plan's funds are sufficient, based on a contribution rate of 9,9%. The funding situation requiresparticular attention if, over the projection period, the reserve falls below the minimum level targeted prior to the 1998 reform, that is, twice the annual cash outflows. This report indicates such a result.
The second indicator is the steady-state contribution rate, which is used to determine the Plan's long-term funding stability. This indicator is the contribution rate for future years that would be required to maintain a constant ratio of the reserve to annual cash outflows over the long term.
The steady-state contribution rate is an indicator of the "ideal" state of the Plan's funding. In reality, it is not necessary for the Plan to be perfectly balanced. A difference of 0,3 percentage point between the actual contribution rate set by law and the steady-state rate can be tolerated without making an adjustment to the Plan necessary. A larger difference may warrant changes to the Plan, strictly from a funding perspective. However, to be certain that such a difference will persist, it must be noted in two consecutive triennial actuarial reports. The consultation that is required by law every six years since the 1998 reform would therefore provide an opportunity to discuss the measures necessary to restore balance to the Plan's funding.
The steady-state contribution rate calculated in this report is 10,3%, a difference of 0,4 percentage point compared to the 9,9% contribution rate.The rate is higher than the 10,1% calculated on the basis of the results from the previous actuarial report. This difference is attributable in large part to a negative return on reserve investments in 2001 and 2002 and an upward adjustment in life expectancy of beneficiaries.
Conclusion
This actuarial report shows that the contribution rate of 9,9% that is prescribed in the Act respecting the Québec Pension Plan, is sufficient to pay future benefits until 2055. In spite of the substantial increase in benefits paid, resulting from the aging of the population, the Plan will be able to meet its commitments throughout the projection period.
The 9,9% contribution rate, however, does not ensure stable funding of the Plan over the long term. In fact, the projection shows an eventual depletion of the reserve. If no change to contributions and benefits is introduced before then, this depletion will require future generations to assume a contribution rate of approximately 12,5% beyond 2055.
The projected reserve therefore drops below the minimum level, that is, twice the annual cash outflows, before the end of the projection period. Furthermore, the difference between the steady-state contribution rate and the prescribed contribution rate of 9,9% is greater than 0,3 percentage point. The results of this analysis therefore constitute a signal of possible future changes to the Plan, given its funding situation. These results, however, show a much less problematic situation than the one anticipated before the 1998 reform, which made it possible to ensure the Plan's sustainability.
To access the documents (all of which are in French only):
Régie des rentes du Québec
December 2004