- Should Canadians be concerned about their CPP pensions?
Canadians’ CPP pensions are not at risk and Canadians should not be concerned about their CPP pensions. Canada’s Chief Actuary stated in his latest report in October 2009 that the CPP Fund is sustainable throughout the 75-year period of his report. In May 2009, the finance ministers of Canada announced at the conclusion of the Triennial Review that the CPP is financially sound.
Despite the recent unprecedented market downturn, we remain confident that our investment strategy will deliver the returns required to help sustain the plan for decades and generations. The CPP Fund is broadly diversified and designed for a long investment horizon and multi-generational mandate.
The $127.6 billion portfolio is not being used to help pay pensions today. In fact, it will be another 11 years before even a small portion of the CPP Fund’s investment income will be needed to help pay pensions in 2021.
Beyond that time, the CPP Fund will continue to grow for decades to come.
- What is the projected growth of the CPP Fund?
The CPP Fund is expected to grow significantly between now and 2021. Canada’s Chief Actuary estimates the CPP Fund will grow to approximately $275 billion over the next decade. Beyond this time, it will continue to grow, but at a slower rate, as a small portion of the investment income will be needed to help pay pensions. By increasing the long-term value of funds available to the CPP, the CPP Investment Board will help the plan to keep its pension promise to Canadians.
- Do the year-end results for fiscal 2010 impact the long-term sustainability of the CPP?
At the end of fiscal 2010, the CPP Fund totaled $127.6 billion, reflecting one of its highest ever returns at 14.9% or $16.2 billion in investment income. When combined with excess contributions of $6.1 billion, this resulted in a $22.1 billion increase from the previous year.
As a long-term investor, the CPPIB focuses on five- and 10-year returns which align with our approach to manage the CPP Fund for decades and generations. For the five-year period ending March 31, 2010, the CPP Fund generated an annualized rate of return of 4.0 per cent, or $18.5 billion of investment income. For the 10-year period, the Fund had an annualized rate of return of 5.5 per cent, or $39.3 billion of investment income.
Our strategy and portfolio are designed to deliver the long-term real rate of return designed to help sustain the CPP as constituted. Our returns should be viewed within the context of our long-term strategy. While it is certainly important to report on, and pay attention to, quarterly and annual results, we see our primary role as focusing on investment activities with longer-term performance. What matters most is how the CPP Fund performs over the span of multiple years and decades.
- Given the recent financial crisis, have you made changes to your investment strategy?
No, we have maintained our long-term investment strategy and the strategic asset weightings for the portfolio. In October 2009, the board of directors and senior management reaffirmed the investment strategy and we continue to capitalize on our comparative advantages and to build internal capabilities to execute on this strategy.
The $127.6 billion CPP Fund is broadly diversified and structured to help secure Canadians’ CPP pensions over the long-term and the funding structure of the CPP.
- At $127.6 billion in assets, is the CPP Investment Board now the largest single-purpose pension fund in Canada?
Yes. We are the largest single-purpose pension fund in Canada. In fact, the CPP Investment Board is one of the largest and fastest-growing single-purpose pools of assets anywhere in the world.
- How does the CPP Investment Board measure its performance?
Our most relevant yardstick is our benchmark – the CPP Reference Portfolio – to measure performance for the overall CPP Fund. We seek to generate value-added returns above this benchmark over the long term. The CPP Reference Portfolio is made up of six broad market indices that embody the long-term investment objectives and associated risk that were envisioned by the CPP stewards at the time of the CPP reforms in 1997. This model portfolio is approved by the board of directors for accountability and measurement purposes only and does not act as a target portfolio for the actual CPP Fund.
As a long-term investor, the CPPIB also focuses on five- and 10-year returns which align with our approach to manage the CPP Fund for decades and generations. For the five-year period ending March 31, 2010, the CPP Fund generated an annualized rate of return of 4.0 per cent, or $18.5 billion of investment income. For the 10-year period, the Fund had an annualized rate of return of 5.5 per cent, or $39.3 billion of investment income.
- What rate of return is necessary to maintain the sustainability of the Canada Pension Plan for generations to come?
The CPP Fund, which was successfully reformed in 1996–1997, is sustainable.
In fact, in October 2009, Canada's Chief Actuary reaffirmed that the CPP is sustainable throughout the 75-year timeframe of his report.
According to the Chief Actuary, the CPP Fund needs a real rate of return – that’s return after inflation – of 4.2 per cent, over the 75-year projection period in his report, to help sustain the plan at the current contribution rate.
- Should Canadians be concerned that the five- and 10-year returns are below the annualized 4.2% real rate of return projected by Canada’s Chief Actuary to sustain the CPP Fund?
These returns should be viewed in the context of the overall performance of major global financial markets. Our 10-year returns took place during the worst decade of equity performance in the more than 200 years of recorded capital market history.
Looking back further, however, during the past 25 years, the CPP Reference Portfolio (which serves as a market-based benchmark for the Fund) outperformed the 4.2% threshold on a rolling 10-year basis in every year except calendar 2008 and 2009.
Given our long-term view, we remain confident that we will meet and exceed the 4.2% rate of return over the 75-year period of the Chief Actuary’s projection.
- Why does the CPP Investment Board not use specific asset allocations?
In order to meet our value-added investment objectives, we focus primarily on the long-term performance of the total portfolio rather than the performance of isolated asset classes or individual investment departments. We call this the Total Portfolio Approach.
Under this approach, we do not target specific dollar or percentage allocations for individual asset classes. Rather, we assess each investment according to its underlying risk/return attributes or “economic exposures.” Active investments, such as real estate, infrastructure, private equity and private debt are made only if we are confident that their risk/return characteristics will outperform the assets that must be sold to fund the investments. This approach leads us to make decisions in the context of the characteristics and performance of the total fund, hence the name Total Portfolio Approach. We believe this promotes better investment decision-making.
- Why doesn’t the CPPIB use a currency hedging strategy to protect foreign investment gains from a strong Canadian dollar?
As a long-term investor, we have chosen not to hedge currency. We expect there will be sharp movements in currency values in any 12-month period, as the last two years show us. However, historical data and our own research indicate that currency movements balance out over longer periods of time, and as such, the costs associated with currency hedging are not justified. Therefore, we do not hedge currency, as we believe that currency losses and gains even out over time. We only hedge currency with foreign sovereign bonds.
- What proportion of the assets is invested in stocks?
Public equities make up 43.2 per cent of the CPP Fund. Our current asset mix is as follows:
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Public equities:
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43.2%
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Private equities:
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12.5%
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Fixed Income:
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30.8%
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Inflation-sensitive assets:
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13.5%
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- How would you summarize CPPIB’s investment activities in fiscal 2010?
The defining themes for CPPIB’s investment activities this year were our ability to capitalize on a number of significant investment opportunities and the flexibility to maintain our strategic asset weightings including 65% in equities.
CPPIB is increasingly being viewed as a leading global investor with the capital and internal expertise to invest alongside top-tier partners. This is evident in the size and complexity of investments – across all regions of the world – that we completed during the year.
- Why don't you invest only in Canada to create economic growth and jobs?
Our mandate is to help sustain the future pensions of 17 million CPP contributors and beneficiaries and by maximizing returns without undue risk of loss.
With approximately 43% of our portfolio (or $54.9 billion) invested in Canada, we will always have a large part of the fund invested here but we do not want to be overly dependent on the strength of the Canadian economy and so are systematically looking for opportunities to diversify internationally. But portfolio diversification by asset class and by geography is a fundamental part of the CPP Investment Board’s long-term investment strategy.
Over time, we will be investing a higher proportion of the Fund in international investments to further diversify the CPP Fund. A strategy that invests predominantly in Canada would not be in the best interests of CPP contributors and beneficiaries. First, it is important to diversify risk exposure beyond the relatively small Canadian economy. Second, greater global diversification allows income from foreign investments to flow back into Canada to support our future pension payments. Third, there are attractive economic sectors available globally that are small in Canada, such as the pharmaceutical industry, computers and branded consumer products. These sectors help to diversify the assets.
- Is the CPP Investment Board really independent of government?
Yes. We were created to operate at arm's length from governments and to make independent investment decisions. As enshrined in the Canada Pension Plan Investment Board Act, the board of directors approves our investment policies and management makes investment decisions consistent with the approved policies. Management is accountable to the board of directors of the CPP Investment Board.
However, as a Crown corporation, we are accountable to the federal and provincial finance ministers, who are responsible for the Canada Pension Plan.
In the event a politician were to try to influence our investment decision making, we would remind the individual, in writing, of the CPP Investment Board's arm's length relationship to government and the political process. Further, the incident would be reported to our board of directors for review and action if warranted
- Why don't you use positive or negative screens when making investment decisions?
We believe that screening increases portfolio risk and diminishes returns over time. As a result, our approach to responsible investing focuses on engagement, not screening.
Engagement is widely recognized as an effective strategy for large institutional investors with long-term investment horizons. In general, engagement refers to the use of our ownership position in some 2,900 companies to encourage improved performance on and disclosure of environmental, social and governance (ESG) factors. We do this by exercising our proxies, by joining coalitions of like-minded investors and through direct contact with companies.
We believe engagement on ESG factors is more effective in the long term than screening. This is consistent with the approach taken by European institutional investors.
Many issues pertaining to responsible investing relate to the ownership of publicly-traded equities. Our positive public equity holdings tend to replicate major market indexes. This approach enables the CPP Investment Board to invest large sums of capital in diverse business sectors in Canada and internationally in an efficient and cost-effective manner.
- What are your three core focus areas for PRI?
In March 2007, we identified three areas of focus for our engagement program: the extractive industries (oil, gas and mining), climate change, and management compensation.
These areas have significant potential to affect the long-term value of our portfolio.
- Extractive industries make up a large proportion of our portfolio and typically deal with a number of ESG issues.
- Climate change is an issue with a long time frame, well suited to a long-term investor like us. We believe that there are significant economic benefits to be derived by companies managing risks in an increasing regulatory environment.
- Management compensation related to shareholder value creation is critical to good governance.
- How does your Policy on Responsible Investing compare with that of other large investors in Canada?
We have adopted a fiduciary investment approach to ESG issues, focused on engagement, based in part on leading practices in Canada and globally. We are one of the early adopters of this approach in Canada.
Our approach is consistent with our mandate, investment objectives and fiduciary obligations.
We have been recognized by the UN Principles for Responsible Investment for our Policy on Responsible Investing and reports published by the Social Investment Organization in Canada credit us with having a progressive approach to responsible investing that reflects our fiduciary duty and investment mandate.
In addition, we want to learn from, and work with, other leaders in this field, including like-minded investors.
For more information about our Policy on Responsible Investing, please visit the Responsible Investing section.
- Different groups of Canadians believe that the CPP Fund should not be invested in various industries or companies ranging from defence stocks and genetically modified foods to tobacco and open pit mining. Why don’t you take these views into account when investing the CPP Fund?
While we do not use positive or negative screens in our investing, we do take into account many of the issues that concern Canadians to determine the potential impact of environmental, social and governance (ESG) factors on the company’s long-term performance.
We look at ESG factors only as investment criteria from a risk/return point of view and we integrate these factors into our investment process.
Divesting eliminates the opportunity for dialogue with company management which can lead to positive outcomes over the longer term.
- Why does the CPP Investment Board seek investments in infrastructure?
Infrastructure is an attractive asset class for the CPP Investment Board and for most other large pension funds in Canada.
The CPPIB infrastructure program’s focus is on assets with lower risk and return characteristics, typically characterized by strong regulatory environments, and with low substitution risks. Such investments might include electricity transmission and distribution, gas transmission and distribution, water utilities, toll roads, bridges and tunnels, airports, and ports.
- What is your general view on the current Canadian pension reform debate?
We are not prescribing one solution over another. We believe it is important that in-depth discussions and debate on the issue take place.
We have every confidence that policymakers will be successful. They did it once before in the mid-1990s with the CPP reforms; we believe they can succeed again.
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What are the principles of the CPP Investment Board’s management compensation framework?
To successfully manage a $127.6 billion global diversified portfolio requires a very diverse range of investments in public and private markets and the expertise to manage them. As one of the largest funds of its type globally, we require people with significant experience in investment management, investment research, portfolio design and risk management, investment operations and other skills.
Our compensation program is a key factor in attracting the talent we need to execute our strategy and achieve our mandate to earn the investment returns needed to help sustain the Canada Pension Plan.
The CPPIB’s compensation framework meets and, in some cases, exceeds the Principles for Sound Compensation Practices established by the Financial Stability Board and endorsed by the G20 nations. These principles require a substantial proportion of management compensation to be variable, and for performance to be assessed and paid for over a prolonged period of time.
In accordance with the pay for performance philosophy and the G20 principles, compensation at the CPPIB is based on investment performance over four-year periods.
Calculation of total compensation depends on three factors:
- CPP Fund returns;
- Actual investment income generated above our market-based benchmarks; and
- Performance against predetermined individual objectives.
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How are members of the board of directors appointed?
The director nomination process is designed to ensure that the board has directors with proven financial ability or relevant work experience such that the CPP Investment Board will be able to effectively achieve its objectives. Directors are appointed by the federal Governor in Council on the recommendation of the federal finance minister, following the minister’s consultation with the finance ministers of the participating provinces and assisted by an external nominating committee with private-sector involvement. In line with Treasury Board recommendations for Crown corporations, the CPP Investment Board provides assistance in the identification of desirable director competencies and retains and manages an executive search firm to source qualified candidates for consideration.
The names of those candidates are forwarded to the external nominating committee, which considers them and submits names of qualified candidates to the federal finance minister.
For more information see members of the board.
