-
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. In fact, the sustainability of the CPP fund was recently confirmed by two key sources. In mid-July, Canada’s Chief Actuary reaffirmed that the CPP is sustainable throughout the 75-year period of his 2007 report. And in late May, 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 $123.9 billion portfolio is not being used to help pay pensions today. In fact, it will be another 10 years before even a small portion of the CPP Fund’s investment income will be needed to help pay pensions. In addition, approximately $28 billion of additional cash inflows is anticipated between now and 2019.
Beyond that time, the CPP Fund will continue to grow for decades to come.
-
Do the quarterly results, negative or positive, impact the long-term sustainability of the CPP?
Our strategy and our portfolio are designed to deliver the long-term real rate of return designed to help sustain the CPP as constituted. Negative as well as positive returns both need to be viewed within the context of our long-term strategy. It is certainly important to report on, and pay attention to, quarterly and annual results, but we see our primary job as focusing on investment activities with longer-term performance. After all, it is how the CPP Fund performs over the span of multiple years and decades that matters most.
Since the CPPIB began investing in April 1999, the CPPIB has generated $39.4 billion in investment income for the Fund reflecting an annualized rate of return of 5.3 per cent. Another relevant measure is the four-year annualized investment rate of return through December 31, 2009 which was 2.1 per cent representing $8.3 billion in investment income.
According to the Chief Actuary of Canada’s latest report released in 2007, and reaffirmed in July 2009, the CPP is sustainable throughout the 75-year period covered by his report. When the Office of the Chief Actuary prepares its next report for the period ended Dec. 31, 2009, it will review a wide range of factors that impact the sustainability of the CPP.
On May 25, 2009, the federal, provincial and territorial Ministers of Finance, as joint stewards of the CPP, confirmed in a public statement that the CPP remains on a sound financial footing following the conclusion of their triennial review of the CPP.
-
Given the current market conditions, will you make changes in your investment strategy?
No. While we have adjusted our short-term tactics in light of crucial changes in the markets, we will maintain the strategic asset weightings for the portfolio and emphasize our strengths as a large, long-term investor to capitalize on investment opportunities we see in current market conditions.
The $123.9 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.
The $123.9 billion CPP Fund will continue to grow for another 10 years before a portion of the investment income is needed to help pay CPP benefits, according to the 2007 report by the Chief Actuary of Canada.
-
What kinds of opportunities have you found in the market during the current downturn?
Since we are not forced to sell assets to pay current benefits, we are well-positioned to take advantage of opportunities to acquire quality assets at attractive prices that will benefit the Fund over the long term.
On the other hand, current market conditions are forcing so many other investors and financial institutions to become shortterm in their focus. They need to sell assets, raise capital and create liquidity. Among the opportunities that we are considering are investments in private equity investments, public equities, infrastructure and real estate assets.
As we assess potential new investments in this market, we are continuing to make decisions based upon our disciplined analysis of risk and return factors.
-
At $123.9 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 against a benchmark?
We do not make direct comparisons with other pension funds. Our most relevant yardstick is our benchmark – the CPP Reference Portfolio. Introduced in fiscal 2007 and revised in fiscal 2009, the CPP Reference Portfolio represents a low-cost, low-complexity portfolio that embodies the long-term investment objectives and associated risk that was 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 believes that investment performance is best measured over rolling four-year periods. The four-year annualized investment rate of return through December 31, 2009 was 2.1 per cent representing $8.3 billion in investment income.
Since the CPPIB began investing in April 1999, the CPPIB has generated $39.4 billion in investment income for the Fund reflecting an annualized rate of return of 5.3 per cent.
-
Can you explain why you changed the composition of the CPP Reference Portfolio in fiscal 2009?
Consistent with our mandate to maximize investment returns without undue risk of loss, we pursue a value-added strategy that seeks to deliver returns over and above a market-based benchmark over the long term. We call that benchmark the CPP Reference Portfolio and under reasonable capital market assumptions, it can generate the long-term 4.2 per cent real rate of return required to help sustain the CPP. Based upon extensive asset/liability modelling that we conducted in fiscal 2009, we have changed the composition of the CPP Reference Portfolio which is now more broadly diversified, has increased foreign exposure to reduce reliance on the Canadian economy, and recognizes domestic capital market capacity constraints that could impede the CPP Fund as it grows larger. Our work has led us to conclude that this is a more robust design for the CPP Fund’s key benchmark. Going forward, we will continue to monitor the CPP Reference Portfolio annually and do a more extensive review every three years to correspond with the release of the Chief Actuary’s triennial report.
-
What specific changes were made to the composition of the CPP Reference Portfolio?
The CPP Reference Portfolio now has the inclusion of emerging market equities at a 5 per cent level as well as the inclusion of foreign sovereign bonds at the 5 per cent level. Also, Canadian equities were reduced from 25 to 15 per cent and global developed market equities were increased by 5 per cent.
The inclusion of emerging market equities at a 5 per cent level allows the portfolio to harness the long-term growth potential of emerging markets, consistent with our long investment horizon. Also, it helps us reduce over-exposure to the Canadian economy and avoid the “double jeopardy” effect, given that contributions to the CPP vary with the health of the Canadian economy.
-
Why does the CPP Investment Board use a Total Portfolio Approach instead of specific asset allocations?
In order to meet our value-added investment objectives, we focus primarily on the performance of the total portfolio rather than the performance of isolated asset classes or individual investment departments. We strive to make the total portfolio as efficient as possible by considering proposed investments in terms of their marginal risk/return contribution.
Under this approach, we do not target specific dollar or percentage allocations for individual asset classes. 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 it promotes better investment decision-making.
-
How are members of the board of directors appointed?
The nomination process is designed to ensure that only those with expertise in investment, business and finance are appointed to the board. See CPP Investment Board Act.
Directors are appointed by the federal finance minister in consultation with the participating provinces, and with the assistance of an external nominating committee. Each director is appointed for a term of three years and is eligible to be reappointed twice for a maximum of three terms or nine years of service. The federal government appoints the chair of the nominating committee, and each participating provincial government appoints one representative.
The nominating committee recommends candidates for appointment and re-appointment to the federal finance minister who, in turn, makes the appointments in consultation with the provincial finance ministers.
For more information see members of the board.
-
What proportion of the assets is invested in stocks?
Public equities make up 43.9 per cent of the CPP Fund. Our current asset mix is as follows:
|
Public equities:
|
43.9%
|
|
Fixed Income:
|
30.0%
|
|
Private equities:
|
12.2%
|
|
Inflation-sensitive assets:
|
13.9%
|
-
What is the projected growth of the CPP Fund?
The CPP Fund will grow significantly between now and 2020. Beyond 2020 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.
-
What rate of return is necessary to maintain the sustainability of the Canada Pension Plan for generations to come?
According to the Office of the Chief Actuary of Canada, 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.
In July 2009, the Chief Actuary has reaffirmed that the CPP is sustainable throughout the 75-year timeframe of his 2007 report; the Chief Actuary will publish a new projection for the CPP in 2010. Over this long timeframe we expect that there will be periods where returns are above or below this threshold. Since the CPPIB began investing in April 1999, the CPPIB has generated $39.4 billion in investment income for the Fund reflecting an annualized rate of return of 5.3 per cent.
On May 25, 2009, the federal, provincial and territorial Ministers of Finance, as joint stewards of the CPP, confirmed in a public statement that the CPP remains on a sound financial footing following the conclusion of their triennial review of the CPP.
-
Why don't you invest only in Canada to create economic growth and jobs?
Our mandate is to contribute to the financial strength of the CPP by investing in the best interests of 17 million CPP contributors and beneficiaries and by maximizing returns without undue risk of loss.
With approximately 42.6% of our portfolio (or $52.8 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 to manage the growing complexity of the fund. On its own, Canada does not provide sufficient diversification opportunities. Canada’s stock market is small, representing less than 2% of the world market capitalization, and it is heavily concentrated in a few sectors. The flow of contributions to the CPP varies directly with the health of the Canadian economy. By reducing the fund’s reliance on the Canadian economy, global diversification offers a source of returns for periods of weak performance by the Canadian economy.
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 Parliament through the federal minister of finance and 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.
-
In March 2007, you announced your three core focus areas for PRI. Why did you choose these three areas?
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 want to invest 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 and monopolistic elements, 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.
-
Derivatives
-
What are derivatives?
A derivative is a financial contract, the value of which is derived from the value of underlying assets, indexes, interest rates or currency exchange rates.
-
Why is the CPP Investment Board interested in using derivatives?
Using derivatives improves the CPP Investment Board's ability to mitigate risk, reduce costs, and increase expected returns by making investments more efficient and reducing costs.
-
Will the use of derivatives increase risk in the CPP Fund?
No. All risk/return decisions are made within risk management policies and parameters approved by the Board of Directors of the CPP Investment Board.
-
Absolute Return Strategies
-
What are Absolute Return Strategies, also known as hedge funds?
Absolute return strategies consist of investments in funds whose objective is to generate positive returns regardless of the market conditions, that is, returns with a low correlation to the market.
Our absolute return strategies are managed within controlled risk parameters by experienced external asset managers.
-
Why does CPPIB invest in hedge funds?
Absolute return strategies provide a broader array of investment options to further diversify our active risk within the portfolio.
Our absolute return strategies are managed within controlled risk parameters by experienced external asset managers.
-
How much of the CPP portfolio is invested in hedge funds?
Absolute return strategies represented $1.8 billion or 1.7 per cent of the portfolio at the end of fiscal 2009. We do not have an explicit portfolio allocation for hedge funds; rather, on a case-by-case basis, we evaluate them on the same risk/return investment criteria as other externally managed active strategies.
-
Does the use of hedge funds increase risk in the CPP Fund?
No. All risk/return decisions are made within risk management policies and parameters approved by the Board of Directors of the CPP Investment Board.
Our absolute return strategies are managed within controlled risk parameters by experienced external asset managers.
-
Currency Hedging
-
Why doesn’t the CPPIB use a currency hedging strategy to protect foreign investment gains from a strong Canadian dollar?
We maintain a strategic unhedged exposure to foreign currencies in the portfolio based on our belief that over the long term the cost of currency hedging outweighs the potential benefits.
An unhedged foreign exposure helps to offset increases in CPP liabilities due to inflation.
The foreign emerging market equity component in our Reference Portfolio benchmark is an inherent hedge against a decline in the Canadian dollar.
We have 42.6 per cent of the fund or $52.8 billion invested in Canada, which is an implicit hedge against the losses we may experience when the dollar strengthens against our foreign assets denominated in foreign currencies.
-
Private Debt
-
Why is CPPIB interested in investing in private debt?
By investing in private debt instruments, we are increasing our ability to access a broader set of investment opportunities that complement our existing investment streams in infrastructure, principal investments, and funds & secondaries.
Because of our very long-term investment horizon, our plan is to access these markets in scale with a high degree of internal expertise. This will allow us to access very large markets for private debt and capture the premium for illiquidity that these markets offer to well-capitalized, patient investors.
-
What are the principles of the CPP Investment Board’s management compensation framework?
There are three key principles that serve as the foundation for the CPP Investment Board’s Management Compensation Framework:
-
Management compensation is determined by an independent and qualified board of directors. In order for the CPP Investment Board to fulfill its mandate as a global investor, the board of directors believes it is essential to provide a compensation opportunity that will enable the organization to compete with other investors to attract and retain talented investment and management professionals with specialized skills and knowledge in those global markets that are the focus of our investment programs.
-
Management compensation is based on investment performance over four-year periods. The CPP Investment Board has a pay-for-performance approach that measures performance against market-based benchmarks over rolling four-year periods. This longer-term focus is consistent with the nature of the CPP Investment Board’s mandate and places the organization at the forefront of current best practices for management compensation.
-
Management compensation is based upon two key performance criteria: Investment income generated above market-based benchmarks and overall total Fund returns.
-
How was management compensation calculated in fiscal 2009?
Compensation for fiscal 2009 is based upon the cumulative results for the four-year period ending March 31, 2009. In the three years since the CPP Reference Portfolio was adopted as the organization’s key total fund benchmark (fiscal 2010 will complete the first four-year period), we have generated cumulative value-added returns of 487 basis points representing approximately $5.3 billion in additional income.
Recognizing the current economic environment, the Board of Directors has decided not to award the CEO and the three investment officers the individual component of the Short-Term Incentive Plan (STIP), which is the portion of STIP that is not tied to four-year returns. In addition, officers will not receive salary increases for fiscal 2010.
This decision, combined with the impact of the four-year investment performance on incentive compensation, results in a 31.4% year-over-year decline in total compensation for these officers. All short-term incentives awarded to the 4 top investment professionals this year were tied to four-year portfolio performance. The Board of Directors considers this decision appropriate, but it is not a reflection of the individual performance of these officers in fiscal 2009. The Board of Directors remains very confident in the abilities of the CEO and the investment officers to lead the investment programs and successfully implement the long-term investment strategy to help sustain the CPP for decades and generations.
More details about management compensation for fiscal 2009 are available in the 2009 Annual Report.
-
Did the CPPIB submit a response to Minister Flaherty regarding compliance with the Financial Stability Forum principles as requested in June?
Yes. On June 24, 2009, CPPIB Chair Bob Astley submitted the Board’s response to Minister Flaherty’s request to all crown corporations to assess its compensation framework against the G20 Financial Stability Forum principles. The response letter is available on our website.
- Does CPPIB’s compensation framework align with the principles proposed by the G20 nations?
An examination of the CPPIB’s compensation framework shows that it clearly meets and in many cases exceeds the standards set out in the G20 Principles on Compensation in Financial Services. Further, the Board of Directors believes that CPPIB’s compensation structure, which has been in place for almost four years, meets best practice standards, not just for institutional investors, but for financial institutions and public companies globally.
The CPPIB compensation structure overseen by the Board of Directors also reflects the organization’s long-term goals and its strong risk management culture designed to invest the $123.9 billion CPP Fund for decades and generations on behalf of 17 million Canadians.
