Unpacking the CPP Investment Board

At $153.2 billion, the Canadian Pension Plan is one of the largest single-purpose pools of money in the world.

Caretaker to our public retirement system is the CPP’s Investment Board, an arms length organization founded to administer the assets of some 17 million Canadians.

The CPPIB is widely acknowledged as one of the most highly functioning investment managing organizations, and yet what frustrates the hard workers at CPPIB the most is the widely held misconception – in part inspired by the social security fear-mongering of the U.S. – that the Canadian pension programme is not sustainable.

Says CEO of CPPIB David Denison, “Canadians don’t believe that the CPP will deliver the promised pension for them when they retire, though it is the gold standard for a sustainable national pension system. It is a terrific story for Canada, and sadly still is under appreciated.

“True,” Denison adds, “part of the investment income will have to be rerouted to paying CPP benefits starting in 2020.” But will this harm the nest egg? Denison says no.

“The great news for Canadians is that unlike the U.S. or most European countries that are only now getting around to fixing their pension, our national pension system was fixed in 1997.”

Established in 1966, it was former Prime Minister Paul Martin who reformed the CPP in the mid-1990s. Upon realizing that the fund was going to dry up within 15 years, he corralled the finance ministers into raising the contribution rates. This dramatically changed the payout.

He also axed the old model whereby all surplus was lent to the provincial government as bonds at the lowest rate possible. In its place, he created the CPPIB, an independent body meant to address the triple threat of an aging population, longer life expectancy, and thinning work force.

The pool, which was $30-40 billion in 1999, surpassed the $150 billion mark in the last quarter. It is expected to reach $275 billion in 2020.

How did this happen? By burnishing that curiously non-Canadian trait: playing offensive.

From Day 1, CPPIB embraced the pathos of aggressive investing by replacing conservative bonds and passive portfolios with equities and bonds that replicate the major indices, bringing the overall makeup to 65-35 in favour of equities.

Another shake up came in the mid-2000s when CPPIB decided it was going to try its luck in direct investment. And so in 2006, Canadian’s pension dollars began flowing into public and private equity funds all over the world.

This has meant that the CPPIB is responsible for everything from its more well-known investment in Skype to the lesser known involvement in intellectual property through the diabetes drug Lyrica, a Pfizer brand.

Canadians by proxy also own bites out of the Big Apple. Both the Rockefeller Center and the McGraw-Hill Building, featured in the opening credits of Saturday Night Live are part of CPP’s real estate portfolio.

As of this writing, there are Canadian dollars invested in a Chilean electrical transmission company, a water service company that services essential water and sewage services in southwest UK, and an aircraft leasing company based out of Dublin.

When asked if the CPPIB has a mandate to invest outside of Canada, Denison brings up the 407 express toll route which they purchased for $4.1 billion last year and argue that his team is willing to “go pretty much wherever we can find the best value.”

The pool of money continues to grow. In 2010, CPPIB introduced debt financing, through which they finance the likes of Legendary Productions, film house of Hangover fame.

In the next 10-20 years, Denison sees a whole lot of BRIC. Already, it’s opened a Hong Kong office, and is angling for greater presence in the mainland.

There are worries, however, that the CPPIB’s guiding principle of “maximizing return without undue risk of loss” may hinder its commitment to environmental, social and corporate governance. CPPIB has been up front about the fact that they will not make investments solely for socially responsible considerations, and that only those ESG factors that align with the board’s long-term financial benefits will be respected. Further, it continues to invest heavily in the extractive industries, own shares in tobacco companies, while monitoring “investment risks” in these areas.

Ian Braggs, Associate Director of Social Investment Organization, says that the resource-based nature of the Canadian economy makes it difficult for a portfolio to exclude the extractive industry, a sector that takes up over 17 per cent of the Toronto Stock Exchange. What the CPPIB can do, he suggests, is identify the best sectors and use their long term investing to their advantage by trying to improve their standards over time.

According to Braggs, the easiest area for CPPIB to improve upon is introducing more transparency.

“I’ve brought this up with them, and their answer is that they are too big a player in the market to expose all of their activities as it may have a massive impact on the markets.”

This is a legitimate concern, says Braggs, but he also maintains that Canadians have just as much right as the next investor in knowing where their money’s at.

Original Article
Source:  toronto standard 
Author: May Jeong