This annual report is an important opportunity for the Canada Pension Plan Investment Board to communicate with its wide range of stakeholders – from the finance ministers of the provinces and federal government who serve as Canada Pension Plan stewards to the 16 million Canadians who either contribute to or benefit from the CPP.

It is, first and foremost, a review of our operations over the last fiscal year as well as a financial snapshot of where the organization stood at March 31, 2005. The investment performance of the CPP reserve fund is detailed elsewhere in this annual report, but in summary, the fund earned an 8.5 per cent rate of return, thereby generating $6.3 billion in investment income for the year ended March 31, 2005, compared with a 17.6 per cent return and $10.3 billion of investment income the previous year. Including $4.5 billion of contributions not required to pay CPP benefits, the reserve fund grew by $10.8 billion this past year.

As a result of excess contributions and investment gains during the first six years of the CPP Investment Board’s investment program, the reserve fund has grown from $44 billion at the end of the first year to $81.3 billion at the end of fiscal 2005. And there is much more growth still to come. The Chief Actuary of Canada has estimated the CPP reserve fund will amount to approximately $147 billion by 2010. In keeping with the theme of this report, Forward Thinking, I would like to let you know what we are doing today to manage the CPP reserve fund’s existing assets and how we are evolving the organization for future growth.

When I joined the CPP Investment Board as chief executive officer in January, the first element of the diversification program had been completed. The focus of the early years of the CPP Investment Board was to diversify the CPP reserve fund from its initial 100 per cent concentration in government fixed income securities to a more balanced portfolio including equities and other assets. By adding the required professional expertise, we have diversified the reserve fund so that at March 31, 2005 government fixed income securities were 39 per cent of assets, with the remaining 61 per cent invested in public equities, private equities and, to a smaller extent, in real estate and infrastructure investments.

We will continue to build this foundation to create more capabilities to further develop the total portfolio. The results of the past year reflect a number of factors including the current composition and stage of development of the portfolio, the fact that we are still only partway through our diversification program and the fact that to date we have relatively few real return assets, an investment class that performed strongly last year.

As we look forward to fiscal 2006 and beyond, one key priority is to further diversify the reserve fund by increasing our holdings in real estate, infrastructure and other real return assets. To enable this, we will add the professional experience we require as well as the technology and operational capabilities to support additional investment activities. This clearly means our operating budget will grow, but it will do so only in proportion to the size of the investment-management task at hand.

In fiscal 2006, we will continue to evolve the global sector approach and active management we have developed for equities in order to make our total portfolio more efficient. We will further expand our private equity program by increasing commitments with our existing partnerships and developing additional relationships with more leading private equity managers around the world. Next year, we will also focus particularly on assets that, over the long term, are a good match for the inflation-indexed benefits provided by the CPP.

The goal of this diversification is to enhance the risk-adjusted returns generated by the reserve fund. By using a wider range of investment opportunities – while understanding both the risks and the potential returns they represent – we will help to ensure that we continue to generate the long-term investment returns that contribute to the sustainability of the CPP.

Diversification applies to the geographical scope of CPP reserve fund investments as well as their composition. Last year, the CPP Investment Board announced its intention to increase the size of international holdings of the CPP reserve fund, which now stand at 25.9 per cent. With regard to the CPP Investment Board’s directly managed assets, which will continue to be a subset of the total CPP reserve fund until the completion of the fixed income transfer from the federal Department of Finance in 2007, we comply with the foreign property rule in a similar manner to many other public pension funds in Canada. In its recent budget, the federal government announced plans to eliminate the foreign property rule. Currently, pension funds and individual Canadian investors have to restrict their foreign holdings to 30 per cent of their registered retirement portfolios at cost. Once enabling legislation is passed, this restriction will be lifted.

The CPP Investment Board welcomes this policy change because we believe that the broadening of available investment opportunities will benefit CPP stakeholders. With more international investments, we can further diversify the CPP reserve fund, thereby reducing concentration risk and improving our ability to increase our long-term rate of return.

Canadians can take pride in the fact that the CPP is recognized as a world leader among national pension plans. Its solid foundation for good governance and sustainability is well recognized by pension experts around the world. Canadians can also be confident that the CPP Investment Board is continuing its evolution as a leading professional investment organization that has the capability to effectively manage the CPP reserve fund for present and future generations.

David F. Denison
President and Chief Executive Officer