- 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 November 2010, the Chief Actuary of Canada reaffirmed through his triennial review that the CPP remains sustainable at the current contribution rate of 9.9% throughout the 75-year period of his report, based on actuarially accepted assumptions.
Despite the recent market volatility we have witnessed, 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 $152.3 billion Fund 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 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 Q2 fiscal 2012 results impact the long-term sustainability of the CPP?
At September 30, 2011, the CPP Fund totaled $152.3 billion, compared to $153.2 billion at June 30, 2011, a $0.9 billion decrease from the previous quarter.
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 September 30, 2011, the CPP Fund generated an annualized rate of return of 3.1 per cent, or $19.6 billion of investment income. For the 10-year period, the Fund had an annualized rate of return of 5.9 per cent, or $51.7 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 we report quarterly and annual results as part of our disclosure policy, 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.
- In the wake of the 2008-2009 financial crisis, did you make 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 $152.3 billion CPP Fund is broadly diversified and structured to help secure Canadians’ CPP pensions over the long-term.
- At $152.3 billion in net 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 September 30, 2011, the CPP Fund generated an annualized rate of return of 3.1 per cent, or $19.6 billion of investment income. For the 10-year period, the Fund had an annualized rate of return of 5.9 per cent, or $51.7 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, which was successfully reformed in 1996–1997, is sustainable.
According to the Chief Actuary in his most recent triennial report released in November 2010, the CPP Fund needs a real rate of return – that’s return after inflation – of 4.0 per cent, over the 75-year projection period in his report, to help sustain the plan at the current contribution rate.
Our nominal 10-year return of 5.9% is now consistent with the 4.0% after-inflation return currently used by the Chief Actuary of Canada in confirming the sustainability of the Canada Pension Plan.
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.
Given our long-term view, we remain confident that we will meet and exceed the 4.0% 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.
- What proportion of the assets is invested in stocks?
As of September 30, 2011, public equities make up 33 per cent of the CPP Fund. Our current asset mix is as follows:
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Public equities:
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33.0%
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Private equities:
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16.6%
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Fixed Income:
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32.8%
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Inflation-sensitive assets:
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17.6%
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- How would you characterize CPPIB’s investment activities this quarter?
CPPIB’s Q2 F2012 results demonstrate our long-term global investment strategy in action including our policy of diversification, including initiatives to further enhance the CPP Fund’s holdings in private market investments. These recent transactions are also good examples of our deep investment expertise to participate in complex and sizeable investments as a global investor. CPPIB is a long-term investor with a highly disciplined approach. The Fund evaluates all potential transactions carefully to determine their fit with our long-term strategy and mandate.
- 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 48.3% of our portfolio (or $71.7 billion) invested in Canada as of March 31, 2011, 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. 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.
- How does your Policy on Responsible Investing compare with that of other large investors in Canada?
We have adopted a fiduciary investment approach to environmental, social and governance (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.
CPPIB helped develop and is a founding signatory of the UN Principles for Responsible Investment. Reports published by the Social Investment Organization in Canada credit CPPIB 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.
In keeping with our commitment to disclose our responsible investing activities, the Report on Responsible Investing provides a detailed review of our activities and achievements. For more information about our Policy on Responsible Investing, please visit the Responsible Investing section of our website.
- What are your current engagement focus areas?
We currently have four focus areas for our engagement program: the extractive industries (oil & gas, and mining), climate change, management compensation and water.
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.
- In 2010, we added water as a focus area due to the increasing operating risks to companies related to water supply and quality.
- Do 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 3,100 companies to encourage improved performance on and disclosure of 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.
Many issues pertaining to responsible investing relate to the ownership of publicly-traded equities. Our passive 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.
- Different groups of Canadians believe that the CPP Fund should not be invested in various industries or companies. Do 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 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.
- Does CPPIB's Policy on Responsible Investing restrict you from making certain investments?
We look at any particular investment within the context of our "investment only" mandate. We evaluate companies based on investment criteria, with the goal of helping sustain the pensions of 17 million Canadians.
This doesn’t mean that we don’t consider environmental, social and governance issues. However, we look at them in a financial context.
We follow two sets of guidelines to help us invest responsibly:
- Our own Policy on Responsible Investing
- The United Nations' Principles for Responsible Investment, which provides a practical framework for investors to integrate consideration of ESG factors into investment decision-making and ownership practices.
- 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, as these assets provide steady cash flows and investment returns.
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 $152.3 billion global diversified Fund 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, tied to long-term performance and 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.
