CPP Investment Board

History

The Canada Pension Plan was first established in 1966. For much of its history, the plan relied on contributions to pay benefits. By 1996, the federal government had determined that the CPP as currently constituted was unsustainable. Major changes to the plan occurred, leading to a gradual increase in the contribution rate to its current 9.9% and the creation of the CPP Investment Board.

Under the direction of then Minister of Finance Paul Martin, the CPP Investment Board was created by an Act of Parliament in 1997 as an independent, but accountable, body to monitor the funds held by the Canada Pension Plan. The CPP Investment Board began its investing program in 1999, establishing the CPP Reserve Fund to hold investment earnings and CPP contributions not needed to pay current pensions. It reports quarterly to the public on its performance, has a professional board of directors to oversee the operations of the CPP reserve fund, and also to plan changes in direction. As a Crown corporation, the CPP Investment Board is accountable to Parliament and reports annually through the Minister of Finance. While accountable to Parliament, the CPP Investment Board is not controlled by the government or subject to government appointments, its employees and directors are not part of the Public Service of Canada.

Mandate

The CPP Investment Board's mandate is laid out in its founding legislation, the Canada Pension Plan Investment Board Act (S.C. 1997, c. 40). Its sole investing mandate is to achieve a "maximum rate of return, without undue risk of loss."

Investments

The CPP Investment Board invests in private equity, public companies, and real estate. The CPPIB invests in real estate and made their first direct office investment in Seattle in 2016. Notable investments include 50% of the American pet store chain Petco, 50% of American luxury department store chain Neiman Marcus, 50% of Australian office tower development International Towers Sydney, 40% of the Ontario Highway 407 toll highway, 21.5% of South Korean discount store chain Homeplus, and 19.8% of multinational media corporation Entertainment One.

As outlined in its Policy on Responsible Investing, first adopted in 2005, the Board considers environmental, social and governance (ESG) issues/factors from a risk/return point of view and encourages companies to adopt policies and practices that enhance long-term financial performance.

Future and direction

Mark Machin is the current Chief Executive Officer of the CPPIB, replacing Mark Wiseman on June 13, 2016.

According to the 2013 Annual Report, about 63% of the fund's assets are now invested outside Canada, largely in the United States, Europe and Asia. In addition, the CPPIB has been broadening the scope of its investments to include emerging markets, although Mr. Denison, CEO at the time, would not pinpoint a specific country or area. “Canada as a single market cannot accommodate the future growth of our organization,” said Mr. Denison.

In recent years, the CPPIB changed direction in its investment philosophy. It evolved from investing exclusively in non-marketable government bonds to passive index-fund strategies and, in 2006, to active investment strategies.

Growth and strategy

According to the Office of the Chief Actuary of Canada, the CPP Fund needs a real rate of return of 4.0%, over the 75-year projection period in his report, to help sustain the plan at the current contribution rate.

In December 2013, the Chief Actuary reaffirmed that the CPP is sustainable throughout the 75-year timeframe of his 2012 report. Over this long timeframe it is expected that there will be periods where returns are above or below this threshold.

Consistent with the CPPIB's mandate to maximize investment returns without undue risk of loss, they pursue a value-added strategy that seeks to deliver returns over and above a market-based benchmark over the long term. That benchmark is called the CPP Reference Portfolio and under reasonable capital market assumptions, it can generate the long-term 4.0% real rate of return required to help sustain the CPP.

The CPPIB reserve fund receives its funds from the CPP and invests them like a typical large fund manager would. The CPP reserve fund seeks to achieve at least the projected return (inflation-adjusted) needed to help sustain the CPP, a rate set at 4.0% by 2017 in the CPP actuary's report, starting from 3.2% in 2011. As indicated in its Financial Highlights for the fiscal year ended March 31, 2013, the CPP reserve fund averaged 4.2% return in the past 5 years, and a 7.4% return in the past 10 years, above the sum of projected Canadian inflation rates and the 4.0% target identified by the CPP Actuary report, or 6.3% in nominal basis, that is required for CPP contribution sustainability.

The CPP total assets are projected to reach the following levels according to the 2012 actuarial report: (in assets):

The strategies used to achieve these targets are:

Significant transactions

CPPIB, as part of a consortium, first invested US$300 million in Skype in September 2009. In May 2011 CPPIB sold its stake in Skype to Microsoft for US$1.1 Bn before debt repayment, or US$933 million. In 2009 CPPIB also invested in the $5.2-billion purchase of IMS HealthIMS Health with Texas Pacific Group and the $2.1-billion purchase of Macquarie Communications Group.

In May 2015, Unibail-Rodamco revealed it had signed an agreement with the Canada Pension Plan Investment Board to sell its 46.1 percent stake in German shopping mall operator MFI AG for €394 million.

In May 2015, the sale of a joint 70% investment with BC Partners in U.S. cable television operator Suddenlink for over US$9 Bn to Altice was also announced. The interest had been acquired in a 2012 LBO.

In June 2015, CPPIB announced it would acquire GE Capital’s private equity lending portfolio for $12 billion.

In November 2015, CPPIB and CVC Capital Partners acquired American pet supplier Petco in a deal worth $4.6 billion.

Performance

The performance and the market value of the CPP Fund is reported on a quarterly basis.

Investments held by the CPP Fund include equities, fixed income (primarily government bonds), and inflation-sensitive assets (real estate, inflation-linked bonds and infrastructure). The CPPIB is making a major push into real estate, especially real estate in India.

Historical information on the performance of assets available to the Canada Pension Plan, and financial statements of the CPP Investment Board, can be found under the Quarterly Reports and Annual Reports section of the CPPIB's website.

The total growth of the CPP Reserve Fund is derived from the CPP contributions of working Canadians, and the return on investment of the contributions. The portion of CPP Reserve Fund growth due to CPP contributions varies from year to year, but have shown a slight decrease in the past 3 years. The CPP Reserve Fund has consistently under-performed the S&P 500 by several percentage points. The historical growth with the investment performance is tabulated as follows:

¹Assets are as at the period end date (March 31).

²Commencing in fiscal 2007, the rate of return reflects the performance of the CPP Fund which excludes the short-term cash required to pay current benefits.

³Increased fund value due to worker and employer CPP contributions not needed to pay current benefits. The negative investment return amounted to $303 million CAD.

Board of directors

Director since December 2010. Appointed Chair effective October 2014 Former Principal and Vice-Chancellor of McGill University, Montreal, Quebec. Former Vice-President of Research and International Relations, and Professor and Dean at the University of Toronto.

Corporate Director, Calgary, Alberta. Director since April 2007. Retired executive vice-president and CFO of TransAlta Corporation

Corporate Director, Oakville, Ontario. Director since January 2009. Former vice-chair and group treasurer of the Bank of Nova Scotia

Corporate Director, Winnipeg, Manitoba. Director since February 2017. Director of Manitoba Telecom Services. Governance and Nominating (chair) committee.

Certified Management Accountant of Canada, Toronto Ontario. Director since September 2015.

Corporate Director, Toronto, Ontario. Director since October 2009. Recently retired Chairman, chief executive officer and director of McLean Budden

Corporate Director, Vancouver, British Columbia Director since February 2017 Recently retired CEO of RBC Global Asset Management

Corporate Executive, Halifax, Nova Scotia. Director since October 2012.

Corporate Director, Greenwich, Connecticut Director since June 2016

Corporate Executive, Lawyer, Corporate Director. Toronto, Ontario Director since October 2013.

Chartered Accountant, Corporate Director, St. John’s, Newfoundland and Labrador. Director since October 2012

Fellow, Institute of Chartered Accountants of Ontario, London, Ontario. Director since April 2007

Criticism

In 2009 executives of the Canada Pension Plan Investment Board took a 31.4% cut in their bonuses after questions were raised about the level of compensation at the crown corporation.