Find answers to some of the most common questions asked about CPP Investment Board. Have a question that was not answered on this list? Visit our Contact us page or Search for more information options.
Yes. Canadians’ CPP pensions are not at risk and Canadians should not be concerned about their CPP pensions. In September 2016, 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.
The Chief Actuary of Canada assumes that the CPP Fund will attain an average annual real rate of return, which takes into account the impact of inflation, of 3.9% over the 75-year projection period in his report, to help sustain the plan at the current contribution rate.
Our 10-year net nominal annualized return of 7.3% or 5.6% on a real return basis is comfortably above the Chief Actuary’s assumption over this period.
The $287.3 billion Fund is not being used to help pay pensions today. Starting in 2021 a small portion of the CPP Fund’s investment income will be needed to help pay pensions.
Even with those payments, the CPP Fund will continue to grow for decades to come.
Results in any given fiscal quarter or year do not impact the long-term sustainability of the CPP. As a long-term investor, CPPIB focuses on 10-year returns which align with our approach to managing the CPP Fund for decades and generations. For the 10-year period ending September 30, 2016, the Fund had an annualized net nominal rate of return of 7.3%, representing $142.0 billion of investment income.
Our returns should be viewed within the context of our long-term strategy. The Canada Pension Plan’s multigenerational funding and liabilities give rise to an exceptionally long investment horizon. CPPIB is building a portfolio and investing in assets designed to generate and maximize long-term returns. 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.
The Chief Actuary of Canada’s assumes that the CPP fund will attain an average annual real rate of return, which takes into account the impact of inflation, of 3.9% over the 75-year projection period in his report, to help sustain the plan at the current 9.9% contribution rate.
Our 10-year annualized net nominal rate of return of 7.3% or 5.5% on a real return basis is comfortably above the Chief Actuary’s assumption over this period.
Given our long-term view, we remain confident that we will meet and exceed the 3.9% real rate of return over the 75-year period of the Chief Actuary’s projection.
The CPP Fund is expected to grow significantly for decades to come. The Chief Actuary projects that the CPP Fund will grow to approximately $476 billion by 2025. By focusing on our mandate to maximize long-term investment returns to the CPP Fund, the CPP Investment Board will help the plan to keep its pension promise to Canadians.
Yes. CPP is the largest single-purpose pension fund in Canada.
Our benchmark is the CPP Reference Portfolio, which comprises a group of 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. We seek to generate value-added returns above this benchmark over the long term.
Given our long-term view, we track cumulative value-added returns since the April 1, 2006, inception of the benchmark Reference Portfolio. Cumulative value-added over the past 10 years (to March 31, 2016) totals $17.1 billion, after all CPPIB costs.
CPPIB is focused on delivering returns over a very long horizon and as such, we construct a portfolio that has a diversified, long-term asset mix.
Our current asset mix is as follows:
Public Equities: 33.2%
Private Equities 20.8%
Fixed Income: 25.9%
Real Assets (real estate and infrastructure): 20.1%
CPPIB believes that the “asset allocation” approach to investing tends to create pressure, possibly at inopportune times, to buy or dispose of illiquid investments in order to stay close to allocation targets.
Infrastructure is an attractive asset class for the CPP Investment Board, as these assets provide steady cash flows and investment returns. Their underlying value tends to rise along with inflation, making them a good match for the long-term nature of CPP net liabilities given that CPP benefits are indexed to inflation.
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.
Our mandate is to help sustain the future pensions of 19 million CPP contributors and beneficiaries and by maximizing returns without undue risk of loss.
With approximately 18.5% of our portfolio invested in Canada as of June 30, 2016, we will always have a large part of the fund invested here but a Fund of our size cannot 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, technology and branded consumer products. These sectors help to diversify the assets.
CPPIB is committed to source and secure the most attractive investment opportunities globally in an efficient and cost-effective way. We have confidence that, with our comparative advantages as an investor, CPPIB’s active management strategy will deliver attractive returns over the long run.
We disclose our costs on an annual basis. As of March 31, 2016, total costs consisted of the following:
o External Management Fees: External asset managers were paid a total of $1,330 million in fiscal 2016 compared to $1,254 million in fiscal 2015. The increase in investment management fees is due in part to the continued growth in the level of commitments and the average level of assets with external managers.
o Transaction costs: Transaction costs for fiscal 2016 totalled $437 million compared to $273 million in the prior year. Investment returns are reported net of these costs. Transaction costs are often associated with the acquisition of private assets such as infrastructure, real estate and private equity, and can vary from year-to-year according to the number, size and complexity of our investing activities.
o Operating expenses: operating expenses reflect the direct costs incurred to manage the CPP Fund. Operating expenses were $876 million this year, representing 32.0 cents for every $100 of invested assets, compared to $803 million in fiscal 2014 or 33.9 cents for the prior years.
This level of total costs reflects the resources required to maintain and further develop CPPIB’s infrastructure, processes, systems and personnel to support the organization’s international footprint, which today consists of seven offices.
Our investment strategy is building an enduring, resilient portfolio over an exceptionally long horizon. Since inception of our active management strategy CPPIB has provided $125.6 billion in net investment income after all CPPIB costs to the Fund and provided $17.1 billion in dollar-value added, after all costs, compared to what a passive portfolio might have provided over the same time period.
Yes. CPP Fund assets belong to the 19 million contributors and beneficiaries who participate in the CPP. Unlike many other national pension plans, CPPIB management reports to an independent, professional board of directors, not to government. 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. The Director appointment process is designed to ensure that the Board has Directors with proven financial ability or relevant work experience such that CPPIB will be able to effectively achieve its objectives. As a Crown corporation, we are accountable to the federal and provincial finance ministers, who are responsible for the CPP. However, 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 CPPIB.
In the event a politician were to try to influence our investment decision making, we would remind the individual, in writing, of CPPIB'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.
We believe that considering environmental, social and governance (ESG) factors in our investment decisions and asset management activities will lead to better long-term investment performance across the CPP Fund. A company’s approach to ESG often serves as a good indicator of the quality of the business and its management and board oversight, and how it will perform over the long term.
We have adopted a fiduciary investment and ownership approach to ESG issues, focused on integration and engagement, based in part on leading practices in Canada and globally. We are one of the early adopters of this approach in Canada.
Our efforts focus on two main areas, integration and engagement:
· ESG risks and opportunities are incorporated into our investment decision-making and asset management activities, as standard practice. Given CPPIB’s mandate to pursue maximum investment returns without undue risk of loss, we integrate ESG factors into our investment analysis alongside other investment considerations, rather than screening investments or, conversely, targeting investments, based on ESG factors alone.
· We are an active, engaged owner and work to enhance long-term performance of companies in which we invest by engaging, either individually or collaboratively with other investors. We encourage companies to provide better disclosure and adopt better practices on ESG factors that we believe are material to the long-term performance of the company. We pursue the full spectrum of engagement that ranges from thoughtful exercise of our proxy voting rights to direct discussions with the Board Chairperson.
CPPIB’s Head of Sustainable Investing is one of the members on the Financial Stability Board’s Task Force on Climate-related Financial Disclosures, chaired by Michael Bloomberg. Task Force members represent preparers and users of financial disclosures, and comprise individuals from both financial and non-financial companies across a range of countries and relevant areas of expertise.
In keeping with our commitment to disclose our sustainable investing activities, our annual Report on Sustainable Investing provides a detailed review of our activities and achievements. For more information about our approach to sustainable investing, please visit the Sustainable Investing section of our website.
We currently have four focus areas for our engagement program: climate change, water, extractive industries (oil & gas and mining) and executive compensation. These areas have significant potential to affect the long-term value of our portfolio.
a. Climate change: At CPPIB we recognize that climate change has the potential to significantly impact our investments. We encourage companies to adopt a more long-term mindset, and to provide better disclosure regarding climate change-related risks and opportunities to allow us to make better long-term investment decisions.
b. Water: We encourage companies to increase corporate reporting on water-related strategies and performance, to provide more comparable disclosure, and to enhance their approach to managing long-term water risks.
c. Extractive industries: We actively seek improved disclosure and practices of oil & gas and mining companies on environmental and social matters given the significant impacts companies in these sectors have on both the physical environment and the local communities where they operate.
d. Executive compensation: We continue to advocate for companies to adopt good governance practices in executive compensation to ensure that the interests of management are aligned with those of long-term investors.
Our view as an experienced investor is that “negative screening” could hurt investment returns over time and increase risk, and this would go against our singular investment-only mandate to maximize returns without undue risk of loss. As an engaged owner, we believe we can have a powerful influence on the companies in which we invest. Instead of simply selling our investments when issues arise, we engage with companies to seek better disclosure and improve practices.
We are responsible for helping to support the financial wellbeing of the Canada Pension Plan for generations to come. Given our legislated mandate to maximize returns without undue risk of loss, we integrate environmental, social and governance (ESG) factors into our investment analysis, rather than eliminating investments based on those factors alone.
We follow two sets of guidelines to help us invest responsibly:
1. Our own Policy on Responsible Investing
2. The UN-supported Principles for Responsible Investment, which provides a practical framework for investors to integrate consideration of ESG factors into investment decision-making and ownership practices.
We are not advocating for any policy outcome or specific reform proposal. If federal and provincial stewards of the CPP decide to expand the existing CPP model on a mandatory basis, we would be able to manage the additional assets.
Managing the investment operations of one of the world’s largest retirement funds requires highly skilled professionals with significant experience in investment management, portfolio design, risk management and investment operations. Competitive compensation is essential to attract and retain this talent to develop and manage CPPIB’s highly sophisticated investment programs.
CPPIB’s compensation framework meets and in certain cases exceeds the G20 compensation principles, which requires a substantial proportion of management compensation to be variable, and for performance to be assessed and paid for over a prolonged period of time. CPPIB’s pay-for-performance approach directly links compensation to both investment and individual performance. The majority of total pay is incentive-based and pay is linked to performance over a rolling five-year period, consistent with CPPIB’s focus on long-term investment performance.
Calculation of total compensation depends on three factors:
a) CPP total Fund returns and investment income generated above our market-based benchmarks;
b) Department and group performance; and,
c) Performance against predetermined individual objectives.
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 Minister of Finance.
For more information see Board of Directors.