TORONTO – The fund that invests on behalf of more than 18 million contributors and beneficiaries of the Canada Pension Plan has reported a gross investment return of three per cent in its fiscal 2013 third quarter, but that wasn’t what pleased new CEO Mark Wiseman the most.
“Obviously we’re happy with the investment results, but as we’ve said in the past, we don’t judge our successes or our failures 90 days at a time,” Wiseman said in an interview Friday.
“What I do think you see in the quarter’s results is not just the financial results but you see evidence of the capabilities that we’ve built as an organization — our extensive professional investment capabilities, which are increasingly global in nature.”
It’s a capability not to be taken lightly, especially in light of pressure to expand the CPP in an era when private pension plans are increasingly struggling to provide Canadians with adequate income in retirement.
And while Wiseman refuses to be drawn into the policy debate over reforming the CPP, he says the CPP Investment Board is geared up to meet the challenge no matter which way the debate turns out.
“We have perhaps the easier job of just managing the capital,” he said.
Wiseman, who took the helm at the CPPIB last July following the retirement of David Denison, was a co-architect with Denison on the CPPIB’s current active investment strategy.
The strategy, launched in 2005, is aimed at growing the fund to help meet pension obligations even when payouts begin to outnumber contributions on an annual basis sometime in the next decade.
Previously the board, created in 1999, had been primarily focused on passive investments in stocks and bonds.
Although Ottawa has suggested alternative measures for building retirement incomes, Finance Minister Jim Flaherty announced in December that federal and provincial officials would study the idea of expanding the CPP and report back by June.
“I don’t think we take a view one way or another on the reform of the CPP,” Wiseman said.
“(But) in terms of our ability to manage increased scale (should the CPP be expanded), this organization has been designed for scale.”
He said the board is growing regardless of whether or not there are CPP reforms, noting that current assets will double to some $350 billion over the next several years through ordinary compounding and contributions.
“We’ve built our systems, our processes and our investment philosophy around a scalable enterprise and… everything else being equal, we are in a position to manage increased assets because of the total portfolio approach,” said Wiseman.
Under that approach, CPPIB is able to “very efficiently” invest the capital as it comes in (about $5 billion this year on a net inflow basis).
“Then, as we find active investment opportunities, be they in public markets, in private markets, in real estate, we then are able to sell down that passive portfolio and make the active investment decisions,” he said.
The CPPIB said net assets as of the end of the third quarter on Dec. 31 totalled $172.6 billion, up $2.5 billion from the quarter ended Sept. 30.
The increase in net assets after operating expenses resulted from $5 billion in investment income, offset by $2.4 billion of seasonal cash outflows.
The CPP fund says it routinely receives more CPP contributions than are required to pay benefits in the first part of the calendar year and then remits a portion of those funds for benefit payments in the latter part of the year.
So far this year, the fund has increased by $11 billion, including $9 billion in investment income before operating expenses. That represents a gross investment return of 5.5 per cent in the first nine months of its fiscal year and $2.4 billion in net CPP contributions.
The funds asset mix at the end of December included public and private equities totalling $85.4 billion, $57.8 billion of fixed income and real estate and infrastructure assets of $29.6 billion.
The CPP Investment Board, with headquarters in Toronto and offices in London and Hong Kong, is a professional investment management organization that invests the funds not needed by the Canada Pension Plan to pay current benefits.
In its latest review released in November 2010, the chief actuary of Canada reaffirmed that the CPP remains sustainable at the current contribution rate of 9.9 per cent throughout the 75-year period of his report. That includes the assumption that the fund will attain an annualized four per cent real rate of return.
The 10-year annualized nominal rate of return of the fund currently is 6.7 per cent, although the five-year rate is 3.1 per cent.
The latest chief actuary report also indicated that CPP contributions are expected to exceed annual benefits paid until 2021, providing an eight-year period before a portion of the investment income from the CPPIB will be needed to help pay pensions.