Under the direction of the then Canadian Finance Minister Paul Martin
, the CPP Investment Board
was created in 1997 as an organization independent of the government to monitor and invest the funds held by the Canada Pension Plan
(CPP). In turn, the CPP Investment Board created the CPP Reserve Fund. The CPP Investment Board is a crown corporation created by an Act of Parliament. It reports quarterly
on its performance, has a professional management team to oversee the operation of various aspects of the CPP reserve fund and also to plan changes in direction, and a board of directors that is accountable to but independent from the federal government.
Socially Responsible Investing
The growing issue of socially responsible investing
has been raised for the CPPIB, with civil society
groups like ACT for the Earthand InterParesexpressing
concerns about the investment policies of the CPP Investment Board, alleging potential conflicts of interest or asking for the adoption of ethical investment policies. These groups have criticized the CPP's investments in arms manufacturers, tobacco companies, big oil, and companies that engage in criminal activities. The CPP Investment Board (CPPIB) has responded with a Policy on Responsible Investing
ACT for the Earth countered this with its own report, Against Common Sense
, which argues that the CPPIB uses its proxy shares in a wide array of companies "to vote against peace, ecology, and human rights at numerous corporate shareholder meetings," in direct violation of its own responsible investing policies.
Future and Direction
is the current Chief Executive Officer of the Canada Pension Plan Investment Board
. An article in the May 18, 2006 Globe and Mail
reported that the CPPIB plans to increase the fund's foreign investments. According to the 2007 Annual Report, about 45% of the fund's assets are now invested in securities
domiciled outside Canada, largely in the United States
and Western Europe. In addition, the CPPIB has been broadening the scope its investments to include emerging markets, although Mr. Denison 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 has also changed direction in its investment philosophy. It evolved from investing exclusively in non-marketable government bonds to passive index-fund strategies and, more recently, to active investment strategies.
Growth and Strategy
The CPP 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 4.1% by 2020 in the CPP actuary's report, grading down from 5.0% in 2005. As indicated in its Financial Highlights for the fiscal year ended March 31, 2007 (document consulted on Aug. 3, 2007), the CPP reserve fund averaged 13.6% return in the past 4 years, well in excess of Canadian inflation rates.
The CPP reserve fund is aiming to achieve the following growth targets (in assets):
- $147 billion by 2010.
- $200 billion by 2015.
- $592 billion by 2030.
- $1.55 trillion by 2050.
The strategies used to achieve these targets are listed on the CPPIB website, and include the following:
- Diversification. In 1997, the CPP fund was 100% invested in federal government bonds, but it has since diversified not only by asset class, but also internationally.
- Employing basic asset allocation theories. With diversification of investments as one of their objectives, the current asset mix is now as follows:
Using equity firms to assist in achieving targets for each asset class. The CPP reserve fund allocates certain amounts to various pre-qualified equity firms to be managed and used towards reaching the growth targets. For example, the CPP Investment Board hires private equity firms to help it invest in private companies, fund managers to help it invest in public equities, bond managers to assist in investing in bonds (within Canada and foreign bonds), and so forth.
Public Equity => 55.2%
Federal & Provincial bonds => 33.1%
Private equity => 3.6%
Cash+Money Market => 4.1%
Real return assets => 4%
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 historical growth with the investment performance is tabulated as follows:
|| Net Asset Value (CAD)¹
|| Rate of Return (annual)² |
| Mar 2003
|| $55.6 Billion
|| -1.1% |
| Mar 2004
|| $70.5 Billion
|| +10.3% |
| Mar 2005
|| $81.3 Billion
|| +8.5% |
| Mar 2006
|| $98 Billion
|| +15.5% |
| Mar 2007
|| $116.6 Billion
|| +12.9% |
| YTD 2008³
|| $119.4 Billion
|| +0.5% |
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.
³April - December 2007.
Losses due to changes on Income Trust taxation
On October 31, 2006, Finance Minister Jim Flaherty proposed new rules that will effectively end the tax benefits of the income trust structure for most trusts. The Canadian Association of Income Trust Investors research shows that the Canada Pension Plan has lost $300 million CAD in market value as a result of the surprise change in tax legislation.
However, according to the CPPIB website, no such losses were ever reported or even acknowledged. The above suggested estimates are unverified by either the Ministry of Finance or by Bank of Canada. The accuracy of the Canadian Association of Income Trust Investors report has never been verified by an independent auditor. However, from their report, it is not clear if the alleged losses refer to losses by CPP because they held Income Trusts in their portfolio or because the Toronto stock market index, the TSX, fell the next day.