Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.
Josh Wingrove, Greg Quinn and Scott Deveau of Bloomberg report, Canada Pension chief to testify amid trillion-dollar boost:
The head of the Canada Pension Plan Investment Board will face lawmakers for the first time in 14 years as Prime Minister Justin Trudeau’s government finalizes a trillion-dollar cash expansion of one of the world’s largest public pension funds.
Mark Machin, who took over as president and CEO of the arm’s-length investment board in June, will speak to the House of Commons finance committee Nov. 1 at its request. His testimony comes as Trudeau prepares to amend the law governing both the Canada Pension Plan and CPPIB, which manages the $287-billion fund, to formalize a deal to expand benefits.
The new plan, rolled out from 2019 to 2025, will leave the fund on pace to reach $2 trillion by 2045 — doubling the value of the original program. Enacting legislation will be made public “shortly,” Finance Minister Bill Morneau said Tuesday after British Columbia signed on to the deal, clearing the way for the government to move forward.
Morneau has said he and his provincial counterparts are still finalizing pension expansion changes and will meet in December. A departmental official said CPP “policy actions” could still be forthcoming as part of a triennial review, while Morneau spokeswoman Annie Donolo ruled out “major changes.” All modifications must be approved by seven provinces representing two-thirds of Canada’s population.
“We need to make sure we get all the details right,” Morneau said Sept. 6. “We see the CPPIB vehicle as a respected and effective vehicle for managing Canada’s pension assets.”
Lower for longer
The Canada Pension Plan is the mandatory workplace retirement savings program for 19 million Canadians. Its expansion will substantially increase the investment board’s portfolio at a time when pension funds are coping with an era of low global interest rates that threaten returns.
Board officials, excluding Machin, met informally with lawmakers earlier this year, according to finance committee chairman Wayne Easter. “We enthusiastically look forward to engaging with members of the House finance committee based on good dialogue held so far,” CPPIB spokesman Michel Leduc said.
Trudeau’s expansion will, in effect, create a two-stream plan managed by the investment board. Government officials refer colloquially to “CPP 1” and “CPP 2,” each distinct from an accounting perspective. The independent new program is considered to be fully funded and therefore will rely more heavily on future returns. Benefits for each generation will “depend on their own contributions and the associated investment returns,” finance department spokesman Jack Aubry said. That leaves fund directors under pressure to deliver.
The investment board’s track record is solid. It had a net return of 16 per cent on its investments for the calendar year in 2015, and a 7.5 per cent net return on an annualized basis for the past decade, according to a spokesman.
That compares to a 9.1 per cent net return in 2015 at Canada’s second-largest pension fund, Caisse de Depot et Placement du Quebec, according to its website. The Caisse returned about 5.96 per cent on an annualized basis over the past decade. Ontario Teachers’ Pension Plan had a 13 per cent net return in 2015 and an annualized return of 8.2 per cent over the past decade, according to its website.
CPPIB invests in private and public equities, fixed income products and real assets around the globe. Trudeau’s government isn’t considering “using other vehicles” to manage the new cash influx, Donolo said.
The Office of the Chief Actuary, in a report last month, found the fund’s investment income was nearly 250 per cent higher over the past three years than originally expected due to its “strong investment performance.” The investment board has been concentrated on diversifying across asset classes and geographies in an effort to reduce risk, in effect turning its eye away from Canada.
The investment board is a world-renowned model, according to Michel St-Germain, a vice-chairman at the Association of Canadian Pension Management. “We have managed to create a governance structure that’s very autonomous, independent of political pressure. I’m quite confident that we will be able to maintain this,” he said. “Having said that there is a challenge. There will be a lot of money there.”
Machin, an Englishman who spent years in Asia for Goldman Sachs Group Inc., may shed light on how CPPIB will handle the cash influx. His appointment was announced in May along with the departure of former president and CEO Mark Wiseman to BlackRock Inc. At the urging of lawmakers, Machin’s hearing date was moved up to Nov. 1 from an initial date later in the month. It will be the first finance committee appearance by the head of the investment board since 2002.
“With the very rapid succession, I think it was important that parliamentarians and Canadians hear from the new CEO of the CPPIB,” Liberal lawmaker and committee member Steven MacKinnon said in an interview. “Ideally it would have been better to have had him earlier, but it’s now very timely with the announced expansion.”
I was busy with an emerging manager conference today but I wanted to quickly cover this story.
First, I think it is a great idea to invite Mark Machin, CPPIB’s new CEO, to speak to parliamentarians and Canadians on what CPPIB does and why it is well equipped to handle the explosive growth that will come after the provincial and federal governments ratify the law to enhance the Canada Pension Plan (CPP).
On Monday, I wrote a comment, “Long live the CPP!!” where I stated Canadians are very fortunate to have the Canada Pension Plan, its stewards, and the astounding and highly qualified professionals at the Office of the Chief Actuary, as well as the senior managers and board of directors running and overseeing the Canada Pension Plan Investment Board (CPPIB).
I also stated absent some new public defined-benefit plan which will manage and better protect existing corporate defined-benefit plans that are dwindling, the CPP is really all Canadians can rely on with certitude to retire in dignity and security.
Sadly, as I write this comment, another story appeared in the CBC today on a pension decision looming for thousands of former Nortel workers. Basically, a lot of nervous former Nortel employees are meeting across the country at gatherings meant to help them figure out what to do when the company’s pension plan finally winds down. Decisions have to be made by the end of the year.
The article quotes a 95 year old man, former Nortel executive Dave Stevenson, stating the following: “I thought the pension was good for life, like most pensions should be.”
Unfortunately, most private pensions are not good for life which is why I’ve been arguing all along to enhance the CPP and go even further to make sure we bolster existing private defined-benefit pensions or start offering them with new funds backstopped by the federal ad provincial governments.
Basically, my philosophy is private defined-benefit pensions are dying, being replaced by defined-contribution plans which are not real pensions for life, so we need to rethink this whole business of private companies managing pensions.
In an ideal world, working Canadians pension contributions would be matched by their employers but the retirement assets would be managed by the CPPIB or one or several other large, well-governed public pensions backstopped by the federal or provincial governments.
This way if when a company goes belly-up, like Nortel, the pensions are safe and not impacted in any meaningful way because the money is part of pooled assets of several thousand companies and every employee can be reassured they can still retire in dignity and security.
This is all very logical to me and I really hope Justin Trudeau who was my brother’s classmate in high school and Bill Morneau think long and hard about continuing to improve pension policy once they finish with enhancing the CPP. There is still a lot more work left to be done and as I keep harping on my blog, good pension policy is good economic policy.
On this note, I end with a news release from CARP, CPP Enhancement to Proceed, with BC Reconfirming Support:
Vancouver, BC: CARP members will be pleased to learn that the Province of British Columbia has confirmed their support of the agreement in principal to enhance the Canada Pension Plan, allowing all the provinces and the federal government to proceed with legislation enabling CPP enhancement.
Over the last week CARP members had engaged in an email writing campaign to BC Minister of Finance, Michael de Jong, asking him to support CPP enhancement without delay.
An agreement in principal was signed by the majority of provincial Ministers of Finance on June 20th, but in mid-July, Minister de Jong called for consultations with stakeholders in BC, before proceeding with ratification.
Today, the Government of British Columbia formalized their support of the agreement, citing strong support for CPP enhancement among the over 2000 comments received, with 65% supportive and 32% unsupportive. In contrast, over 90% of CARP members polled were supportive of CPP enhancement, even though they themselves would not benefit from the updated pension plan.
CARP COO & Vice President, Advocacy, Wanda Morris, who is currently in British Columbia meeting with volunteer Chapter leaders and government officials said, “Minister de Jong made the right decision to support CPP enhancement in June and we are glad that he has reiterated that support today, after hearing from British Columbians who are supportive of a strengthened national pension plan for Canadian workers.”
“Increases in CPP contributions from employees and employers are modest and affordable and will be phased in over a period of several years in the proposed plan, but the end result will be of significant benefit to future retirees and Canada will be a better country for it,” said Wade Poziomka, CARP Policy Director.
I agree with Wade Poziomka, the end result will be great for the entire country for years to come.
As far as Mark Machin testifying in Ottawa, all I can say is he is a very nice, smart and transparent leader and I’m sure he looks forward to answering all the questions parliamentarians want him to address.
One question I would ask him is do you think CPPIB can handle the growth which is a direct consequence of enhancing the CPP or should we create another CPPIB, say a CPPIB2 to handle the needs of CPP2?
Anyways, I am not worried about Mark Machin, he’s a consummate professional who will address all their questions in a very direct and open manner. There is a reason why China signed a deal to learn from CPPIB, it’s because its leaders want to emulate its success and that of other large, well-governed Canadian defined-benefit pensions.