CPPIB Fixing China’s Pension Future?

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

The Canadian Press reports, Canada, China to share pension expertise:

The top executive at Canada’s largest retirement fund is in Beijing today to help grow the fund’s relationship with Chinese pension officials.

Mark Machin was on hand for the official launch of a Chinese translation of “Fixing the Future” — a book tracing the political and financial hurdles that were overcome when the Canada Pension Plan Investment Board was created in the 1990s.

Machin says the translation of the 380-page book was a Chinese initiative that complements a previously announced “pooling of resources” planned by the CPP Investment Board and China’s National Development and Reform Commission.

He says Canada and China face similar challenges as the number of retired people grows faster than the number of working people paying into the retirement system.

Machin says CPP Investment Board will be leading efforts to co-ordinate Canadian pension expertise and share it with Chinese government officials and other pension experts.

He anticipates the book — written by a former Globe and Mail reporter under a commission from CPPIB — will be used as a textbook in China to help teach about pension reform.

David Paddon of the Waterloo Chronicle also reports, Canada, China to share pension expertise:

China sees Canada as a valuable source of expertise as both countries grapple with the needs of an aging population that’s increasingly retired, according to the head of the Canada Pension Plan Investment Board.

“China faces very similar demographic issues and pension challenges that Canada has faced and continues to face. When you put the demographics side-by-side, there are some striking similarities,” Mark Machin said in a phone interview Monday from Beijing.

He said the most important similarity is that each country will have only about 2-1/2 working-age people per retired person by 2046.

“That’s the crux of the challenge for pension systems.”

As recently as September, the Chief Actuary of Canada’s latest three-year projection said the Canada Pension Plan will remain sustainable at current contribution rates if the CPP Fund managed by Machin’s organization can produce inflation-adjusted rates of return averaging 3.9 per cent over 75 years.

As of Dec. 31, the CPP Funds inflation-adjusted rate of return over the past 10 years was 4.8 per cent and about $300 billion of assets around the world — with more than half in North America.

While CPP Investment Board has had an office in Hong Kong that looks for suitable deals in China and the surrounding region, Machin said that its new collaboration with Chinese officials has a more general purpose.

“I think part of this is making sure that, when we’re investing in markets, we’re not just looking for things that we can get but offering a little bit back — offering a little bit of advice and insights.”

Machin was in China’s capital for the launch of a Chinese translation of “Fixing the Future,” a book tracing the political and financial hurdles that were overcome when the Canada Pension Plan Investment Board was created in the 1990s.

He anticipates the book — written by a former Globe and Mail reporter under a commission from CPPIB — will be used as a textbook in China to help teach about pension reform.

Machin says the translation of the 380-page book was a Chinese initiative that complements a previously announced “pooling of resources” planned by the CPP Investment Board and China’s National Development and Reform Commission under a memorandum of understanding signed in September.

The memorandum was one of the agreements signed in Ottawa during an official visit by China’s Premier Li Keqiang.

While the CPP Investment Board is designed to be politically independent from all levels of government, Machin said there’s a common interest with the Canadian federal government’s efforts to build economic and trade ties with China.

“Those two things are definitely aligned. I wouldn’t say they’re co-ordinated, but they’re aligned.”

CPPIB put out a press release providing more details on this exchange, Canada Pension Plan Investment Board Launches the Chinese Edition of “Fixing the Future”:

Canada Pension Plan Investment Board (CPPIB) today launched the Chinese edition of “Fixing the Future: How Canada’s Usually Fractious Governments Worked Together to Rescue the Canada Pension Plan.” Written by Bruce Little, Fixing the Future describes how Canada addressed the looming demographic crunch and its impact on the Canadian pension system in the mid-1990s. Today, the CPP Fund totals $300 billion and is projected to be sustainable for the next 75 Years. CPPIB, the manager of the Fund, is a leading global institutional investor and invests in more than 45 countries through eight offices around the world.

In the mid-1990s, the Canada Pension Plan (CPP) was underfunded and faced an uncertain future. Experts predicted that the CPP Fund would be exhausted by today, and a major overhaul was urgently needed to ensure the sustainability of the CPP for future generations of Canadian retirees. Canada’s federal and provincial finance ministers made some difficult decisions and introduced a set of reforms to the CPP, including the creation of CPPIB, which effectively ended the funding crisis.

“We are honoured to share Fixing the Future, the story of Canada’s pension reform, with China,” said Mark Machin, President & Chief Executive Officer, CPPIB. “Many of the issues that Canada faced in reforming their pension system are shared between our two countries. With China’s pension reform now well under way, we hope that some of the lessons learned in Canada are of value to policymakers in China as they work to secure the pension system for many generations to come.”

On September 22, 2016, during the visit of Premier Li Keqiang to Canada, CPPIB’s CEO, Mark Machin, signed a Memorandum of Understanding with Xu Shaoshi, Chairman of the National Development and Reform Commission. Through this memorandum, CPPIB has agreed to assist Chinese policymakers in addressing the challenges of China’s ageing population. The translation of Fixing the Future into Chinese is just one way CPPIB is delivering on this agreement.

“Fixing the Future is inspiring to policy makers and academia in thinking about establishing a coordinated policy-making mechanism for the pension reform currently taking place in China. Demographics and pension management is an important subject for China’s future, and we believe CPPIB’s successful model will set a precedent for the academia and policy makers in China as they are striving to build a sustainable social security system,” said Professor Zheng Bingwen, the translator of the book and Director of Center for International Social Security Studies, Chinese Academy of Social Sciences (CASS).

The new edition of Fixing the Future includes a foreword by the Right Honourable Paul Martin, former Prime Minister of Canada and federal Finance Minister, who was intimately involved in the reforms, and an afterword by renowned pension expert Keith Ambachtsheer. The Chinese edition also includes a foreword from Mr. Lou Jiwei, former Finance Minister of China and now Chairman of National Council for Social Security Fund, highlighting the relevance of the book to Chinese readers.

The translated version of the book was launched at an event in Beijing, co-hosted by CPPIB, the Embassy of Canada to China, CASS Center for International Social Security Studies, China Human Resources and Social Security Publishing Group and China Council for the Promotion of International Trade.

Back in September, I explained why CPPIB is aiding China with its pension reform. In short, the global pension storm is hitting China particularly hard and I’ve been talking about the need to overhaul China’s pension system for a few years now.

But I’m not sure a textbook translated in Chinese will help China address many structural weaknesses in its pension system and economy. First and foremost, the Chinese need to adopt CPPIB’s governance model which unfortunately runs contra to the country’s communist doctrine where the government has a say on everything, including the way state pensions invest assets.

Moreover, China, much like Japan, has a huge problem, namely an aging demographic which will require some form of pension safety net to make sure these people don’t die from pension poverty and starvation. In other words, bolstering China’s pension system is critically important for all sorts of socio-economic reasons.

By the way, bolstering pensions is critically important all over the world, not just China. A friend of mine is in town from San Francisco this long US weekend and we had an interesting discussion on technological disruption going on in Silicon Valley and all over the United States.

My friend, a senior VP at a top software company, knows all about this topic. He told me flat out that in 20 years “there will be over 100 million people unemployed in the US” as computers take over jobs and make other jobs obsolete at a frightening and alarming rate (Mark Cuban also thinks robots will cause mass unemployment and Bill Gates recently recommended that robots who took over human jobs should pay taxes).

“It’s already happening now and for years I’ve been warning many software engineers to evolve or risk losing their job. Most didn’t listen to me and they lost their job” (however, he doesn’t buy the “nonsense” of hedge fund quants taking over the world. Told me flat out: “If people only knew the truth about these algorithms and their limitations, they wouldn’t be as enamored by them”).

He agreed with me that rising inequality is hampering aggregate demand and will ensure deflation for a long time, but he has a more cynical view of things. “Peter Thiel, Trump’s tech pal, is pure evil. He wants to cut Social Security and Medicare and have all these people die and just allow highly trained engineers from all over the world come to the US to replace them.”

He also gave me a very grim assessment of the United States still very divided along racial lines. “Dude, I am a white Greek Christian and there are places in the country where I don’t feel welcomed at all because my skin is too dark and my name has too many vowels in it. I have Muslim friends of mine that have been beaten and harassed because of the way they look. If you live in the big cities, it’s obviously not as bad but it’s still very tense.”

We both agreed that Trump’s immigration executive order was a huge fail (“even Peter Thiel came out against it”) but I told him he will personally prosper under Trump in a “bigly” way.

He said: “No doubt, I’m getting a huge tax cut which will make me a lot richer but I’ve already decided to donate whatever I gain in tax cuts to Planned Parenthood, the ACLU and other organizations that Trump is trying to weaken.”

He told me there is “massive, widespread poverty in the US” and “the only way to effectively combat growing inequality in the US is to tax the rich, just like President Roosevelt did in the 30s when he implemented the New Deal.”

He also told me that the reason Trump wants to be close to Russia is because “racist white supremacists like Steve Bannon and others want to destroy Islam and they see Russia as a critical player to help them with their anti-Islamic agenda.”

I told him Bannon won’t survive a year in Trump’s administration and I wouldn’t worry too much about America and Russia joining alliances to “destroy Islam.”

Both my buddies out in California — this software engineer and a cardiologist — are very smart, successful left-wing bleeding heart liberals who hate Trump with a passion so we engage in some spirited email chats as to why Trump was elected and whether he’s as dangerous as they both claim (we all agree he’s a bit unhinged and a huge megalomaniac but I see this as more of a show to distract people and I tend to agree with Trump, the mainstream media in the US is completely biased and out to get him).

Anyways, why am I bringing all this up again? Oh yeah, pensions and why a good pension system is critical to ensure people retire in dignity and security and don’t succumb to pension poverty. A good pension system fights growing inequality and allows people to spend money during their retirement years, allowing governments to collect sales and income taxes from these people after they retire.”

China is nowhere near the US or Canada when it comes to its pension system but if it’s one country that can get its act together in a hurry, it’s China. Will there ever be a Chinese CPPIB? I strongly doubt it but as long as they drastically improve the current pension system by implementing some key reforms, it will be a vast improvement over what they have now.

Lastly, you should all take the time to read Mark Machin’s remarks to the Canadian House of Commons Finance Committee when he testified back in June:

Thank you for having me here today to discuss and answer questions regarding the Canada Pension Plan Investment Board and how we are helping ensure the CPP remains sustainable for future generations of Canadians.

To my right is Michel Leduc, our Senior Managing Director of Public Affairs and Communications, and to my left is Ed Cass, our Chief Investment Strategist.

I joined CPPIB four and a half years ago as the first President of Asia and then became Head of International in 2013. Prior to that, I worked for Goldman Sachs for twenty years in Europe and Asia. While I am a new resident to Canada, so far I’ve had the pleasure of travelling across the country meeting with finance ministers, the stewards of the CPP and some of our contributors.

I was enormously honoured to be chosen by CPPIB’s Board of Directors to lead such an important professional investment organization with a compelling public purpose. International organizations such as the OECD, the World Bank, Harvard Business School and The Economist, have all praised the ‘Canadian model’ of pension management due to its strong governance and internal investment management capabilities.

Our governance structure is a careful balance of independence and accountability, enabling professional management of the CPP Fund while ensuring that we are accountable to the federal and provincial governments, and ultimately the Canadian public. We know that contributions are compulsory and so we are motivated to work even harder to earn that trust.

You can the full speech here and it goes over a lot of key elements behind CPPIB’s long-term success.

By the way, when I recently told you to ignore CPPIB’s quarterly results,  I forgot to mention that those results do not include private market assets which are valued only once a year when CPPIB releases its annual report, so don’t read too much into quarterly results of any pension, especially CPPIB.

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