The role of the CPP Investment Board (CPPIB) in managing the reserve assets of the Canada Pension Plan was described to the IAPF conference by its CEO, John MacNaughton, who joined the board last September. The pension plan, which 12.5m Canadians contribute to and 4m draw benefits from, had liabilities of C$465bn (e344bn) at the end of 1992 and assets of C$36.5bn, equivalent to 8% of the liabilities. The aim is to build reserves up to 20% of liabilities, he said, as the fund moves from exclusively pay-as-you-go to fuller funding.
The board’s portfolio is dominated by C$30bn worth of government bonds, often issued at preferential rates to the provincial governments, and to offset this, the cashflow is 100% invested in equities. Domestic equities were allowed on an indexed basis only, by ministerial requirement. “During our start-up period, I think we would have chosen this approach anyway,” he said. “We did this also when making foreign equity investments.” In Canada, the Toronto SE 300 Composite Index is used, in the US the S&P500, and, for further afield, the MSCI EAFE index.
Recently, the restriction on passive investment was eased. “We can now actively invest up to 50% of the funds we allocate to Canadian equities and we expect this restriction to be removed entirely next year.” Until recently only 20% could be invested abroad, currently the limit is 25%, and next year it will be 30%. It will take the new organisation time to recruit the investment professionals it needs and widen its investment scope. Once the investment team is built up, MacNaughton says the board will look “at the benefits of active and passive investing in equity and debt, merchant banking, private equity, infrastructure projects, venture capital opportunities, real estate investments and derivative contracts”.
With only C$3.5bn in equities, 90% of the CPP’s assets are fixed income, but MacNaughton expects funds available will grow fast. “According to a projection last December by the federal government, CPPIB will receive between C$70bn and C$90bn from the CPP by the end of 2007. We expect to have C$100bn invested within the decade.” So, it will become one of Canada’s largest institutional investors.