Canada Pension Plan

CPP Investment Board

Under the direction of then Finance Minster Paul Martin, the CPP Investment board was created in 1997 as an independent organization to provide the necessary investment returns to sustain the CPP. In turn, the CPP Investment board created the CPP reserve fund, which will basically be the vehicle for achieving sustainability. The CPP Investment board is organized like a publicly traded company. It reports quarterly on its performance, has a 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 the Federal government.

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The CPP reserve fund receives its funding from the CPP and basically invests that like a fund manager would. As of August 2005, the CPP Reserve fund contained a total of $87 Billion under management.

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The CPP reserve fund needs to achieve a goal of 4.1% return (inflation-adjusted) in order for the CPP to be self-sustainable. As indicated in its most recent quarterly report in August 2005, the CPP reserve fund averaged 7.2% return in the past 5 years. Adjusted for inflation, the real rate of return is 4.6%, which means that it has achieved its stated goal thus far.

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Growth and Strategy

The CPP reserve fund is aiming to achieve the following growth targets:

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• $147 billion by 2010.
• $160 Billion by 2012.
• $200 Billion by 2015.

The strategies they use to achieve these targets are listed on the CPPIB website, and includes the following:

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• Diversification. Back in 1997, the CPP started out 100% invested in Federal bonds, but now it has diversifed not only by asset class, but also by country, as it is no longer restricting itself to invest in Canadian equities and assets.
• Employing basic asset allocation theories. With diversification of investments as one of their objectives, their current Asset mix is now as follows:
• * Public Equity => 55.2%
• * Federal & Provincial bonds => 33.1%
• * Private equity => 3.6%
• * Cash+Money Market => 4.1%
• * Real return assets => 4%
• 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.

Controversy

The CPP reserve fund is well on its way to sustainability, but it also has its fair share of problems. The most obvious one would be its rather generic social investing policy. Basically, the CPPIB says that as long as a company is engaged in a business that is lawful in Canada, or is located in a country that do not have any trade sanctions applied against that country, then the CPPIB will consider investing in that company. This basically means that the CPPIB can and will invest in tobacco companies, stem cell research companies, whale meat processing plants, or companies that have a bad track record of polluting the environment. Consequently, this policy has drawn a lot of criticism from many advocate groups.

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Another concern is that the CPPIB does not disclose exactly how much fees and commissions are paid out to all of the fund managers who are contracted to assist with managing the allocated amounts of the reserve fund. The only fee structure disclosed in the annual report are those to private equity firms, where it is stated that management fees are approximately between 1% and 2% of the total amount committed to those firms. However, there is no disclosure of a breakdown of the management fees paid out to all the other fund managers in each asset class.

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