BC: Can you talk a bit about the new law?
HR: We had new law that was adopted just before Christmas (the Act to amend the Act respecting the Caisse de dépôt et placement du Québec, which defines the fund’s objectives). Namely, [there are] two [changes]. The new law clarified the main mission: to manage the money coming from the depositors in order to provide them with the best returns within their investment policy. The other thing the law has been doing is to substantially improve the governance rules concerning the Caisse. There will be a few changes: for example, the split of the chairman and the CEO. There will be an incoming executive part-time chairman of the Caisse and also will be, down the road, changes of the board structure; the target [is] to have two-thirds of the directors be totally independent of the depositors.
BC: What have you been focusing on recently?
HR: In this business, it’s people driven and talent is key. And the challenge is to [not] have mediocrity—you pay for performance. So, this is a tricky culture change to implement. At the same time, I’m going to pay each individual for what they really produce.
BC: Are salaries a concern in light of the spotlight on executive compensation—are you bound by any hiring restrictions?
HR: One [restriction] is through the fact the Caisse is a public sector organization. We have, over the years, been trying to improve compensation. But we also have a perception issue. I guess we’re lucky enough [to be] in a situation where the depositors are very supportive so that they’re pushing the Caisse and all the stakeholders to make sure that we are able to recruit the best people. Now, this is a moving target. Look at what leaders and top managers [are facing]. But in any area, in real estate, in financial, in hedge funds, in private equity, in those [companies] that aren’t creating value, [talent] is rare and you have to pay for it.
BC: Let’s talk about alternative assets.
HR: Alternative assets are key. Long-term bonds offer a 4.5% return and we need 7% to 8%. So the gap has to be closed by something else. Traditionally, stocks were the way to close the gap. But the risk premium that we used to enjoy on the stock side has been reduced. What’s left are a lot of other things—real estate is a natural candidate. Private equity is another one. Hedge funds. And also other geographies, be it Eastern, Asia, China, India, Latin America. Over the last eighteen months, [there] has been the tremendous amount of the cash that has been available to all of these markets. [There is] too much money for the number of deals—and the price is going up. We’ll probably end up with a lower return on financial and real estate assets in the next two to five years because of that.
BC: What challenges remain?
HR: If the interest rate goes down from 5% on the 10-year bonds to 2%, you have a three basis point drop in interest rates. What will this produce, most likely, on the asset side, is a big jump in the value of the bond portfolio. If interest rates go down because of a recession, then the stock market may go down. In that case, you end up with the assets going up only on the bond side. But one thing is sure: if you have a drop of three basis points on the interest rates, and those interest rates drop off with all interest rates across a curve, then the value of the liabilities of the pensions is going to increase substantially. And you may end up with a very nice return [which is] totally erased by the increase of the liabilities. That is something that we’re not educated about. There’s a lot of confusion out there about what you need to believe to have a better future in pensions.
Anna Sharrat is managing editor of Benefits Canada.
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