As some governments consider restricting the ability of sovereign wealth funds to invest in their countries’ assets, the Canada Pension Plan Investment Board is taking steps to protect itself from protectionism. Benefits Canada sat down with the Board’s chair, Gail Cook-Bennett, to talk about why the CPPIB isn’t an SWF and why it’s the envy of other public pension plans.

What are sovereign wealth funds (SWFs)?

They’re large pools of capital from government revenues. They could be from foreign exchange reserves; they could be from commodities, such as oil and gas. And their governments are actively investing these pools of capital around the world. And there’s a wide range of them with quite different characteristics. The problem is that some of them lack clarity of objectives and certainly, that gives rise, potentially, to concern as to what they’re about. That is, whether they’re truly commercially driven organizations or if they’re somehow operating strategically [or] politically in what could be sensitive industries.

Is there any legitimacy to the fears about these funds?

There’s legitimacy in the sense that some of them are pretty opaque. What we’re calling for is to move beyond the label of ‘sovereign wealth fund’ and look at the characteristics of these entities. It is important to focus on how they behave, so that any response to the concerns does not give rise to a pretty blunt instrument, in the form of protectionism.

What have you seen in the way of protectionism?

As far as I am aware, there is only discussion about potential legislation. Perhaps that’s because we’re at a pretty early stage in the debate. It is only recently that the spotlight has been placed on these funds.

What differentiates the CPPIB from a sovereign wealth fund?

Well, we’ve got clear differences. First of all, the assets that we’re operating with are not government assets. They are the contributions of individual Canadians and employers to the CPP. So, right from the beginning, that fundamental difference is important. Then, add to that the reforms that came about in the mid-’90s—our funds are segregated from government general revenues and assets; the CPPIB doesn’t receive any top-ups in the form of tax revenues. Those reforms were specifically designed to protect us from government interference. So we were designed to be an organization operating at arm’s length from governments, but with accountability. And, given that this governance approach is enshrined in legislation, we have an added insurance policy. That is, to change the legislation and therefore the governance framework, the agreement of two-thirds of the provinces with two-thirds of the population is required.

How big an impact could protectionism have on the CPPIB?

Any impact would come from broad-based protectionist measures that did not recognize the characteristics of our fund.

What impact is there, if any, for other large public sector pension plans in Canada, such as the Ontario Teachers’ Pension Plan or OMERS?

With ‘Canada’ in our name, with ‘Ontario’ in [their] names; to the extent that the differentiation is not made [between SWFs], I think there’s a potential problem.

How successful have you been in convincing those who matter that the CPPIB is different?

Internationally, we have been working on this—in the U.S. and with the OECD—and those that understand our model respect it. There is a fair bit of envy about our arm’s length protections from governments. I think the issue here is education of policy-makers that we are different. What we’re trying to do is contribute to the general debate. We believe there are aspects of our model [that make us different], and I’ll point to two. Our investment objectives (to maximize returns without incurring undue risk of loss) are very clear, and we’re not permitted by legislation to do anything other than that. The second one is transparency. If you know what these funds are about and you can confirm that they are operating according to commercial principles, then much of the concern is reduced.

Are others using the CPPIB model? Are others taking components of our model and implementing them into their own?

In this process of differentiating themselves there are funds that are saying “our investment objectives are clear and we are transparent” so there are some that even though they are SWFs and dealing with government money are stressing those two features in their response.

Jim Flaherty recently pledged $33 billion to investments in Canadian infrastructure and he put out an invitation for public pension funds, such as CPP, to make investments in Canadian infrastructure. Do you see Canada as a good source of infrastructure investment opportunities?

The fund is interested in diversification and diversification into infrastructure and what we look for are opportunities either at home or abroad where the regulatory system and the system of dealing with these going private transactions are absolutely clear, so that’s the basis upon which we go into the investments.

The CPPIB has accomplished a great deal in the past 10 years or so and has gone from a passive investor to an active investor. To what do you attribute this success?

That’s interesting. We walked before we ran so to speak. We made a decision about three years ago to become a more active investor. That was shortly after David Denison came on board. What that meant was that if we were going to try to add value to a passive market return that we were going to have to build an organization with people who could compete with other pools of capital whether they be private equity or market participants. That’s what we have done under David’s leadership. We’ve built an organization. We’ve incented them to perform on the basis of total portfolio returns. And also quite frankly to do so in a fashion that respects all of the individuals involved. It’s a platform that is evolving now and we hope will continue to bring good value added results, not as good as last year’s, but certainly over time it can achieve added value. We’re doing this for 17 million Canadians.

Is it safe to say that the whole nature of pension investing is changing?

If I were to comment I would say it is changing for the good and the governance of pension funds is changing for the good and for the benefit of the beneficiaries quite frankly. I will say also if you go to international meetings you find that large pension funds in Canada are very well received abroad and among the very best internationally.

Looking forward, what are some of the bigger challenges and opportunities for the CPPIB in the next 10 years?

If you looked at the comments from the C.D. Howe Institute about our model, the one thing they point out is that everyone has to be absolutely vigilant about protecting our arm’s length relationship from governments. One of the best ways to differentiate yourself from a sovereign wealth fund is actually to be independent. Our success is going to depend on that arm’s length relationship being retained. There has been no evidence in the nine years we have been in operation that there has been interference, but you have to be vigilant.

Don Bisch is editor of Benefits Canada.

© Copyright 2008 Rogers Publishing Ltd. A shorter version of this article first appeared in the February 2008 edition of BENEFITS CANADA magazine.