Built to Last

What is the board’s biggest challenge?
I think the biggest challenge will be to stay disciplined, given all of the turmoil that’s around us. To keep the focus on the long term, to keep the focus on disciplined investment analysis and assessment—and the discipline not to make knee-jerk reactions to current environments.

We’ve reaffirmed our investment strategy as being correct for our long-term horizon—for the fact that we do not face redemption requests and we have quite a certainty of cash flows, and bearing in mind our responsibility to contribute to the realization of those CPP benefits over time. We think in terms of the 75-year horizon that the chief actuary considers and what our part is in ensuring that those benefits are going to be paid and contribution rates [are] kept at the manageable levels that they’re at now.

How has the CPPIB been affected by the market downturn?
Every large pool of capital has been affected. But we’re also mindful that we had applied a disciplined approach throughout [it]. We avoided some of the dramatic pitfalls out there in terms of securitized assets and highly leveraged assets. Current market conditions, besides creating near-term portfolio declines, are also providing us with long-term investment opportunities.

When you do think the markets will turn around?
I’ve learned a long time ago that making predictions about the market in the short term is not going to do me any credit. But I would say that we continue to believe that our long-term investment strategy, which has a significant equity component, is the right one for us. But whether markets will improve or whether they’ll be choppy for many, many months, no one knows. We’re there for the long term; we’re not going to try to time the market.

We know that we’re going to have new cash to invest for the next 11 years, so we’re in a favourable position to take advantage of depressed asset prices now—which will prove to be very good investments for the long term. That’s a state that not all investment pools have. Many of them are facing demands for redemptions or unpredictable cash flows.

What does this mean for the future retirement income of Canadians?
I would want to get the message out that the CPP is sustainable and secure. There may be a lingering worry that [it] is not going to be there when [you] come to retire. That fear should be put to rest. The chief actuary has reaffirmed that the plan is sustainable—that, over the long term, contribution rates are going to be sufficient to pay the promised benefits.

What is the CPPIB’s take on the funding crisis that many pension plans are experiencing?
I hesitate to comment on other pension plans because our portfolio structure is really quite different. We are a partially funded plan. We’ll never be fully funded because we have a relatively high degree of certainty of contributions coming in and a high degree of certainty of the benefits that are expected. With 17 million participants, the predictions of benefit outflows and contributions are pretty reliable. But we’re certainly mindful and sympathetic of the pension angst that’s out there.

What is the board’s approach to governance?
We start with our legislated mandate, which is to invest the funds for ‘maximum return without undue risk of loss.’ That seems like such an innocuous phrase, yet it guides our whole governance structure and approach to investing. The board made a fundamental decision in 2005 to pursue a value-added investment approach. The approach is really centred around that mandate and that decision. We oversee the investment policy [and] the management’s execution of that policy. We approve a risk profile for the organization and monitor the continued operation within that risk profile.

Has this approach changed as a result of the current economic climate?
Tactically, the management has made some shifts in its investment decisions and has decided to emphasize certain areas and to back away from others. But the fundamental investment philosophy has not changed.

Has governance become more of a priority now?
It was always a priority. I would say it just continues to be a source of great attention on the part of the board and the management.

The CPPIB had a recent bid to acquire infrastructure assets. What’s behind this?
On March 31, we announced an offer for the shares of Macquarie Communications Group. The assets are very attractive infrastructure assets—perfect for a long-term investor. There are more and more of those opportunities surfacing.

Can you describe CPPIB’s philosophy/approach with respect to responsible investing?
We have a very clear policy on responsible investing, which is outlined in our annual report. We were one of the early participants with the United Nations group that developed principles for responsible investing. That’s an important part of our philosophy.

But I need to emphasize that this is not making social judgments; this is recognizing that economic, social and governance practices have an impact on long-term investment returns. That’s our mandate. We encourage disclosure, we encourage compliance with environmental regulations because we believe it will enhance long-term investment returns—not because we have a particular axe to grind.

What about the scrutiny the CPPIB has undergone for investing in tobacco?
There are some funds around the world that have screens based on a particular political or interest group’s view of different investments, but we don’t make screens of investments. However, we do look at environmental, social and governance factors as they relate to future investment returns. We have had direct engagement with all of the tobacco companies in which we invest, asking them to disclose how they are responding to increased regulation of tobacco products.

You say the CPP fund has been “built to last.” To what do you attribute this?
I really attribute it to the wisdom of the federal and provincial officials and their political leaders back in the mid-1990s, who confronted the fact that the CPP fund was in trouble as it was back then and reformed the CPP to be sustainable.

Any final thoughts?
There continues to be, among a significant portion of the population, a misunderstanding that the CPP might go broke. The CPP is on a sound footing. Canadians should sleep well at night.

This interview is an extended version of View Point, published in the May 2009 issue of Benefits Canada and available online at: www.benefitscanada.com/issuearchive/may2009

Brooke Smith is associate editor of Benefits Canada.
brooke.smith@rci.rogers.com

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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the May 2009 edition of BENEFITS CANADA magazine.