I was in London this past September and met with the London office of the Canada Pension Plan Investment Board (CPPIB).

 

One topic that usually comes up in our financial planning conversations with our clients is that of CPP benefits.  

 

If you are receiving CPP benefits today, the maximum benefit is $1134/month; not shabby at all.  I can think of many exciting ways to spend that kind of money when I am retired.  A whole summer in the Rhone Valley perhaps; basking in the sunshine by the pool and sipping on a delicious Chateauneuf-du-Pape thinking about stocks!

 

 

Years ago, CPP was set up as an in-and-out fund – with contributions from people working today paying retirement benefits to people who had already retired.   But in the 1990s, studies of Canada’s population showed that there would be too few workers to support the growing numbers of retirees at some point in time. When that happened, it was feared there wouldn’t be enough money coming into CPP to pay benefits to those who had retired.

 

To fix this problem, Canada’s federal and provincial governments reformed CPP in 1997 and created an investment body (the CPP Investment Board, or CPPIB) to invest money not being used to pay benefits and to help ensure the CPP would be able to pay out to future generations.

 

That solution is working. Reviews of the CPP by Canada’s Chief Actuary project that, at current rates of return, the CPP will be able to pay benefits to retirees for at least 75 years.

 

CPPIB earns those returns in a variety of ways.  They invest in public markets (stocks and bonds) as well as private transactions that range from toll roads and student housing to clean energy providers and data centres worldwide.

All those investments have one thing in common: CPPIB sees them as growth opportunities that will generate returns and help CPP to pay pensions to generations of Canadians.

 

The CPPIB operates with a singular objective: to maximize long-term investment returns without undue risk, taking into account the factors that may affect the funding of the CPP and its ability to meet its financial obligations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The CPP fund is currently $368 Billion

• 16% Canadian assets
• 18% Europe
• 23% Asia Pacific
• 3% Latin America

Asset allocation:

• 21% fixed income
• 23% real assets
• 55% in public and private equities

What most Canadians may not know is that Canada forms only 16% of the CPPIB’s total investment portfolio. A large portion of these Canadian assets comprise of legacy fixed income investments inherited from the provinces and as these mature in the next few years, they plan to deploy into more non-Canadian assets. Emerging markets currently make up 20% of the fund but will go up dramatically to one-third in the next 7 years. Their focus in emerging markets are in countries like China, India and Brazil.  

 

The CPPIB staff are currently mostly in Toronto, but these are mostly operations, support and IT staff. Half of the CPPIB’s investment professionals will be foreign-based in a few years.  Their London office has been growing massively and they are currently running out of space at Portman Square. 

 

They have created a dedicated group called Thematic Investing, which identifies sources of structural growth or disruption – including innovations in technology, business models and demographics.  This group focuses on six major themes – aging, growth in peak spenders (particularly millennials), growth in both retiree and middle-class populations in China and India, data and analytics, auto-mobility, and energy disruption.

 

E-commerce, which they believe is the most significant consumer trend of the past 15 years, gets close attention since it intersects with both CPPIB’s retail real estate holdings and their more recent investments in logistics centers and delivery companies that support e-tailers.

 

Keeping pace with opportunities also requires institutional investors to widen the lens on emerging markets, particularly in the Asia-Pacific region.   For CPPIB, that’s meant deeper exploration of investments in China and India.

 

Mark Machin, CEO of the CPPIB notes that “by 2025, the Asia-Pacific region is anticipated to comprise around 40% of global nominal GDP and about 50% of global population. It also will account for about 30% of private consumer consumption”.

 

CPPIB’s made significant investments in China – $37.1 billion, representing about 10% of the CPP Fund’s total assets.

 

And those numbers are set to rise. Sometime between now and 2025, we expect emerging markets investments to account for approximately a third of CPPIB’s portfolio.

 

I enjoyed my discussion with my CPPIB friend over lunch at a chippy in Mayfair!