Finance Committee on June 11th, 2018

[The Chair, Liberal, Wayne Easter]

I call the meeting to order.

Today, pursuant to Standing Order 108(2), we are studying the Canada Pension Plan Investment Board, which we do at least annually.

With us from the Canada Pension Plan Investment Board is Mr. Mark Machin, President and Chief Executive Officer, and Mr. Michel Leduc, Senior Managing Director.

I believe, Mark, you have an opening statement. Go ahead. The floor is yours.

Welcome, and thank you. I hope we didn't upset your schedule too much by moving you up a little earlier.

[Mark Machin, President and Chief Executive Officer, Canada Pension Plan Investment Board]

No.

Thank you, and good afternoon, Mr. Chair and members of the committee.

Thank you for having me here today to discuss and answer your questions.

It is an honour to appear on behalf of the Canada Pension Plan Investment Board, or CPPIB. How we are helping ensure that the CPP remains sustainable for future generations of Canadians is an important issue to this committee.

With me is Michel Leduc, Senior Managing Director and Global Head of Public Affairs and Communications for the Canada Pension Plan Investment Board.

We welcome the opportunity to discuss CPPIB and how we are investing the funds that have been entrusted to us.

We're strong believers in the value of transparency and open dialogue as one element of public accountability, especially through Parliament. I know your schedule is quite busy, so I'm not certain whether you've had a chance to read our submission and annual report, but regardless, I look forward to the committee's questions. I'll keep my opening remarks brief with that in mind.

I'll start by sharing a few observations on the global investment climate and trends that are affecting how we operate. I'll then touch on our recent financial performance and some strategic considerations for the years ahead, including preparations to receive, invest, and manage additional CPP.

Beginning with the investment climate, competition for investments continues to be strong. There is a glut of capital with, in essence, more money chasing fewer opportunities. There are signs of this across various asset classes. The lengthy bull market in stocks, growing demand for private assets, low yields on income-oriented investments, and high valuations on infrastructure are some examples.

In this type of environment, CPPIB's advantages are even more important. These include our exceptionally long investment horizon, our size, the certainty or predictability of our assets, our people, our expert partners, our unique approach to managing our portfolio, and increasingly, our corporate brand and reputation in the world's most hotly contested investment markets.

It's equally important that we remain patient and disciplined. We must continue to be highly selective about what investments we will make. The businesses we buy need to be able to preserve their value through cycles and achieve growth in the longer term.

The businesses we are buying should also be able to withstand or benefit from disruption, but this does not mean rushing to invest in the latest innovations; rather, it means thoughtfully studying how disruptors might affect the assets we like today in the decades to come. For example, what will autonomous vehicles mean for toll roads that we own, or for parking lots? These are the types of questions we continue to examine.

When we're considering trends like the heightened competition for assets and new disruptive forces, we look well beyond the immediate horizon. We're not trying to beat the market each and every year; we're looking to add value over decades. Our strategy aims to deliver steady, absolute, long-term returns over time through significant upswings and corrections.

I continually remind our stakeholders that we fully expect that one year in 10, the fund will drop by at least 12.5%. This is planned for. We design our strategy and actions to deliver strong performance measured over multiple generations of contributors and beneficiaries.

Amidst this backdrop, our return for fiscal 2018 was 11.6%, after all of our expenses. This was driven by strong public equity markets through the first nine months of the fiscal year, and when market volatility picked up during the fourth quarter of our year, the diversification of the portfolio provided resilience.

Investment income was $36.7 billion after all of our costs, and when combined with net inflows from CPP contributions of $2.7 billion, this brought the CPP fund to $356.1 billion as of March 31. When I last appeared before you about 18 months ago, the fund stood at about $300 billion. The 10-year return on the investment portfolio is 8% and the five-year is 12.1%. After inflation, these figures were at 6.2% and 10.4% respectively, well above the office of the chief actuary's assumption of an average 3.9% return to keep the fund sustainable over the 75-year projection period in their report.

Before concluding, I'll briefly touch on a few operational and strategic considerations for the years ahead.

As you know, in January 2019 CPPIB will receive and invest its first cash flows from the CPP enhancement that the federal and provincial governments have collectively put in place. Our preparations to manage additional CPP contributions are well under way and firmly on track. Our teams are diligently working to receive these new funds. We will structure the fund going forward in a way that will respect the funding differences between the base and additional CPP, while also ensuring that we make full and efficient use of our existing platform and global investment capabilities.

You will have gathered from our remarks that given our investment horizon, we are continually looking ahead into the future. As we do this and assess the various trends that I've discussed, we know that we can't rest on our laurels. The asset management industry is changing, and we must continually adapt. Our investing strategy will become more agile so we can seize opportunities and continue to be resilient as we face a number of forces whose precise outcomes remain uncertain, whether it's global growth trajectories, technological disruption, geopolitical forces, or climate change.

To position our international competitiveness, we will invest responsibly in new technology and data capabilities. This will augment our investment talent and skills, and we'll focus on improving operational efficiencies and increasing collaboration and knowledge-sharing across our diverse investment teams and corporate functions.

Our culture will be even more innovative and ambitious, while firmly rooted in our compelling public purpose.

That concludes my formal remarks, and on behalf of my colleagues, we thank the Standing Committee on Finance again for inviting us here today. I look forward to our discussion and I'm pleased to answer any questions you may have.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much.

We'll go to approximately six-minute rounds. That way we can get everybody on with one round of questions.

We will start with Mr. McLeod.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you, Mr. Chair.

Thank you for the presentation here today. I read your report with interest. I find it very interesting that some of the emerging threats included climate change. That's an issue that has generated a lot of concern in the Northwest Territories.

I want to talk about vulnerability, which you mentioned in your report. In your annual report you outlined various measures through which the CPPIB is held accountable to the federal and provincial governments. Given the distinct nature of the territories, can you outline how the CPPIB currently engages with the governments and the contributors and the beneficiaries in the three territories? As well, is there an interest from the board to increase its accountability to northerners either through a more formal process or an informal process?

That's my first question.

[Mark Machin]

Thank you very much for the question.

Yes, we are accountable to northern Canada through the federal government. It's our understanding that the territorial ministers are present at all the finance ministers' meetings where discussions and decisions on the CPP take place. In addition, we understand that territorial officials are members of the CPP committee of officials that acts as the main forum for the exchange of information and policy ideas among the federal, provincial, and territorial officials.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you.

Maybe we can work on arranging a little more in terms of round table discussions and information sharing in the Northwest Territories specifically, and I'd be glad to help with that.

I do have a question on another issue that you raised in your report. The report mentions that the CPPIB values diversity at its highest levels, and that this year the board achieved gender parity. How does the CPP currently fare at addressing other forms of diversity, such as inclusion of people of colour and/or indigenous Canadians in the board, in management positions? Is there a commitment to addressing these areas if there is a shortfall?

[Mark Machin]

That's a terrific question.

As you pointed out, our board is 50% women, and we have a policy that there should be no greater difference than 60:40. Our senior management team today is just over 30% women, and overall we're at about 44% women.

In terms of targets for other aspects of diversity, we're very focused on that at both the board level and at the management level. We have put in place targets, and we're a meritocracy. We have to be a meritocracy to compete internationally, but we do think there is a value in having some targets in the future, so we aim in particular to increase the representation of visible minorities at the more senior levels of the organization.

Today in Canada, visible minorities are about 41% of our employees, but it's a lower percentage at the more senior level, and we want to increase that significantly. It is the same with the LGBT community. We also have a target to increase representation there. For the senior levels of women, we also have a target to increase that over time as well.

[Michael McLeod, Liberal, Northwest Territories, NT]

Do you have specific targets also for indigenous Canadians, and if you do, what is the strategy to reach those targets? Is that something you can share with this committee?

[Mark Machin]

Today we don't have a target for indigenous Canadians. About half a per cent of our employee population are indigenous Canadians, but it's something we will examine in the future.

[Michael McLeod, Liberal, Northwest Territories, NT]

What does “in the future” mean?

[Mark Machin]

Well—

[Michael McLeod, Liberal, Northwest Territories, NT]

At what point do you start to include indigenous Canadians as part of your targets?

[Mark Machin]

It's something that I think we should look at over the next year or so, so by the next time I come here, I should certainly have a crisper answer for you than telling you where we are today and where we aim to be.

[Michael McLeod, Liberal, Northwest Territories, NT]

Okay. I look forward to that information. Thank you.

[The Chair, Liberal, Wayne Easter]

Mr. Albas is next.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you, Mr. Chair.

Thank you to both Mr. Machin and Mr. Leduc for your presentation today, as well as for the work you do for Canadians in making sure that they have a strong, secure pension.

In light of those comments, obviously 15% of the current assets of the CPPIB are within Canada. Many might say that there are obviously opportunities within Canada, whether it be infrastructure or other projects.

The government came into office with a promise of a Canadian Infrastructure Bank that was oriented towards making sure that small communities across the country could have lower interest rates on their borrowing. They have instead changed that and have taken monies away from those same municipalities in order to fund this Canadian Infrastructure Bank.

Do you see the Infrastructure Bank as being a mature institution where you could put Canadians' money at this time?

[Mark Machin]

On the Canadian Infrastructure Bank, I think, from our perspective, one of the challenges I mentioned in my opening remarks is the huge amount of money chasing opportunities and the lack of supply of those opportunities. That's particularly acute in the field of infrastructure around the world. Valuations on infrastructure in Canada and around the world are at extremely high levels, and things are very finely priced, and we have struggled to find new investments in infrastructure.

One of the main reasons for that is the lack of a predictable pipeline of opportunities, opportunities of size. We have to keep our cost structure at a minimum, and therefore we can't have massive teams that are just on standby for when an opportunity comes along. As a result, our infrastructure team is fewer than 50 people to look at all opportunities in the world.

One of the things that we are hopeful about is that if the Infrastructure Bank gets up and running effectively, then it will increase the pipeline of sized opportunities that are available for investors like us, institutional investors. If that happens, then we'd welcome looking at those and looking at those through our risk return requirements.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

The question was, though, is this an institution mature enough for you to do business with? I think it will take at least five years before this crown corporation is up and running with policies and deals. As well, much infrastructure is owned or managed provincially, so to have a pipeline may be a bit of a challenge.

The question was whether you feel this institution is mature enough for the investment board's attention.

[Mark Machin]

Again, our job is to assess the pipeline of opportunity. We are hopeful a significant pipeline of opportunity will come over time as the bank gets up and running.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

The last time we had you we asked the Minister of Finance about whether or not he would stay at arm's length from trying to influence the CPPIB from making particular investments that would be politically advantageous in regard to the Canada Infrastructure Bank. Has that been the case?

[Mark Machin]

Yes, that's been the case.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Has there been any pressure to invest in the Kinder Morgan Trans Mountain pipeline?

[Mark Machin]

No, there has been no pressure.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Okay. Thank you.

My riding has a lot of seniors, and they depend on the CPPIB to make sure there are good returns, but next year with the additional CPP opening up, many millennials have asked me whether we're going to have a strong, stable CPP for them in the future.

Could you tell us a little about the reason for the separation of the CPP base and the additional CPP fund and what measures you have to ensure millennials understand that when they put that money away, it will be there when they need it?

[Mark Machin]

Yes, certainly. We expect the first funds from the additional CPP to arrive in January of next year. A huge amount of work has gone on internally to make sure we're totally ready for those funds to arrive.

Given the nature of the funding of the additional CPP versus the base CPP, we will need to run them at a lower risk level than the base CPP funds. We are also required by the act to report on the funds separately, so we'll be ready to do that and we'll be ready to invest that additional money responsibly within the risk parameters that are appropriate for that money and to make sure it is there for people who are contributing from January 1.