Finance Committee on Nov. 1st, 2016

[The Chair, Liberal, Wayne Easter]

We shall call the meeting to order.

Today we're studying the Canada Pension Plan Investment Board. We're fortunate to have with us Mr. Machin, the president and chief executive officer; Mr. Leduc, the senior managing director and global head of public affairs and communications; and Mr. Cass, the senior managing director and chief investment strategist.

Before we go to Mr. Machin, Mr. Albas has a notice of motion he wants to present. We'll get that out of the way.

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

I appreciate that, Mr. Chair. I'll be very brief. This is the notice of motion:

“That the Standing Committee on Finance undertake a comprehensive study on the first report by the Advisory Council on Economic Growth and that the committee report its findings to the House.”

[The Chair, Liberal, Wayne Easter]

Notice has been given. The notices of motion have been translated, so you can pass them around.

Mr. Machin, the floor is yours.

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

Good morning, Mr. Chair and members of the committee.

Thank you for having me here today to speak with you and answer questions regarding the Canada Pension Plan Investment Board and how we are helping ensure that the CPP remains sustainable for future generations.

With me are Michel Leduc, our senior managing director of public affairs and communications, and Ed Cass, our chief investment strategist.

I'm Mark Machin. I joined the CPPIB four and a half years ago as their first president for Asia and then became head of international work in 2013. Prior to that, I worked for Goldman Sachs for 20 years in Europe and Asia. While I'm a new resident of Canada, so far I've had the pleasure of travelling across the country meeting with finance ministers, the stewards of the CPP, and some of our contributors.

I was enormously honoured to be chosen by CPPIB's board of directors to lead such an important professional investment organization with a compelling public purpose. International organizations such as the OECD, the World Bank, the Harvard Business School, and The Economist have all praised the “Canadian model” of pension management due to its strong governance and internal investment management capabilities.

Our governance structure is a careful balance of independence and accountability, enabling professional management of the CPP fund while ensuring that we're accountable to the federal and provincial governments, and ultimately to the Canadian public. We know that contributions are compulsory, so we're motivated to work even harder to earn that trust.

We hold ourselves to an extensive disclosure policy, including quarterly reporting, annual reports, triennial reviews, and special examinations, and we announce all major investments and corporate developments.

It was just over 20 years ago that the Chief Actuary of Canada projected that the CPP would run out of money by 2015 if changes were not made to the management of the CPP. In 1997 the federal and provincial governments addressed this challenge head-on by increasing the contribution rate and creating CPPIB to manage the contributions not required to pay benefits. There was a clear imperative: to expose the fund to capital markets in order to achieve growth objectives.

Since then, CPPIB has been focused on getting the best investment returns possible. Our ten-year rate of return is 7.3%, and our five-year rate of return is 12%. More than half of the assets of the CPP fund today are now the result of investment returns, not contributions. The chief actuary noted in his report last month that over the last three years investment income was 248% higher than anticipated due to the strong investment performance of CPPIB.

Most importantly, the chief actuary reported that the CPP fund would be sustainable for the next 75 years, with an assumed 3.9% net real rate of return after inflation and all expenses. CPPIB's five-year net real rate of return as at September 30, 2016, is 10.5%.

At CPPIB we know we can't take these results for granted. It's a difficult investment climate around the world, and single years can produce very different results. In 2009, we had our worst year ever, losing over 18%, but in 2015, we had our best year ever, with a gain of over 18%. We know we can't focus on the yearly results. Our ability to see past these short-term pressures and pursue the best long-term strategy depends on strong, independent governance and the clarity of our mandate.

With the CPP's risk exposure, including wage growth, demographics, longevity, and economic risks, being highly weighted towards Canada, it's especially important that CPPIB's investments hedge against these risks.

To address these risks, CPPIB is diversifying the fund around the world and across asset classes. Currently, over 80% of the CPP fund's assets are in international jurisdictions and in a variety of asset classes, from private equity, infrastructure, and real estate to public markets.

While we're confident that this is the right strategy, we also know that competing with the largest investment firms around the world to secure the best assets comes with costs.

CPPIB, at approximately $300 billion in assets under management today, is a mid-sized organization competing with global giants. BlackRock, the largest asset manager in the world, has over $5 trillion in assets under management. Closer to home, Sun Life has almost $900 billion. Among global competition, we fall well down the list in size.

To fulfill our long-term investment goals, CPPIB took the decision 10 years ago to pursue an active management strategy that would both maximize returns and create a more resilient, diversified portfolio.

Pursuing an active global strategy was a decision taken very seriously, with considerable analysis. Success depends on sufficient resources to compete and manage risk effectively, and this is important context when looking at our costs. In order to compete, we need expertise and skill as a knowledge-based enterprise. There's no doubt that the winners will be those investment firms with the most talented investment teams and a global footprint to cultivate critical relationships with partners, governments, and others to secure deal flow and manage the risks over time in order to maximize returns and manage risks for our contributors and beneficiaries.

Before concluding, I'd like to address Bill C-26. CPPIB is currently analyzing the legislation to ensure that we are completely ready to implement the amendments that affect us.

With or without reform, the CPP fund is projected to grow significantly in the future, and we're well prepared to manage a larger fund. When we evaluate investment programs, new processes, and supporting technology, we always want to ensure that they can be scaled to take into account increased size. We are very confident that we'll be ready to manage the additional funds.

Bill C-26 requires separate and joint financial statements for both the base CPP and additional CPP. While we're working through the details, we will be able to meet this new requirement.

We believe that it's possible to manage the consolidated fund while having regard to the funding and the requirements of the base CPP and the additional CPP. We recognize the additional reliance upon investment income for the additional CPP due to its fully funded nature and therefore a need for a more conservative asset mix for the additional CPP. We will be working closely with the chief actuary, Finance Canada, and provincial governments to ensure that we are meeting the intent of the legislation.

To conclude, in order to successfully achieve our mandate for Canadians, our competitiveness is predicated on capabilities to buy assets that will create enduring value-building growth. It is a deep privilege to serve, and we believe we are on track. Public confidence is critical, and we must continue to work hard to earn that trust every day. We submit that Canadians have reason to be confident as the hard work continues.

My colleagues and I will be pleased to answer your questions.

Thank you, Mr. Chair.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Machin.

Starting first, with a seven-minute round, we have Mr. MacKinnon.

[Steven MacKinnon, Liberal, Gatineau, QC]

Thank you, Mr. Chair.

Mr. Machin, congratulations on your appointment and welcome to the Standing Committee on Finance.

You mentioned that the Canada Pension Plan Investment Board has $300 billion in assets under management. Is that correct?

[Mark Machin]

Thank you very much for the question, and thank you for your congratulations.

Yes, we have now, in our latest quarter, which we'll formally announce next week, assets under management of $300.5 billion.

[Steven MacKinnon, Liberal, Gatineau, QC]

We can all agree that the board plays one of the most essential roles in Canada. It manages the nest eggs, investments and pension funds of Canadians. This should be mentioned.

The last time one of your predecessors appeared before the committee was in 2002. Do you agree that it has been too long since a board representative has met with us?

[Mark Machin]

I'm delighted to have received and accepted the invitation to appear here. I look forward to future invitations to appear again.

[Steven MacKinnon, Liberal, Gatineau, QC]

You'd be happy to receive those future invitations, and you would agree that we should see you more often.

[Mark Machin]

If the committee would like to see me more often, I'd be delighted to come here more often.

[Some hon. members]

Oh, oh!

[Steven MacKinnon, Liberal, Gatineau, QC]

Very good. I know that a number of my colleagues will have questions.

You outlined in your presentation some important information as to how you judge risk and manage risk, and how you manage assets. The fund has gone from a 70% equity equivalent, I think, in terms of assets under management, to 85%. How do you reassure Canadians that this is not incurring undue risk on their behalf?

[Mark Machin]

Thank you for the question. I'll give some comments, and I think Mr. Cass may want to as well.

We believe that our mandate is very clear. We need to maximize returns for our pensioners and contributors while also not taking undue risks. When we look at maximizing returns without undue risk of loss, we believe that it is prudent to gradually increase our risk up towards the 85% equity equivalent risk, and we're doing so over an extended period of time. We're doing that over three years.

One of the reasons why we took that decision recently was that since active management—we made that decision back in 2006—we've had quite a successful run despite extraordinary volatility in markets over that period of time and despite weathering the global financial crisis. We've had returns over that period of 7.3% and we substantially outperformed what would have been the passive alternative that we measure ourselves against, what we call the reference portfolio. We've created over $17.1 billion of additional value.

When we look at that, we are fairly confident in our ability to manage our active strategies and confident that they are creating value. So we see an opportunity to take a little more risk given the very long-term nature of our outlook. We think that is prudent within the context of the structure of the fund.

[The Chair, Liberal, Wayne Easter]

Mr. Cass, go ahead.

[Edwin Cass, Senior Managing Director and Chief Investment Strategist, Canada Pension Plan Investment Board]

By way of additional comment, it's important to recognize that the base CPP is a modified pay-as-you-go plan, and that's in contradistinction to the additional CPP, which will be a fully funded plan.

As for a pay-as-you-go plan, we're a relatively young investment organization with contributions still exceeding benefits payable, so arguably the risk tolerance of it is higher than a standard pension fund, and that's why we're taking the decision to up the risk equivalent nature of our investments over the next few years.

The additional CPP is a fully funded plan, and as Mark pointed out in his opening remarks, that implies a heavier reliance upon investment income, both now and in the future, and this will mean that the additional CPP will have to be invested with a lower risk tolerance than the existing fund.

[Steven MacKinnon, Liberal, Gatineau, QC]

Thank you very much.

I know that even a $300-billion fund, which is a hard number for Canadians to understand, is not a particularly large fund in a global context, but as we grow with CPP 2 we will move up the league table, so to speak, in terms of size. What I'd like to ask you about is perhaps a more philosophical question in terms of accountability and transparency to Canadians.

In terms of your cost structures and your governance structure, what do you envisage philosophically in terms of how the CPP reports to Canadians? What level of accounting will it provide to Canadians? How understandable will that accounting be? How will CPPIB be governed? Could you provide your reflections on those topics so that we can consider them, both in the context of evaluating Bill C-26, and also in performing our role of oversight and reassuring Canadians that their pension funds will be there when they need them?

[Mark Machin]

Thank you very much for the question.

On governance, we're governed by a professional board of 12 directors who are appointed and selected based on their financial, business, and other related expertise. They take their governance role extremely seriously and challenge management in that regard.

The governance framework that has been set up for CPPIB, with its accountability to the federal and provincial governments and ultimately to the beneficiaries and contributors, to Canadians, is being held up as a gold standard around the world when we look at our peers around the world and the studies that have been done, whether by the World Bank or The Economist or others. It's a robust governance system, and one that is incredibly important.

We also have disclosure that we think is over and above what any of our peers do. We report quarterly and have done so since inception. We have quite extensive quarterly reporting. We have an extensive annual report, a 130-page annual report, with very detailed disclosure. Then we have a triennial review by the chief actuary, plus the other triennial review that happens. We have the special exam that happens on a regular basis.

There is a series of governance and controls and checks and balances externally, and then internally as well. Disclosure-wise, it's not just the annual report and the quarterlies: every single major investment we make, we disclose, and we have thousands of pages of disclosure on our website. We believe that it's important to be transparent and have good disclosure that everybody can access. Also, every two years, we go out and we have physical meetings in every province where we have a steward. We do a public meeting that is accessible to all Canadians. That's what we do on a biennial basis.

Disclosure and governance are very important. We think they've stood the test of time so far, and we'll continue to look for ways to enhance them.

[Steven MacKinnon, Liberal, Gatineau, QC]

My last—

[The Chair, Liberal, Wayne Easter]

Please be very brief, Mr. MacKinnnon.

[Steven MacKinnon, Liberal, Gatineau, QC]

I'll keep it short. I have a final question to ask you and it concerns the Official Languages Act.

You're the CEO of a major Canadian institution. Can you reassure anglophone and francophone Canadians that the investment fund will comply with the Official Languages Act?

[Mark Machin]

I can. We are subject to the act, and we will continue to honour that commitment.

Mr. Leduc.

[Michel Leduc, Senior Managing Director and Global Head of Public Affairs and Communications, Canada Pension Plan Investment Board]

Thank you for the question, Mr. MacKinnon.

Rest assured that we'll keep distributing our communication products in English and French. Even our international offices are bilingual. Our posters and documents are also bilingual, even when modern communication technology such as Twitter is used. We'll keep applying the Official Languages Act.

[Steven MacKinnon, Liberal, Gatineau, QC]

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you.

We were considerably over time on that round.

Mr. Deltell.