Thank you.
Good afternoon, Mr. Chair and committee members.
I'd like to start my remarks by commending members of Parliament for your dedicated public service in response to the COVID-19 pandemic. I recognize these are difficult times for many of your constituents. When faced with a crisis of this scale, your role as elected representatives becomes even more important.
My name is Mark Machin. I am the president and CEO of CPP Investments, and I am accompanied once again by my colleague Michel Leduc, who is our senior managing director and global head of public affairs and communications.
This is our fourth time appearing together before the House of Commons Standing Committee on Finance.
It is great to see some familiar faces, and I look forward to meeting the newest members of the committee. I am disappointed we are unable to meet in person this year, but I am also grateful that we can do this virtually.
CPP Investments has a critical mission, which is to help ensure Canadians have a strong foundation of financial security in retirement. To do so, we invest the assets of the CPP with a clear objective: to maximize returns without undue risk of loss, taking into account the factors that may affect the funding of the plan.
We're governed by federal legislation, the Canada Pension Plan Investment Board Act, or the CPPIB Act. Passed by Parliament in 1997, the decisions made by policy-makers at that time set us on the path to becoming the organization we are today. As outlined in the CPPIB Act, the assets of the fund are managed in the best interests of the Canadian contributors and beneficiaries who participate in the CPP. These assets are strictly segregated from government funds, secured and managed professionally, exclusively to pay earned benefits among contributors.
CPP Investments operates at arm’s length from federal and provincial governments with the oversight of an independent, highly qualified professional board of directors. Management reports not to governments but to our board of directors. Any amendments to the CPPIB Act require the consent of at least two-thirds of the provinces that participate in the CPP, representing two-thirds of the population. CPP Investments is a strong believer in the value of public accountability and transparency. Our act holds us to rigorous accountability requirements, but we also go beyond our legislated requirements and make every effort to ensure federal and provincial stewards, as well as Canadians, are kept informed of our activities.
Our approach to meet the fund’s investment objectives has a dual focus. It is designed to achieve long-term total fund returns that will best sustain the CPP and pay pensions, and to generate returns above what could be achieved through a low-cost, passive investment strategy.
To succeed in highly competitive global financial markets, an investor must have and make good use of its comparative advantages. The enduring nature of the fund, our governance, talent, culture and strategic choices drive our global competitiveness. Our investment strategy is designed to deliver a highly diversified portfolio that will maximize long-term returns without incurring undue risk. We are invested globally across public equities, private equities, bonds, private debt, real estate, infrastructure and other areas.
Today, more than 20 years after receiving our first $12 million of net inflows from contributions to invest, the fund has surpassed $400 billion and is among the world’s top pension funds. Our governance structure and clarity of mandate are internationally recognized as a leading example, for other countries to emulate, of sound management of national retirement plans.
This has been a challenging few months. The health and social impacts of the COVID-19 pandemic upended the personal and working lives of Canadians and billions of people around the world. The COVID-19 pandemic threw the global economy and financial markets into turmoil. Volatility repeatedly spiked to near historic highs. The Dow Jones had the most challenging first quarter in its 135-year history, dropping 23%. Canada's main public exchange suffered its biggest drop in eight decades. The Canadian dollar slumped to multi-year lows. This all happened during the last few weeks of our fiscal year.
For institutional investors, market conditions such as these will test both investment skill and organizational strength. While preventing losses does not receive the same recognition as delivering stronger returns, it is equally important, if not more so.
While the specific threat of the COVID-19 pandemic was something few of us could have fully predicted, the likelihood of a global event leading to market turmoil was something we could prepare for, and thankfully we did. The label “radical uncertainty” appropriately describes the impact of the global pandemic. However, we designed our investment portfolio to be resilient throughout wide-ranging economic conditions, including in the face of severe or radical uncertainty. Diversification through active management, when planned and executed effectively, is the most powerful shield to strengthen financial resilience. The execution of our strategy demonstrably placed the fund in a safe harbour.
From an operational perspective, preparation is the key to effective response to a crisis. In recent years, we advanced our readiness by developing financial crisis, business continuity and pandemic response plans. Plans were necessary, yet insufficient. We conducted multiple realistic exercises to put our plans into practice. We enhanced our risk management framework, asset valuation processes, and our digital and information technology capabilities.
That foresight proved to be invaluable. Once COVID-19 began to spread, we were able to act swiftly. We went from nine offices globally to 1,800 individual home offices in a matter of days. Our board of directors, senior management team, investment departments and core services rallied to guide the fund through the crisis and to help protect one of the core pillars of Canada's overall retirement security system.
Through those efforts, I'm privileged to report to Canadians and this committee that the CPP fund is sound. At the end of fiscal 2020, the fund reached $409.6 billion. Let me break that down.
We started the fiscal year at $392 billion and added $12.1 billion in net income after all costs. Despite the devastating market conditions in our fourth quarter, this represents a net annual return of 3.1% after all costs. Our increase in net assets also included $5.5 billion in net contributions received. This 3.1% fiscal year return is down from the 12.6% return we achieved during the 2019 calendar year, and that demonstrates the impact the last few weeks of our fourth quarter had on our reported performance on March 31, 2020. In reporting on a fiscal year basis, we added an extremely difficult 90-day period and dropped our fiscal 2019 Q4 results, which were very solid.
These reported numbers are superficial because, one, we don't plan, implement or invest with a view to any 90-day window and, two, no CPP benefit is determined by quarters. As a manager of a fund with an exceptionally long investment horizon, I know long-term performance is what matters most and what ultimately helps pay pensions today and tomorrow. I'll get to the relevant measures in a moment.
While our recent returns were impacted by the COVID-19 crisis, our strategy sheltered the fund from the larger losses that our benchmarks faced. Those benchmarks indicate what would have been achieved through a passive investment strategy. This fiscal year we generated an additional $23.5 billion for the fund in dollar value added, or DVA, as a result of active management.
Turning to more relevant time periods, over the last decade we generated close to $57 billion in DVA for the fund. At the end of last month, on May 31, our 10-year return was 10.4%. Over the last decade, we generated nearly one-quarter of a trillion dollars in net investment income after all costs.
Due to the recent volatility in financial markets, some of your constituents have likely expressed concerns about their personal retirement savings. We hope that these results will provide some reassurance that a key pillar of the Canadian retirement system, the CPP, will be available for them when they retire. But you don't need to believe me. Every three years, the office of the chief actuary conducts an independent review of the sustainability of the CPP over the next 75 years. The most recent actuarial review of the CPP was released in December 2019.
[Technical difficulty—Editor]
