Finance Committee on June 9th, 2022

[The Chair, Liberal, Peter Fonseca]

I call this meeting to order.

Welcome to meeting number 56 of the House of Commons Standing Committee on Finance. Pursuant to Standing Order 108(2), the committee is meeting to discuss the Canada Pension Plan Investment Board.

Today's meeting is taking place in a hybrid format pursuant to the House order of November 25, 2021. Members are attending in person in the room and remotely using the Zoom application. As per the directive of the Board of Internal Economy on March 10, 2022, all those attending the meeting in person must wear a mask, except for members who are at their place during proceedings.

I'd like to make a few comments for the benefit of the witnesses and members.

Please wait until I recognize you by name before speaking. For those participating by video conference, click on the microphone icon to activate your mike, and please mute yourself when you are not speaking. There is interpretation for those on Zoom. You have the choice, at the bottom of your screen, of floor, English or French. For those in the room, you can use the earpiece and select the desired channel.

I remind everyone that all comments should be addressed through the chair. For members in the room, if you wish to speak, please raise your hand. For members on Zoom, please use the “raise hand” function. The clerk and I will manage the speaking order as well as we can, and we appreciate your patience and understanding in this regard.

I would now like to welcome our witnesses for the first hour. From the Canada Pension Plan Investment Board, we have president and chief executive officer John Graham. With Mr. Graham is senior managing director and global head of public affairs and communications, Michel Leduc. Welcome.

Mr. Graham, you now have the opportunity to give your opening remarks to the members.

[John Graham, President and Chief Executive Officer, Canada Pension Plan Investment Board]

Good afternoon, Mr. Chair and committee members.

My name is John Graham, and I am the president and chief executive officer of CPP Investments. I am accompanied by my colleague Michel Leduc, who is our senior managing director and global head of public affairs and communications.

This is my first time appearing before the House of Commons Standing Committee on Finance. Thank you for the invitation and I look forward to our discussion today.

Transparency is the foundation of public trust. Although we are a commercial enterprise, our organization is defined by its public purpose, which is to help secure the retirement security of 21 million Canadian contributors and beneficiaries.

Public accountability is a central tenet of how we operate. We go beyond our legislated requirements to ensure federal and provincial governments, as well as Canadians, are well informed of our activities. The session today is an important example of that.

Before moving to questions, I will briefly touch on our organization, the Fund’s performance over the last fiscal year and share some operational highlights.

CPP Investments is a professional investment management organization that manages Canada pension plan assets. We invest around the world in public equities, private equities, real estate, infrastructure and fixed income. We are governed by federal legislation—the Canada Pension Plan Investment Board Act—which was passed by Parliament in 1997. The decisions made by policy-makers at that time set us on the path to become the organization we are today.

We operate under clear objectives to maximize returns without undue risk of loss, taking into account the factors that may affect the funding of the plan. Assets are strictly segregated from government funds and managed professionally and exclusively to pay benefits.

We operate at arm's length from federal and provincial governments under the oversight of an independent, highly qualified, professional board of directors. Any amendments to our act require the consent of at least two-thirds of the provinces that participate in the CPP, representing two-thirds of the population. Our governance structure and clarity of mandate are internationally recognized as a leading example of sound management of national retirement plans for other countries to emulate.

We create value for the fund through active management. Our investment strategy is structured to be resilient in the face of wide-ranging market and economic conditions. Diversification helps mitigate risks of the CPP's inherent exposure to Canada—the only country from which it draws contributions. We are nevertheless highly overweighted in Canada compared to its relative proportion of global GDP and capital markets. We will continue to be so, given our strong knowledge of the Canadian market.

We recognize that active management is not a simple, low-cost strategy. Each dollar used for expenses is a dollar not invested. Cost management and disclosure are key to our public accountability.

Nearly 25 years after receiving our first $12 million of contributions to invest, the fund has surpassed $500 billion. When we first began to operate in 1999, everything was passively concentrated in Canada and the fund was not expected to reach this milestone until 2028. Since that time, with investments in more than 50 countries, CPP Investments has contributed $378 billion in cumulative net income to the fund, after all costs.

Our most recent fiscal year, which ended March 31, was solid despite turbulent market conditions in the fourth quarter. We achieved a net nominal return of 6.8% and the fund grew from $497 billion to $539 billion. The volatility affecting public equities at levels not seen since the beginning of the pandemic muted returns achieved through the first nine months. Bond prices also declined at a pace unseen in more than 40 years.

On top of the ongoing pandemic, the war in Ukraine continues to send shock waves around the world. In Canada, many of us are deeply impacted by the tragedy and our hearts go out to the people of Ukraine.

Despite economic and geopolitical headwinds, our diversified portfolio demonstrates resilience as we outperformed our benchmark. That benchmark represents what could be achieved through a low-cost passive alternative.

Since 2006, we have generated $41 billion of additional income through active management. This fiscal year, our active programs, including private equity, infrastructure, real estate and credit, were the main contributors to the fund's overall performance.

Because the CPP is designed to serve multiple generations, long-term performance is what matters most. To that end, we achieved a 10-year nominal return of 10.8%, with a cumulative net income of $329 billion over the same time frame. All of our performance results are reported net of cost.

This year we appointed our first chief sustainability officer, who is now responsible for integrating an enterprise-wide approach to sustainable investing, with a focus on climate change. This follows on our commitment that our investment portfolio will be net zero for GHG emissions by 2050. As an initial step, we will boost our investment in green and transition assets to roughly twice their current level by 2030.

As part of our announcement, we made it clear that we do not believe in blanket divestment. We went beyond that and announced a dedicated decarbonization strategy that will support and partner with companies that are innovating and developing new technologies to lower their emissions. If we lose our conviction that a particular company is achieving its decarbonization plan, we will not hesitate to sell. We believe our overall, constructive approach to contributing to the transition is more productive towards the global goal of net zero compared to divestment.

These steps build on work the organization has been doing for more than a decade to increasingly incorporate risks and opportunities associated with climate change into our decision-making. We developed a comprehensive program that ensures the assessment of climate change is embedded into our investment process. Our engagement and influence through proxy voting helps push our portfolio companies to improve their climate change practices. We are pressing the market for better standards and disclosure.

We believe that on the spectrum of perceived wrongdoings by corporations, a violation of human rights is one of the most severe and indefensible. A failure to address human rights issues is among the top reasons we will not invest in a company. We believe that companies that uphold human rights will perform better. We have been strengthening our systems and processes to capture not only direct but indirect exposure to companies that do not uphold human rights. This includes how those companies address potential issues in their supply chains.

It has been 25 years since parliamentarians decided to create our organization to serve as the investment manager of the CPP Fund. Our 2,000 world-class professionals, in nine global offices, are dedicated and purpose driven. They have a track record of investment performance and operational excellence. We are committed to growing the Fund and helping current and future beneficiaries achieve retirement security.

I am honoured to be in this position and excited about what the future has in store.

With that, we look forward to your questions.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Graham and Mr. Leduc. Thank you for the work you do on behalf of Canadians' pensions. I know the members will have many questions for you.

We are going into our rounds of questions. In this first round, each party will have up to six minutes to ask questions.

We are starting with the Conservatives, and I have MP Chambers up for six minutes.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much, Mr. Chair.

Welcome to both Mr. Graham and Mr. Leduc. It's a pleasure to have you with us.

Mr. Graham, since it's our first time meeting, congratulations on your appointment. Obviously, you should be very proud to lead this important organization on which many Canadians rely for retirement security, but also one that is looked very highly upon throughout the world with respect to pension plans.

In your opening statement, you mentioned a bit about structure and governance and a bit about independence. I wonder if you wouldn't expand a little about how important independence is with respect to investment decisions. In this political climate, there are often many calls for pension plans and others to change their investment decisions based on some political factors, as opposed to sound investment decisions or long-term horizons, as you've laid out.

[John Graham]

I would describe the independence as essential. We have a single fiduciary duty, and that is to maximize return without undue risk of loss, taking into account the factors that impact the funding of the plan. We have 2,000 professionals in the organization who are focused on delivering investment returns and the best investment returns for the contributors and beneficiaries.

That independence allows us to be a global investment organization. We are a pension plan. We're an investment organization. We're not a sovereign wealth fund. We're able to make investment decisions that are in the sole best interests of the contributors and beneficiaries.

[Adam Chambers, Conservative, Simcoe North, ON]

You just mentioned sovereign wealth funds. I understand that the CPPIB has an exemption in the U.S. from how it would look at sovereign wealth funds with respect to independence

Can you give us a brief discussion about why that distinction is important to maintain that exemption?

[John Graham]

CPP Investments is an exempted investor in the U.S. under CFIUS. That allows us to be active in lots of different markets on the private and the public side, and in many ways be treated like a domestic investor in the U.S. without going through a national security review. The U.S. is our biggest market. It's the largest market in which we invest. It allows us to operate very much as a domestic investor.

[Adam Chambers, Conservative, Simcoe North, ON]

A metric the government often likes to use—governments of all stripes, by the way, over the last number of years—is this notion of what it calls “net debt-to-GDP”. That measure includes the assets of the CPP.

Does that metric imply that there is a bit less independence between the CPP and government? Does that potentially pose a bit of a problem, as we talk about these ratios and how well Canada's doing, if we do get an exemption on the basis of the independence?

[John Graham]

Our independence is pretty clear, and the funds are there for the sole purpose of paying out benefits. They are segregated funds.

With respect to some of the specific accounting rules on how they get accounted for, I'm actually not that familiar. The funds that CPP Investments manage are there solely to pay benefits.

[Adam Chambers, Conservative, Simcoe North, ON]

Our position would be that those assets are not to be used or are available for government and for pensioners.

This may be a more of a general question. Large and passive ETFs now control a significant number of voting securities and publicly traded securities across the world, but in particular in North American markets.

Do you believe these ETFs should continue to have the ability to vote at shareholder meetings and exercise a significant amount of influence? I'm thinking about some of the political influence, or the political winds that sometimes blow, that these large ETFs can now implement on corporate entities across North America.

[John Graham]

Maybe I'll share how we think about voting our proxies, and we actually publish on our website our principles for voting our proxies. As an active manager, which we are, we do think it is important as a fiduciary to vote the proxies.

We're very clear on what our policies and what our principles would be, and they're all grounded in value creation. They're all grounded across different metrics, different categories, but all really focused on areas where we feel it drives value and drives long-term value for companies.

I won't comment specifically on the ETFs, but for us as an active manager, we do think it is important that we vote our proxies, and we're very transparent on our website as to how we're going to vote.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much.

I have one final question in my last 30 seconds. Obviously, there are lots of critics in this discussion between active and passive investment. There are some pension plans in the U.S. that primarily use a passive strategy. Can you just talk very briefly about how you manage personnel costs and maybe how you benchmark personnel costs to know that Canadians are receiving full value for active management?

[John Graham]

Yes, it's an important question for sure as we think about active management. As I said in the opening remarks, active management is not the low-cost path. In our view, it is the path that drives the most value, and we're here to maximize return without undue risk of loss for the contributors and beneficiaries. We certainly take the perspective and really take the approach that every dollar that we spend on expenses is a dollar that's not in the fund to invest.

When the decision was made to pursue active management, there was a view that CPP Investments would have certain comparative advantages. We have scale. We have time horizon. We have certainty of assets, and these would allow the organization to compete in the global capital markets. To date that's been a successful strategy. Since the inception of active management, we delivered $41 billion of dollar value added, as we would call it, and those are funds that are in the portfolio now that wouldn't be there if we didn't pursue active management.

As we think about expenses, we think about it very much from a return on investment perspective, and we think about how we need to allocate our internal resources, allocate them towards value-added activities to maximize the value added and maximize the return.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you, Mr. Graham.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Chambers and Mr. Graham.

Now we go to the Liberals. We have MP Baker for six minutes.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thanks very much, Chair.

Thank you both for being here today. Before I get into my questions, I'll just say, Mr. Graham, it's a pleasure to have a chance to ask you some questions. Thank you for being here. I had the pleasure of meeting with some of your representatives, who spoke a little bit about some of the topics you've already spoken to, and I look forward to having this conversation.

I will say I've had a number of former colleagues from one of my prior employers at the Boston Consulting Group join your company, join CPPIB, and I think you are fortunate to be benefiting from their expertise as well.

My first question is around the current context we find ourselves in globally. We've had the pandemic, we still have the pandemic, and we've had the war in Ukraine. Can you talk a little about how the pension plan has been affected by these macroeconomic forces and how you've had to adjust your management of the plan as a result?

[John Graham]

One of the keys, and I touched on it a little during my opening remarks, is around diversification. The organization made a decision years ago that it's important and it's the right path for long-term value creation to have a diversified portfolio, to have a diversified portfolio across asset classes and a diversified portfolio across geographies. That allows us to get access to the sources of global growth, to have a more diversified portfolio and to look for opportunities to drive alpha or value added. As the fund grows, having that global footprint and having the global capabilities and the relationships have been really important.

I think it's fair to say that right now, as we look forward, navigating the geopolitical landscape is one of the biggest challenges that's going to face institutional investors. You highlighted a few of the challenges. How we would think about it is that we have a diversified portfolio, diversified across all the major regions of the world and the ability to allocate capital to where we see the best regions, but as I mentioned, I think for investors one of the big challenges going forward is navigating geopolitics.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Let me expand on that, if I could.

If we think about some of the risks going forward, there could be future pandemics. We're not through COVID yet, so we don't know where that will go, although we hope we're getting towards the tail end of the pandemic. There is climate change, and you spoke about that in your remarks. In my view, there is a risk of future wars, especially if the world doesn't effectively stand up to Vladimir Putin in terms of what he's doing in Ukraine, because if we don't, it could encourage others to do the same or Russia to do more of the same.

How significant, in your view, are these risks and others that perhaps we haven't faced in past decades to the same degree? How do you mitigate them? My constituents are watching this. How do they know that their pensions are secure?

[John Graham]

Two things that we've already touched on I'll come back to. One is diversification and the ability to be diversified across asset classes and geographies.

The other, which we actually just touched on, is active management and the importance of active management: the importance of having built out the capabilities across asset classes, across geographies, and having the relationships, the infrastructure, to invest in all these different areas. Going forward, I think the value of active management is going to be even greater because of the importance of navigating these risks.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

When you say “active management”, for those folks who are watching at home, active management to me means that you are not just investing in what most folks would consider passive investment—something like a mutual fund. Am I right? That's something where you put in the money and you expect that it will grow over the long term.

This is a situation where you're actively buying and selling assets. Is that what active management means to you?

[John Graham]

Yes, what active management means to me is that we think about security selection. We are looking across the globe for the best opportunities, the best companies and the best assets to invest in.

The way we think of portfolio construction is to think about it at a very high level without being too prescriptive on the allocations for asset classes and geographies, but having a general sense and then building the portfolio asset by asset: finding the best companies and finding the best assets to invest in.

There is another component to this, too, and that is actually being an active owner of those assets and pursuing value creation opportunities within the companies to extract more value and, as we talked about, by voting on proxies and being an owner who influences the value creation within the companies.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

We find ourselves in a high-inflation environment at the moment. I only have about 60 seconds left, but can you talk briefly about how that is impacting your returns—in other words, the money that you raise to pay people's pensions? How is that affecting the demand for pensions, the amount that people need to pull out to receive their pensions?

[John Graham]

I will focus on the asset side. If you zoom back and think about CPP contributions, benefits and demographics, it's a much longer answer.

I'll focus on the asset side and maybe keep coming back to the word “diversification” and the importance of diversification. We build a portfolio for the long term. We build a portfolio that we think will be resilient over the long term and will be resilient across multiple economic environments, including high inflation.

Our portfolio has a fair number of real assets in it, which are assets that will somewhat protect us in inflation, but I think it's fair to say that, with asset prices in general across the broad market, inflation will be challenging.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, MP Baker.

We are moving to the Bloc now, with MP Ste-Marie for six minutes.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Good afternoon, gentlemen. Thank you for taking the time to appear and congratulations on your appointment.

I just want to digress for a moment to thank the analysts for the outstanding work they do before each meeting. I take my hat off to them and thank them. Their work allows us to be well prepared to welcome all the witnesses we meet. Given the many intensive sessions we have had, the committee’s analysts have often worked impossible hours, and I want to highlight their work. We are very grateful to them.

Gentlemen, are your net assets indeed $539 billion? Very well.

According to your new calculation method, the cost of management is $7.9 billion. Is that correct? I’m talking about the total cost profile.