CPP Investment Board ready for any public sector expansion

TORONTO — The investment arm of the Canada Pension Plan is prepared for any expanded role, if that’s what the government wants, president and chief executive David Denison said Thursday after reporting that the fund’s assets rose to a record high last year.

TORONTO — The investment arm of the Canada Pension Plan is prepared for any expanded role, if that’s what the government wants, president and chief executive David Denison said Thursday after reporting that the fund’s assets rose to a record high last year.

“We’re not advocating one way or another on reforms, but if it does translate into CPP expansion and we’re asked to manage it — we can do it,” Denison said.

Expanding the CPP has been bandied about as a potential solution as aging baby boomers leave the workforce and there are fewer workers to pay into the fund.

During the election, the Liberals promised to allow Canadians the option of contributing more to a CPP-backed fund, while expanding benefits and the NDP proposed a gradual doubling of CPP benefits, which would require doubling both employer and employee contributions over seven years.

The Conservatives, who won a majority government, did not make any pension reform pledges on the campaign trail, but have been in talks with the provinces and have been largely focused on a private sector solution.

The performance of the investment fund — which invests the money not immediately required to pay pensioners — is key to ensuring that future generations of Canadian have access to CPP payouts, even when the number of contributors declines in relation to pensioners.

Any expansion would give the CPPIB more money to manage, but Denison said there wouldn’t be much change in strategy because it is already preparing for growth in the multi-billion dollar fund.

The CPP Fund’s assets under management reached a record high of $148.2 billion at the end of its most recent fiscal year, compared with $127.6 billion at the end of fiscal 2010, it said in its annual report Thursday.

That surpassed a previous high of $127.7 billion in June 2008, months before the onset of the global financial downturn.

About $15.5 billion of the increase in fiscal 2011 came from investment income.

However, the return rate on its investment portfolio dropped to 11.9 per cent from to 14.9 per cent in the year earlier.

Denison said that although stock markets performed well in 2011, they were even stronger in 2010 when investors flocked back into the market.

For the five-year period, which includes two years of losses, the fund earned a 3.3 per cent annualized rate of return. That was lower than the four per cent return rate the Chief Actuary of Canada has estimated would be required for the fund to be sustainable over a 75-year period.

But the board’s report said the lower five-year rate of return was an anomaly due to the recession and it remains confident it will be able to deliver the four per cent return rate over a longer period.

Meanwhile, excess CPP contributions paid by about 17 million Canadian employees fell to $5.4 billion, down from $6.1 billion in the year-earlier.

The level of surplus CPP contributions will continue to deteriorate until 2021, when the surplus is expected to dry up.

The fund’s assets are expected to see substantial growth in the next half century — projected to surpass $1 trillion by 2050, according to the Chief Actuary’s.

The board has recently been focused on making a number of acquisitions in the private market and says it plans to hone in on developing markets —Asia and Latin America in particular — in 2012. It also plans to add to outposts in Hong Kong and London.

For the second straight year, a majority, $76.6 billion, of the fund’s assets were invested in foreign markets, while $71.7 billion were domestic holdings.

Investments in the private market, such as real estate, infrastructure, private equity and debt made up about 31 per cent or $46 billion of its portfolio during the year.

The CPPIB invested $17 billion in private assets during fiscal 2011, including its participation in the largest private equity made that year.

It partnered with Onex Corp. (TSX:OCX) to acquire British construction firm Tomkins plc for $1.1 billion. CPP also recently took up a 40 per cent stake in Ontario’s busy 407 express toll highway in two separate transactions.

The board stands to receive a potential total payout of $1.09 billion as a major investor in Skype. The CPPIB paid $300-million for a 15 per cent stake in Skype in 2009 when the majority of the service was sold off by eBay Inc.

As part of its annual report, the CPPIB released that its top executives’ pay increased by 10 per cent to a total of $11.6 million from $10.5 million a year ago. The portion of incentive payout tied to performance increased by five per cent.

Denison’s pay was up slightly to $3.05 million compared to $2.99 million in 2010.

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