CPP reform to help lift plan’s assets above $15 trillion by 2090: analysis

OTTAWA — The upcoming enrichment of the Canada Pension Plan will help fuel a 48-fold boost to the public fund’s assets to more than $15.8 trillion by 2090, according to federal calculations.

In comparison, the plan’s investment manager, already among the top-10 largest retirement funds in the world, reported $326.5 billion in net assets at the end of June.

While factors like inflation must be considered when looking at the large, long-term number, the expansion begs the question: how is the Canada Pension Plan Investment Board preparing for the change?

“The investment challenge is around what the hell do you do with the money?” said Keith Ambachtsheer, director emeritus of the University of Toronto’s International Centre for Pension Management.

“Undoubtedly, there are going to be organization design challenges, control challenges, when you’ve got a lot of offices around the world and you’ve got a lot of people on the ground doing a lot of different things.”

The projections account for the impact of a CPP deal reached last year between the federal government and the provinces. The agreement will boost Canadians’ retirement benefits through the plan by gradually raising contributions as of 2019.

The forecast, based on numbers published last October by the Office of the Chief Actuary, was included in a briefing note prepared for federal Finance Minister Bill Morneau earlier this year.

CPPIB invests CPP assets that aren’t needed to pay pension, disability and survivor benefits.

The organization said it’s still working on the eventual framework for the additional contributions, which will be managed separately from the base CPP. The plan will be laid out for the public before the contributions start to flow in January 2019.

“Because we have been anticipating significant growth since inception, even before the introduction of the additional CPP, we are very well prepared to manage a larger fund,” Michel Leduc, CPPIB’s global head of public affairs and communications, said Wednesday.

“Importantly, added contributions will grow very gradually over the next dozen years, enabling even more preparatory work.”

Beyond studying the size of the new fund, Leduc added that CPPIB will require a more conservative investment profile due to its fully funded nature.

This means more of the benefit payments from CPP 2.0 will come from investment programs rather than new contributions.

Ambachtsheer said taking on less risk with the new fund is a debatable approach because they are long-term investments and can likely absorb some volatility. Either way, any decision must be clearly explained to the public, he added.

He said the issue of how any future shortfalls would be handled must also be clarified — will benefits go down or will contributions go up?

Kevin Milligan, a University of British Columbia economics professor, said the fund’s assets are tens of billions of dollars ahead of projections made as recently as 2010. This has created a buffer in case investments were to take a negative turn, he added.

“The fascinating thing to me about the base CPP report … is the assets are still growing when you hit the end of the horizon, 2090,” Milligan said.

“There’s no projection right now that it’s running dry.”

CPP reform was a key goal for Ottawa and provinces including Ontario. They argued it was a way to improve financial security for future generations of retirees.

But it has also faced significant criticism. For example, advocates for small businesses have warned it will be devastating for employers and drive up costs in what they have described as a “payroll tax.”

The increase means the CPPIB will be responsible for far more money than it would have with the base plan. Without the enhancement, the projections say, total CPP assets would have totalled $6.7 trillion in 2090.

Mark Machin, CPPIB’s president and CEO, has said his organization will be ready to manage the additional funds.

“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,” Machin told MPs during an appearance last November before a parliamentary committee.

He has also stressed the importance of the arms-length CPPIB’s independence from government influence when it comes to its decisions around investments. He’s called that separation from potential political pressure one of the secrets to its success.

The January briefing note to Morneau was prepared ahead of a scheduled meeting with Machin. It outlined several expected areas of focus for their discussion, including the Liberal government’s proposed infrastructure bank.

The government’s $35-billion infrastructure bank will seek to use public funds as leverage to attract billions more in private investment for major projects, such as new bridges, transit systems and rail lines. Ottawa has said it hopes the Canada Infrastructure Bank will entice institutional investors, such as pension plans, to participate.

The partially redacted memo to Morneau noted that Machin has emphasized the importance of CPPIB’s independence when it comes to infrastructure investments.

Its suggested speaking notes also featured an overview of the government’s infrastructure bank and a reference to CPPIB’s investment record when it came to infrastructure.

The document, obtained by The Canadian Press under the Access to Information Act, said CPPIB’s infrastructure assets accounted for 7.6 per cent of its global portfolio at the time and that it held only one infrastructure asset in Canada: a stake in the Toronto region’s 407 Express Toll Route.

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