The Canada Pension Plan earned $3.2 billion from investments as markets improved in its latest quarter, but the fund’s managers are ramping up its stake in private holdings to ensure pensions payouts can continue during a downturn.
The CPP Investment Board — which manages the fund that will be used to pay out future pension payments —reported Friday that the value of the fund rose to $152.8 billion during its fiscal third quarter on improved equity and bond market returns.
That compares to $152.3 billion at the end of the second quarter and $140.1 billion at the end of the third quarter of fiscal 2011, when the fund’s investments were still recovering from the recession.
“It was a good quarter for the public markets and our returns reflect that as well,” said David Denison, president and CEO of the CPP Investment Board.
“The market performance in the fourth quarter of the calendar year was positive across the board,” said Denison.
The fund garnered $3.2 billion in investment income during the quarter, on a 2.1 per cent rate of return.
However, that was slightly offset by $2.6 billion in CPP benefits payouts during the quarter.
The CPP fund usually receives more contributions than are required to pay benefits during the first part of the calendar year and then uses a portion of those funds to pay benefits near the end of the year.
The sustainability of pension funds has been making headlines lately as the government tries to prepare for a looming pension crisis as baby boomers retire, drawing down funds in the system instead of contributing.
The board was busy investing in privately held assets in the quarter, continuing a trend that has shifted the balance of its portfolio over the past year.
Still, publicly traded stocks make up about 34.4 per cent of its equity portfolio, while private equities are about 16.3 per cent — up from 15 per cent in the third quarter of last year.
While the board doesn’t have a target for the level of private holdings in its portfolio, a rebalancing to take on a bigger proportion of private holdings is “very much part of our intentional active strategies,” Denison said.
The balance helps the fund’s returns to remain resilient against turbulent market conditions, he added.
Denison said the CPPIB has been much more active in private investment deals so far this year than it had earlier expected. Instead, the board announced more deals in the past quarter than it had in the past few years.
Aside from the Kinetics deal, the board has been making a number of relatively small investments that are “big enough to focus on but not the mega transactions,” Denison said.
The deal for Kinetics is an example of the board’s strategy on private investment opportunities, he added.
“We only want to make an investment in a private company if we believe it will outperform the public market we would otherwise be invested in.”
The investment fund’s performance is key to ensuring that future generations of Canadians have access to CPP payouts, even when the number of contributors declines in relation to pensioners.
The billions of dollars set aside for future use also give the fund’s managers assurance that they will not have to boost employee contributions or cut payouts.
Although some have suggested expanding the CPP could help cope with the pension crisis, the government has tended to focus on private sector solutions.
Prime Minister Stephen Harper has suggested the government will move to ensure that demands on the Old Age Security benefit don’t bankrupt the system. However, he added that the CPP, the “centrepiece” of Canada’s pension system, is fully-funded — in part because of the returns earned through the CPPIB.
Canada’s chief actuary has reviewed the fund’s health and affirmed that it remains sustainable at the current contribution rate of 9.9 per cent for at least 75 years.
Contributions are expected to exceed benefit payouts until 2021, when the CPPIB investments will help to fund pensions.
During the quarter, the CPPIB announced a slew of new investment deals, the biggest of which being its part in a consortium that purchased Kinetic Concepts for $6.2 billion, the second biggest private deal made around the world in all of 2011.
The CPPIB is a professional investment management organization that invests surplus contributions on behalf of 17 million Canadian contributors and beneficiaries of the Canada Pension Plan.