CPP Investment Board - Growth and Strategy

Growth and Strategy

According to the Office of the Chief Actuary of Canada, the CPP Fund needs a real rate of return of 4.0%, over the 75-year projection period in his report, to help sustain the plan at the current contribution rate.

In November 2010, the Chief Actuary reaffirmed that the CPP is sustainable throughout the 75-year timeframe of his 2009 report; the Chief Actuary will send a new projection for the CPP to the Minister of Finance in 2013. Over this long timeframe it is expected that there will be periods where returns are above or below this threshold.

Consistent with the CPPIB's mandate to maximize investment returns without undue risk of loss, they pursue a value-added strategy that seeks to deliver returns over and above a market-based benchmark over the long term. That benchmark is called the CPP Reference Portfolio and under reasonable capital market assumptions, it can generate the long-term 4.0% real rate of return required to help sustain the CPP.

The CPPIB reserve fund receives its funds from the CPP and invests them like a typical large fund manager would. The CPP reserve fund seeks to achieve at least the projected return (inflation-adjusted) needed to help sustain the CPP, a rate set at 4.0% by 2017 in the CPP actuary's report, starting from 3.2% in 2011. As indicated in its Financial Highlights for the fiscal year ended March 31, 2012, the CPP reserve fund averaged 2.2% return in the past 5 years, and a 6.2% return in the past 10 years,slightly less than the sum of projected Canadian inflation rates and the 4.0% target identified by the CPP Actuary report, or 6,3% in nominal basis, that is required for CPP contribution sustainability.

The CPP total assets are projected to reach the following levels according to the 2009 actuarial report: (in assets):

• $197 billion by 2015.
• $275 billion by 2020.
• $465 billion by 2030.

The strategies used to achieve these targets are:

1. Diversification. In 1997, the CPP fund was 100% invested in government bonds, but it has since diversified not only by asset class, but also internationally.
2. Employing basic asset allocation theories, with diversification of investments as one of the objectives. The asset mix has evolved as follows.:

1. Using equity firms to assist in achieving targets for each asset class. The CPP reserve fund allocates certain amounts to various pre-qualified equity firms to be managed and used towards reaching the growth targets. For example, the CPP Investment Board hires private equity firms to help it invest in private companies, fund managers to help it invest in public equities, bond managers to assist in investing in bonds (within Canada and foreign bonds), and so forth.