In his travels to every province and one territory over the last 17 months, British-born Mark Machin was struck most by one thing about Canadians.It doesn't surprise me how clueless Canadians are when it comes to the CPP and CPPIB. I even have well-educated friends of mine who believe CPP won't be around in 20 or 30 years when they retire or worse still, that the federal government will raid it to pay off the debt in the future.
“There’s still this myth that’s circulating that the Canada Pension Plan won’t be there when you retire,” said the CEO of the CPP Investment Board, the largest pension fund in the country that manages a $328-billion investment portfolio on behalf of 20 million Canadian workers and retirees.
“You ask the average person — stop anyone on the street — and they’ll say the CPP won’t be there . . . . It’s amazing,” Machin said.
“Overall it’s the envy of the world.”
So the first person from outside of Canada to head up the independent investment arm of the Canada Pension Plan is now on a mission to reassure Canadians that the fund is safe and healthy for generations to come, even in the face of inevitable economic and stock market fluctuations.
Don’t just take the former Goldman Sachs executive’s word for it. The chief actuary of Canada regularly reviews the financial state of the fund and measures its sustainability, and last year estimated the fund is sustainable for 75 years — until 2091 — with an average rate of return of 3.9 per cent.
The CPPIB says its 10-year annual rate of return after accounting for expenses and inflation was 5.2 per cent, and was 10.5 per cent over each of the last five years — well above the threshold set by the chief actuary.
The widely diversified portfolio is invested across 50 countries, including ownership stakes in a slew of assets few Canadians are aware of, from First Canadian Place and Highway 407 to Viking Cruises and the entertainment conglomerate that owns the Ultimate Fighter Championship (Machin pointed out the UFC is very popular with millennials).
He said that in financial circles around the world, the CPP is renowned as “a smart, sophisticated global investor. So I come to Canada and it really surprised me that people around the country who are contributing their hard-earned money into the CPP don’t know what’s going on,” said Machin, who took over the post in June 2016 after running the board’s international division in Hong Kong.
“We have delegations coming from all over the world here to figure out how we do it, what are the elements that make this so successful in Canada.”
Machin said that’s mainly due to “some really brave and far-sighted things” the Canadian government did in the 1990s to fix the then-faultering pension system, which was formed in 1966 (coincidentally the year Machin was born in Cheshire, England.)
Back then there were 6.5 workers for every Canadian retiree. But by 1993, amid falling birth rates and longer life expectancy, benefits paid out started to be higher than contributions and investment income coming in. Projections showed that by 2055, there would also only be two workers per retiree.
So in 1997, Ottawa did two things: raised contribution rates and created the CPPIB as an arm’s-length organization investing the assets of the CPP outside of what was needed for benefit payments to ensure its financial viability into the future.
“Our job is to grow that pot of money so that there’s more than enough to pay the benefits whenever they’re needed,” said Machin.
Though the chief actuary warned in 1995 that there would be nothing left in the fund by 2015 if the status quo continued, it took up until 2015, coincidentally, before investment income exceeded cumulative net contributions, the board said. That year the fund returned 18.7-per-cent interest and had climbed to approximately $265 billion.
As of Sept. 30, the fund reported assets of $328.2 billion. The fund has about $3 billion extra coming in from contributions than is needed to pay the benefits in any year.
Starting in 2021 however, the CPP is expected to begin using a small portion of CPPIB investment earnings to supplement the contributions that constitute the primary means of funding benefits.
Last year the government also announced an “enhanced” CPP that will increase benefits paid out — although many years down the road — through an increase in contributions over five years starting in 2019.
Another reason for the CPP’s success, Machin notes, is that the investment board is free of political interference so that government can’t dip into the fund to take money out when times are bad or good.
“We are protected by an act of Parliament. To change that act of Parliament is a higher bar than to change the Constitution of Canada. That’s part of the secret sauce,” he said.
Though the investment mix has shifted in recent years from roughly 70 per cent equity “equivalent” (since it includes public and private investments) and 30 per cent fixed income to a more aggressive 85-15 ratio, Machin said he is comfortable with the investment strategy, despite fears of an impending market correction after years of bull markets.
“We think it’s an appropriate level of risk for a long-term investor like us,” he said, adding their experts put the investment model through rigorous stress tests. “You can’t make returns without taking some risks,” he added.
The fund is also invested 82 per cent outside Canada. Though Machin said that might seem like a lot to some, Canada represents less than 3 per cent of world financial markets so given that, the investment on home turf is quite substantial.
“We have a really simple mandate: to maximize returns without undue risk of loss,” noted Machin, who began spreading his upbeat outlook at the Economic Club of Canada in Toronto on Monday and will appear later this week in Ottawa and Vancouver.
“The system is sustainable and we’ve got a group of people here in Toronto to make sure the money’s there and is invested wisely both in Canada and around the world on their behalf.”
I tell them bluntly: "you're all idiots and clueless about how lucky we are to have CPP assets managed by CPPIB. Please don't propagate these myths and for god's sake, read my blog and educate yourselves!". (I know, lack some diplomatic tact but that's how we talk amongst friends and I can't stand when smart people say stupid things).
Why are Canadians lucky to have CPPIB, PSP Investments, la Caisse, Ontario Teachers', HOOPP, AIMCo, bcIMC, OMERS and other large, well-governed pensions? In short, because it means a meaningful subset of the population can retire with dignity and security and avoid pension poverty.
Early this morning, a buddy of mine who is a radiologist gave me a lift to the hospital so I can avoid the hassle of finding parking and hurry up to grab a number for my blood tests before the herd.
We were talking pensions, which is odd since it's a topic that doesn't particularly interest him. He told me: "I need to amass $2 million in my RRSP to collect a $60,000 annual pension, assuming a rate of 3%. I wish I had a pension when I retire."
Now, I'm not crying for my buddy and neither should you. Radiologists get paid extremely well and barring a catastrophe, I'm sure he will eventually amass over $2 million in his RRSP, but the point I'm making is he is willing to pay a lot more now into CPP to gain later in terms of pension benefits.
Smart people know the value of a defined-benefit pension. Period. They want to work 30 or more years and eventually be able to retire knowing they have a safe, secure pension they can count on for the rest of their living years.
All Canadians have that in the form of CPP where assets are managed at arm's length at CPPIB, which effectively means assets are managed in the bests interests of all Canadians, not in the best interests of the federal and provincial governments who oversee the Canada Pension Plan (but not CPPIB which operates independently and has an independent board overseeing its operations).
Briefly, the key advantages to this structure:
- CPPIB can pool assets to lower costs internally and with its external managers. It can invest a huge portion of the assets internally and use its clout to lower fees with external managers (through co-investments in private equity or through direct negotiations with public funds).
- CPP pools investment and longevity risk which means Canadians won't outlive their CPP pension.
- CPPIB invests in both public and private markets allowing it to add significant value-added over its Reference Portfolio over the long run.
CPPIB is invested 82% outside Canada. If it were up to me, the Fund would be invested 95% outside Canada except if the new Canada Infrastructure Bank takes off in a huge way.
By the way, members of the board for the new Canada Infrastructure Bank were announced and I was glad to see Bruno Guilmette, the former head of Infrastructure at PSP Investments, was among those selected. Bruno's investment expertise will be indispensable to this board. You can view a list of the board members here.
As far as CPPIB, I've said it before and I'll say it again, clueless Canadians have no idea how lucky we are to have this Fund manage CPP assets at arm's length from all governments.
And we're also very lucky we have Mark Machin at the helm and other experts at all levels of this beast of an organization running it like a business. Do they get paid well for what they do? You bet but it's in our best interests to pay those that manage billions in the Canada Pension Plan very well.
So, the next time you hear someone say the Canada Pension Plan is doomed, please refer them to this comment, tell them to relax and that the CPP-CPPIB is the envy of the world.
Below, Mark Machin, the head of Canada Pension Plan Investment Board, said he doesn’t think the bitcoin and blockchain space is “investible” yet, but the country’s largest pension fund is monitoring it with interest. Carolyn Wilkins, Senior Deputy Governor at the Bank of Canada discusses why cryptocurrencies aren't currencies.
I personally hope CPPIB finds a way to go long and SHORT cryptocurrencies and profit off the frenzy and inevitable collapse. In the meantime, keep shorting that loonie of ours! -:)