John Gale introduced guest speaker Jeffrey Hodgson, Director of Industry and Stakeholder Affairs/Public Affairs & Communications with the Canada Pension Plan Investment Board (CPPIB).
Jeffrey grew up on a farm outside Prince Albert, Saskatchewan, a town with 492 people and 2 service clubs. As a teen, got to go to the Terry Fox Centre in Ottawa because of the contribution of the Lion’s Club and that set up a path of post-secondary education, and a life in public service. He remarked that Rotary is much like the CPPIB, because it also takes a long term view. Planting the seed of sending a young teenager across the country pays benefits far down the road.
There are many facets to financial stability for retired Canadians: workplace pensions, private savings, Old Age Security (OAS), then Canada Pension Plan (CPP). CPP was created in the 1960s when the government felt something else was needed to support retired Canadians. It was a pay-as-you-go system until 1995 when it appeared CPP was going to run out of money by 2015. Lower birth rates and increased life expectancy meant fewer workers to support more retirees. So, in the 1990's the country’s political parties worked together to come up with a solution: increased contributions, slightly decreased benefits, and an arms-length agency set up to manage investments and improve returns (the CPPIB). It worked! And CPP is now funded for the next 75 years! (More on that later)
Jeffrey talked about what are Canadians thinking today:
66% are worried CPP will run out of funds. 56% are worried that government raids or will raid CPP funds. There is a general lack of confidence given that CPPIB is arms-length, and the 1990's scare about lack of funds. We also hear that the US system (Social Security) will be depleted by 2031 and that big story influences attitudes. Canadians also hear about private plans running out of money (Sears).
The basics of CPP are; a maximum payment in 2018 of $13,610.04 per year; the average Canadian collects $6,726.48. CPP is not the ‘be all’ or the ‘end all’ of retirement income. The latest reform was a 2016 decision to expand to $20,000 per yer maximum benefit.
The CPPIB manages more than $368 billion and has more than 1,600 employees with offices around the world (Toronto, London, and Hong Kong which is the largest) and is the 8th largest pension fund worldwide. The CPPIB is reviewed every 3 years and the Chief Actuary for Canada confirms that the CPP will be sustainable for 75+ years. Please pass this message along! It is important to change the narrative around CPP.
The CPPIB’s job is to achieve the fund’s returns, not make the policy decisions. It manages the investments but doesn't deal with eligibility or benefit levels. The good news for Canadians is that the CPPIB has a net return (annualized) of 10% over 10 years! The CPPIB has a professional board comprised of people with experience in the financial services industry, and they operate independently and at arms-length. The Canadian Government cannot influence investment decisions. Before the CPPIB, CPP funds were invested very 'passively'. Now there is a more ‘value-added’ approach as of 2008 and they are more active investors. Size and scale is on their side, with professional managers, a long investment horizon, and the ability to take on more equity risk because all the funds are not being used. CPPIB has moved more into infrastructure investing and long term assets – they own parts of the largest British port manager, the 407 hwy, Puget Sound energy and more.
What about social consciousness? Jeffrey is also responsible for Sustainable Investing – the CPPIB believes in integrating sustainability factors into their investment decisions. They ask/work with organizations to influence/engage their decision-making in these areas and be a positive force for change. Jeffrey said they want to be active and engaged owners, voting nearly every proxy they are entitled to – several thousand in fact!! There are some ‘no go’ areas - for example, they would never invest in a company making land mines, but push companies as investors to look for long term steady gains and ethical operating principles.
85% of funds are invested outside of Canada, with 15% Canadian exposure. Like most of us, this allows better diversification of funds. Largest market is invested in is the US, but China is growing in importance (now the 2nd largest economy in the world). They have a bit in South Africa, but are a bit cautious about some countries. CPPIB does look to emerging markets; China, India (soon to be world’s most populous country), Brazil.
Bill Grey thanked Jeffrey, noting that the conversation to get him here started in 2011…… The story of the CPPIB is such a good news story for Canadians.