CPPIB announces third-quarter results

(February 11, 2005) In his first conference call as president of the CPP Investment Board (CPPIB), former Fidelity front man, David Denison, discussed the reserve fund’s third-quarter results, the board’s plans for the future and he also restated the CPP’s message of stability.

After making benefit payments of $1.9 billion, in the third-quarter ending December 31, 2004, fund assets grew by $2 billion to $77.2 billion. Investment earnings for the period were $3.9 billion.

That rate of return exceeds the CPP board’s target of 4.5% returns above inflation. Denison says the “results really reflect the robust equity market that prevailed globally during this period.” According to the chief actuary of Canada, the CPPIB needs to generate 4% returns above inflation annually to sustain the plan over the long term.

Denison says current investing concerns like global recession are not on the radar because the nature of the CPP plan is “very, very long term.”

“Global recessions come and go in the short term. Our approach is really to look, virtually decades, into our investment horizon, so we’re not focused on whether in the next year or two years there might be an economic downturn.”

In the coming months, the board plans to continue work on developing the reserve fund’s real estate and infrastructure holdings, which consist of 1% real estate and 0.1% infrastructure. “Building these assets is an important part of our investing strategy going forward,” he says. As well, he says the board is continuing to transition the portfolio from a country-weighted approach to a more customized portfolio weighted by global industry sectors. “We believe this custom design is a better match to the future needs of the CPP.”

The infrastructure strategy is intended to hedge CPP assets against inflation. Denison says the fund is looking for investments in distribution networks for electricity and water, and gas and toll roads, because of the returns the companies generate and because of their relative insensitivity to changes in consumer demand or changes in technology.

Most recently, the fund invested $470 million in the Macquarie European Infrastructure Fund and the Wales & West gas distribution network, bringing the CPPIB’s total infrastructure commitments to approximately $670 million.

To date, all of the fund’s infrastructure plays have invested in companies outside of Canada. Although Denison says the board will continue looking for suitable investments in Canada, he said there were very few domestic opportunities that met the fund’s existing investment criteria.

The CPPIB came into being by an Act of Parliament in December 1997. The board was created to manage the pension plan’s reserve fund of contribution surpluses and generate sufficient investment returns to fund future benefits.

Before that and other reforms were made to the CPP, official numbers indicated the plan would be bankrupt by 2015. Along with bad news of pension instability coming out of the United States, many Canadians today still believe the pension plan will not be around when the time comes for them to retire.

“Some Canadians are still unaware that the CPP funding challenges were addressed in 1997. Our research shows that roughly half of the Canadian population does not expect to collect a CPP pension,” says Denison. “Canadians have every reason to expect they will collect the CPP pension when they are eligible to do so. Our job is to manage the assets of the CPP to produce the long-term returns needed to help sustain the pension plan. Our progress to date is showing that we are meeting the objectives that were set out in the 1997 reform of the CPP.”

Filed by Kate McCaffery Advisor.ca, kate.mccaffery@advisor.rogers.com