How Is Your Canada Pension Plan Managed?

by John F. Higgins, Sep 10/02

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There is a basic feeling most, if not all, people get when you find out something good or bad. This feeling can be elation or deflation and basically can make or ruin your day.

What I have discovered in the last couple of months has left me with one of those feelings, and I'm sorry to say it is the bad one.

I started my working life aside from the newspaper route and the here and there summer lawn mowing jobs at the Canadian National Railway in 1965. It was a good feeling job, I had a title, a "Carchecker" and a very flexible schedule that even my Dad envied. Six months later or so I started paying into the Canada Pension Plan as it is now called. That was 37 years ago. Like so many of us who started paying at that time I thought this was a protected baby that the Government would always make sure nothing could go wrong. Wrong!

Last month a small article, I mean the smallest space a newspaper puts in the paper, appeared in the Vancouver Sun and said that the Federal government was committing $900 million of the Pension Plans money in a variety of investment firms to be invested in the stock market. Well here comes the bad feeling time and I was puzzled as to why I had not heard or read any explanation of this investment activity.

Lo and behold, a couple weeks later, the same paper put another article explaining a little more on our new investment scheme. Alas, one week later in an edition of the National Post there it was, our new government approved, non-government run Canada Pension Plan Investment Board (CPPIB) from this point on referred to as the Board. Here is the site http://www.cppib.ca/index_en.html. Last time I heard of an idea like this was when Bill Clinton thought that was the answer for the Social Security in USA in the 90's. This board and Act came into existence in 1998. My feelings about that were not good. I don't think the American people would have let that go by them like we let this one go by us.

There is no other word to describe this as gambling. But allow me to let the professionals explain why they exist.

By the way as Japan's Nikkei stock market plummets close to 9000 and below the

government has said that the Insurance and Pension funds would have to invest in stocks to bolster the market. If the markets of this world have to rely on this we are in trouble.

The Board has total control with no government interference and incidentally in the Objects and Powers section it reads in "6. (1) The Board has the capacity and, subject to this Act, the rights, powers and privileges of a natural person." Now I'm not a lawyer but it seems to me this is not a corporation and how are these people responsible on an individual basis?

There are 12 board of directors (really only 10, two seats are vacant according to the website) including the chairman. They are from various positions and professions, lawyers, accountants etc. These directors will manage and supervise, write policy, procedures and standards, resolve conflicts, establish code of conducts and designate.

Whoever, whatever, whenever, wherever and I guess forever. These directors will be appointed for a 3 year period and have certain requirements obviously. They are eligible for reappointment.

There are 14 management and staff, and you have everything analysts, lawyers, accountants, actuary, investment banker, electrical engineer and even a plain old stockbroker.

You are probably asking the same question as little old me; these people would want a fair wage for their services, wouldn't they? Yes they would and here it is. Directors draw an average of $32,000 per year. Committee chairs receive an extra $3,250. John A. MacNaughton, the main man gets $85,000.The total salaries and benefits as of March 31/01 were $1,963,000.

These people are not all alone in this big ole' world they have lots and lots of help to spend our dough. Yep, 23 investment managers and 13 external service providers, they all live in commission heaven. The period ending March 31/01, the management and other fees were $2.5 million.

They all must be good little boys and girls and don't tell lies, don't steal each others pencils, don't swear or call others bad names, just act like you did in kindergarten while the teacher looks on. They all have the right to indemnity including their heirs and or personal representatives. The court may order an indemnity on the Board or person as well. The Board may also maintain insurance for the benefit of a person.

You can read the Act on the web http://www.cppib.ca/why/legislation/index.html or get a copy from the Board when they come by to city close to you. It is lawyer jargon and a boring read but if you must know.

They have a bad track record so far, but so has 80% of the investment world. Here is what they have been up to. I hate to spoil a good party but when I see these numbers I get that bad feeling.

On June 30, 2002 the assets consisted of $38.8 billion in fixed-income securities held by the Canada Pension Plan and administered by the Department of Finance in Ottawa, and $17.1 billion in equities managed by the Board in Toronto. This is a total of approximately $55.9 billion. The total assets available to the CPP had a net income of minus $0.4 billion in the 3 months ending June 30/2002 and that my friends is a negative 0.3% rate of return.

The fixed-income securities consisted of $31.9 billion in federal and provincial government bonds and $6.9 billion in interest earning cash reserve for a total of $38.8 billion. These assets generated investment income of $1.1 billion during the three-month period (the first quarter of fiscal 2003) for an estimated 3.2% return.

The equity portfolio managed by the Board consisted of 95% public equities and 5% private equities and cash. Equities increased by $2.8 billion to represent 31% of total assets available to the Canada Pension Plan. The Board received $4.3 billion from the Canada Pension Plan during the period. Thus the $1.5 billion loss.

Equities lost by the Board are $1.5 billion in the quarter for a negative 8.7% return, compared with a negative 9.0% return for the total portfolio benchmark that measures market performance. Canadian investments lost 7.9% versus 8.3% for the benchmark, while foreign investments had a negative 11% that matched the benchmark. Here is the PDF file version of where and how they invest http://www.cppib.ca/news/annual/ar_2002.pdf.

So you may say "nay, nay" this is not good for the country's retiring many and yes, you are right, but let's hear it from the man at the helm. John says "While recent equity markets were bad news for most investors, they were great buying opportunities for us," and "We are a cash-rich investor. We also have approximately 20 years before we will be expected to provide income to the Canada Pension Plan to help pay pensions.

Consequently, any ongoing weakness in markets for the next few years will enable us to continue to build our equity portfolio at prices well below those that will exist in future decades. Realistically, however, we expect choppy markets in the next few years with sharp short-term swings in stock prices."

Could it be in the future that government might pass on all Pension contributions and holdings to this Board and divest itself of fiscal responsibility? Yes they will and this will take place slowly starting in 2003 and 36 months later by 2006 they will be in control of all the pension funds. I really wouldn't like to see this happen but it will. I think each one of us as contributors and recipients of the CPP should ask our Federal Government representative and find out the answers.

Choppy is a mild word in a hurricane. Expectation of further losses is overwhelming and at a loss of even 1/4 of that total would be $375,000,000 per year. It just seems to me that there is a lot of money on the economic chopping block and this could mean disaster for a lot of people. Definitely a bad feeling.

The only thing wrong with this kind of outlook is that expecting the stock market to regain it's voyage back upward is very optimistic and according to most astute observers this is not going to happen in the near future. When you have a bubble that expands to burst point you must expect a deflating of the vessel to its former size. Let's hope he's right and when it comes time for my little pay back from all these years of contributing I too can get that good feeling at the end of the month seeing my return on investment finally come through.

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