Canada Pension Chief to Testify Amid Trillion-Dollar Boost

The head of the Canada Pension Plan Investment Board will face lawmakers for the first time in 14 years as Prime Minister Justin Trudeau’s government finalizes a trillion-dollar cash expansion of one of the world’s largest public pension funds.

Mark Machin, who took over as president and CEO of the arm’s-length investment board in June, will speak to the House of Commons finance committee Nov. 1 at its request. His testimony comes as Trudeau prepares to amend the law governing both the Canada Pension Plan and CPPIB, which manages the C$287-billion ($218 billion) fund, to formalize a deal to expand benefits.

The new plan, rolled out from 2019 to 2025, will leave the fund on pace to reach C$2 trillion by 2045 -- doubling the value of the original program. Enacting legislation will be made public “shortly,” Finance Minister Bill Morneau said Tuesday after British Columbia signed on to the deal, clearing the way for the government to move forward.

Morneau has said he and his provincial counterparts are still finalizing pension expansion changes and will meet in December. A departmental official said CPP “policy actions” could still be forthcoming as part of a triennial review, while Morneau spokeswoman Annie Donolo ruled out “major changes.” All modifications must be approved by seven provinces representing two thirds of Canada’s population.

“We need to make sure we get all the details right,” Morneau said Sept. 6. “We see the CPPIB vehicle as a respected and effective vehicle for managing Canada’s pension assets.”

Lower for Longer

The Canada Pension Plan is the mandatory workplace retirement savings program for 19 million Canadians. Its expansion will substantially increase the investment board’s portfolio at a time when pension funds are coping with an era of low global interest rates that threaten returns.

Board officials, excluding Machin, met informally with lawmakers earlier this year, according to finance committee chairman Wayne Easter. “We enthusiastically look forward to engaging with members of the House finance committee based on good dialog held so far,” CPPIB spokesman Michel Leduc said.

Trudeau’s expansion will, in effect, create a two-stream plan managed by the investment board. Government officials refer colloquially to “CPP 1” and “CPP 2,” each distinct from an accounting perspective. The independent new program is considered to be fully funded and therefore will rely more heavily on future returns. Benefits for each generation will “depend on their own contributions and the associated investment returns,” finance department spokesman Jack Aubry said. That leaves fund directors under pressure to deliver.

‘Strong’ Performance

The investment board’s track record is solid. It had a net return of 16 percent on its investments for the calendar year in 2015, and a 7.5 percent net return on an annualized basis for the past decade, according to a spokesman.

That compares to a 9.1 percent net return in 2015 at Canada’s second-largest pension fund, Caisse de Depot et Placement du Quebec, according to its website. The Caisse returned about 5.96 percent on an annualized basis over the past decade. Ontario Teachers’ Pension Plan had a 13 percent net return in 2015 and an annualized return of 8.2 percent over the past decade, according to its website.

CPPIB invests in private and public equities, fixed income products and real assets around the globe. Trudeau’s government isn’t considering “using other vehicles” to manage the new cash influx, Donolo said.

The Office of the Chief Actuary, in a report last month, found the fund’s investment income was nearly 250 percent higher over the past three years than originally expected due to its “strong investment performance.” The investment board has been concentrated on diversifying across asset classes and geographies in an effort to reduce risk, in effect turning its eye away from Canada.

Political Autonomy

The investment board is a world-renowned model, according to Michel St-Germain, a vice-chairman at the Association of Canadian Pension Management. “We have managed to create a governance structure that’s very autonomous, independent of political pressure. I’m quite confident that we will be able to maintain this,” he said. “Having said that there is a challenge. There will be a lot of money there.”

Machin, an Englishman who spent years in Asia for Goldman Sachs Group Inc., may shed light on how CPPIB will handle the cash influx. His appointment was announced in May along with the departure of former president and CEO Mark Wiseman to BlackRock Inc. At the urging of lawmakers, Machin’s hearing date was moved up to Nov. 1 from an initial date later in the month. It will be the first finance committee appearance by the head of the investment board since 2002.

“With the very rapid succession, I think it was important that parliamentarians and Canadians hear from the new CEO of the CPPIB,” Liberal lawmaker and committee member Steven MacKinnon said in an interview. “Ideally it would have been better to have had him earlier, but it’s now very timely with the announced expansion.”

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