CPP adds $17B to assets now worth more than $409B despite pandemic

The Canada Pension Plan earned a return of 3.1 per cent after expenses during the financial year ended March 31, the board that manages the fund's money reported Tuesday.

Net assets for Canada's national pension plan totalled $409.6 billion as of the end of March, up from $392 billion at the end of the previous financial year.

The $17.6-billion year-over-year increase included $12.1 billion in net income from its investments. The other $5.5 billion came from contributions of more than 20 million Canadian workers covered by the plan.

In the past five years, investment returns have added $123 billion to the fund's assets, the Canada Pension Plan Investment Board said Tuesday.

While the plan made money for the year as a whole, the fourth quarter was a challenging one because of COVID-19. The fund said fixed-income assets did well as investors fled for safety, but values of stock-based investments fell.

"Despite severe downward pressure in our final quarter, the fund's 12.6 per cent return on a 2019 calendar-year basis combined with the relative resilience of our diversified portfolio helped cushion the impact," chief executive officer Mark Machin said.

"Amid the significant number of concerns many Canadians have today, the sustainability of the fund is one thing they shouldn't worry about. The fund's long-term returns continue to help ensure the security of Canadians' retirement benefits."

That annual return of $12 billion implies the fund lost about $16 billion during the pandemic, since at the end of December CPPIB reported nearly $28 billion worth of investment gains in the first nine months of the fiscal year.

A three per cent annual return may not sound impressive, but Michel Leduc, a senior investment executive with the fund, said in an interview that the fund's financial performance in the middle of a serious economic crisis is a testament to its strategy.

The CPP measures its own performance against a series of market-based benchmarks, the main one being the Reference Portfolio. That reference portfolio declined by 3.1 per cent in the past year, the same amount that CPP increased by.

'Quite resilient'

Leduc noted that  the Dow Jones Industrial Average lost 23 per cent in the first three months of this year, its worst quarterly performance in its 135-year history.

If the CPP were just to have matched the stock market, "the fund would be would be $23 billion smaller today," he said. "You've got to look at in the context of going through an economic shock which we know we're going to go through from time to time…. To preserve $23 billion … I would say to Canadians that their fund is quite resilient and the active management put the fund in that safe harbour."

The Chief Actuary of Canada audits the CPP every three years to assess its ability to cover its obligations. At the last review in December 2018, the chief actuary deemed the CPP was on track to meet its obligations for the next 75 years at least, assuming the fund can earn a return of 3.95 per cent above inflation.

The CPPIB has achieved a real return of eight per cent, on average, over the past 10 years, and 6.1 per cent over the past five.

Buying opportunities

Leduc said the current downturn could lead to some attractive buying opportunities for CPP, but that doesn't mean the fund is running off on a buying spree without making sure that any investments fit the long-term objectives.

"We're one of the few institutional investors around the world that can pretty much acquire anything," he said. "We will look at opportunities, very carefully, but it's not the Wild West … we're not going out and buying everything."

While on track in terms of performance, the CPP has faced some criticism for the amount of money it spends on costs as it has grown and expanded over the years.

While its total value has quadrupled from $96 billion to $409 billion since 2006, that growth has come with added costs, as CPPIB now employs 1,824 employees around the world — 11 times more than the 164 it did back then. It only had one office then; today it has nine, including two in the U.S., two in Europe, two in Asia, one in Brazil and one in Australia.

That growth has come at a cost: CPPIB incurred more than $1.2 billion in expenses last year. That's about 30 cents out of every $100 invested, a slightly lower ratio than the previous year's level of 32 cents.

All told, CPP racked up $3.4 billion in expenses, management fees and transaction costs last year. That's up from $3.2 billion the year before.

CPP said it is "committed to maintaining cost discipline as we continue to build a globally competitive platform that will enhance our ability to invest over the long term."