Despite billions of dollars being added each year to the pool of assets for the Canada Pension Plan (CPP), David Denison continues to find it a tough sell to Canadians that the CPP will still be around once baby boomers have gone through the system.
Denison is the president and CEO of the Canada Pension Plan Investment Board (CPPIB), a growing investment fund created in the mid-1990s to fund future CPP benefits. He was in Vancouver last week to launch a week-long cross-Canada tour that the CPPIB is legally required to do every two years to be accessible to the public.
As part of his presentation, Denison, along with CPPIB board chairman Bob Astley, asserted that the fund will continue to grow to fund future CPP benefits long into the future because of reforms made in the mid-’90s to boost CPP contributions and create the investment fund managed by the CPPIB. The fund has grown to $130 billion today from $44 billion in 1999.
It’s expected to grow to $465 billion over the next 20 years, in part because for another 11 years the fund will continue to accumulate CPP contributions not being used to provide current benefits.
But even after Denison’s presentation, the handful of Vancouver attendees repeatedly asked if the CPP will be around 30-plus years from now. While Canadians should have their own savings for retirement, Denison emphasized that the CPP will still serve as a basic foundation for generations to come.
Prior to Denison’s public meeting, Business in Vancouver spoke with him about the challenges and opportunities he sees for the fund’s future.
There’s nothing magic about the 75 years in itself. There just needs to be a finite time frame for the chief actuary to prepare the report. In truth, the fund is sustainable for the foreseeable future. But the message is that the existing level of benefits and the existing level of contributions into the plan won’t need to change over the entire 75-year time frame.
The long-term rate of return the chief actuary uses in his assumptions is 4.2%, after inflation. So, if inflation is, say, 2%, then the fund, over a long period of time, needs to earn 6.2%.
We’ve been looking at real estate in the U.S. for the past five, six years, but have been very cautious historically because we were concerned with valuations that we thought were too high in many markets. Given the downturn, we’ve now started to see some very attractive valuations, so, for example, in May of this year, we bought our first two buildings in Manhattan, because we think valuations they represent over 10, 20, 30 years will be terrific for the fund.
Puget is a great example. The nature of the kinds of infrastructure we’re interested in is that they’re all regulated assets. Puget is regulated in the state of Washington; they determine what fair return is on the investment you have to put in to expand power generation. We can see what that return is, and we’re comfortable with that and we’re happy to invest for five, 10, 15 years into the future.
B.C. is an attractive market to us in a number of areas. Real estate continues to be an area of focus. We just announced our purchase of Hillside Centre in Victoria on Vancouver Island and expanded our ownership interest in real estate across the country.
B.C. is at the forefront in Canada at having public-private co-operation in infrastructure, bridges, highways and so on. We’re attracted to those assets as the province continues down the path to involve the private sector in infrastructure.
It will be something that will be a permanent part of our investment program, which we refer to as private debt, where we’re providing loans – however they’re structured – directly to companies as they look to acquire other companies or expand or whatever the case might be. There are times when it will be more attractive for us to be in that market. This is one of those times. But if the overall credit market gets too frothy or spreads become too narrow, given the risk, like in 2007, you won’t see us as active.
The first comment I’d make is, what a difference 15 years makes, because 15 years ago, if anybody was talking about pension reform, the CPP was part of the problem. Now CPP is part of the solution with a fund that’s destined to grow to $500 million. It’s going to be one of the largest pools of capital anywhere in the world. But we’re not on the policy-making side; that’s up to the finance ministers. Should they decide part of the solution should be to accelerate the growth of the fund and CPP benefits, we’re set up to handle that.