Safer investing structure planned for hike in CPP contributions

Less risk with fixed-income securities

The country’s biggest public pension fund says it has laid the lower-risk groundwork to invest increased Canada Pension Plan contributions that start in 2019.

The Canada Pension Plan Investment Board (CPPIB), which invests funds for the CPP, said it will begin receiving and investing those additional amounts this week.

The added CPP contributions follow a deal that was struck by the federal and provincial governments in 2016 to enhance the plan and bolster payouts to retirees. Contribution rates for both employees and employ- ers will rise to 5.95 per cent by 2023 from 4.95 per cent in 2018.

“Over the past year, CPPIB has worked to ensure that both the base CPP and the additional CPP amounts will be managed efficiently and with a view to the opportunities that may be created as the CPP Fund grows,” Mark Machin, CPPIB’S chief executive, said in a press release.

"We will invest the additional stream of CPP with the same attention to appropriate growth, risk control and transparency that Canadians count on.”

According to the release, the CPPIB has crafted an investment structure that will cover the different needs of the base CPP and the expanded one.

“This structure ensures fairness between the base CPP and additional CPP accounts, and that both benefit from CPPIB’S strengths and have a widely diversified portfolio with appropriate distinct risk characteristics for each account,” CPPIB said.

The extra CPP contributions arrive on the heels of a rocky year for the markets, so risk may be on the mind of many investors heading into 2019.

However, CPPIB’S strategy for investing the extra CPP contributions could involve less risk than the one it uses for the base fund as it has said the additional account will be fully funded from the start.

In its 2018 annual report, the CPPIB said it would establish two investment pools on Jan. 1, 2019, one of which (the “lower-risk” Supplementary Pool, which would be in addition to the Core Pool) would only have assets of the additional CPP account invested in it.

The Supplementary Pool would also only be made up of fixed-income securities.

“The Supplementary Pool is designed in such a way that, when combined in the right proportion with the additional CPP account’s interests in the Core Pool, the resulting overall risk and the underlying exposures are appropriate for the additional CPP,” the report said.

As of Sept. 30, 2018, the CPP Fund had assets worth nearly $370 billion. The CPPIB’S annual report added that the fund’s two accounts are each expected to have assets of around $840 billion by 2055.

At a June meeting of the House of Commons’ finance committee, Machin said the additional CPP “is more of a fully funded pool of capital versus the base CPP, which grows into its liabilities over the long term.”

Therefore, he added, according to a transcript, “we’re going to run a lower risk for the additional CPP and we’ll continue with the base CPP at the current risk levels.”