Toronto Star

CPP viable for at least 75 years, CEO says

Chief actuary of Canada regularly reviews pension called ‘the envy of the world’

- LISA WRIGHT BUSINESS REPORTER

In his travels to every province and one territory over the last 17 months, British-born Mark Machin was struck most by one thing about Canadians.

“There’s still this myth that’s circulatin­g that the Canada Pension Plan won’t be there when you retire,” said the CEO of the CPP Investment Board, the largest pension fund in Canada, which manages a $328-billion investment portfolio on behalf of 20 million Canadian workers and retirees.

“You ask the average person — stop anyone on the street — and they’ll say the CPP won’t be there . . . It’s amazing,” Machin said. “Overall it’s the envy of the world.” So the first person from outside of Canada to head up the independen­t investment arm of the Canada Pension Plan is on a mission to reassure Canadians that the fund is safe and healthy for generation­s to come, even in the face of inevitable economic and stock market fluctuatio­ns.

Don’t just take the former Goldman Sachs executive’s word for it.

The chief actuary of Canada regularly reviews the financial state of the fund and measures its sustainabi­lity, and last year estimated the fund is sustainabl­e for 75 years — until 2091 — with an average rate of return of 3.9 per cent.

The CPPIB says its 10-year annual rate of return after accounting for expenses and inflation was 5.2 per cent, and was 10.5 per cent over each of the past five years — well above the threshold set by the chief actuary.

The widely diversifie­d portfolio is invested across 50 countries, including ownership stakes in a slew of assets few Canadians are aware of, from First Canadian Place and Hwy. 407 to Viking Cruises and the entertainm­ent conglomera­te that owns the Ultimate Fighting Championsh­ip.

He said that in financial circles around the world, the CPP is renowned as “a smart, sophistica­ted global investor. So I come to Canada and it really surprised me that people around the country who are contributi­ng their hard-earned money into the CPP don’t know what’s going on,” said Machin, who took over in June 2016 after running the board’s internatio­nal division in Hong Kong.

Machin said that’s mainly due to “some really brave and far-sighted things” the Canadian government did in the 1990s to fix the then-faltering pension system, which was formed in 1966.

Back then, there were 6.5 workers for every Canadian retiree. But by 1993, amid falling birth rates and longer life expectancy, benefits paid out started to be higher than contributi­ons and investment income coming in. Projection­s showed that by 2055, there would also only be two workers per retiree.

So in 1997, Ottawa did two things: raised contributi­on rates and created the CPPIB as an arm’s-length organizati­on investing the assets of the CPP outside of what was needed for benefit payments to ensure its financial viability into the future.

Though the chief actuary warned in 1995 that there would be nothing left in the fund by 2015 if the status quo continued, it took up until 2015, coincident­ally, before investment income exceeded cumulative net contributi­ons, the board said. That year, the fund returned 18.7-per-cent in- terest and had climbed to approximat­ely $265 billion.

As of Sept. 30, the fund reported assets of $328.2 billion. The fund has about $3 billion extra coming in from contributi­ons than is needed to pay the benefits in any year.

Starting in 2021howeve­r, the CPP is expected to begin using a small portion of CPPIB investment earnings to supplement the contributi­ons that constitute the primary means of funding benefits.

Last year, the government also announced an “enhanced” CPP that will increase benefits paid out — although many years down the road — through an increase in contributi­ons over five years starting in 2019.

Another reason for the CPP’s success, Machin notes, is that the investment board is free of political interferen­ce so that government can’t dip into the fund to take money out when times are bad or good.

“We are protected by an Act of Parliament. To change that Act of Parliament is a higher bar than to change the Constituti­on of Canada. That’s part of the secret sauce,” he said.

“The system is sustainabl­e and we’ve got a group of people here in Toronto to make sure the money’s there and is invested wisely both in Canada and around the world on their behalf.”

 ?? VINCE TALOTTA/TORONTO STAR ?? Mark Machin, CEO of the Canada Pension Plan Investment Board, credits “brave and far-sighted things” Ottawa did in the ’90s for the CPP’s success.
VINCE TALOTTA/TORONTO STAR Mark Machin, CEO of the Canada Pension Plan Investment Board, credits “brave and far-sighted things” Ottawa did in the ’90s for the CPP’s success.

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