Personal Finance

Benchmark-beating performance is reassuring.
By Gail Bebee | 17/07/12

If you work in Canada, up to $2,306.70 of your pay will end up in the coffers of the Canada Pension Plan (CPP) this year. (In Quebec, you pay into the Quebec Pension Plan). That's 4.95% of your pensionable earnings to a maximum of $50,100. Your employer must remit an amount equal to what you pay. The self-employed are responsible for both payments. CPP/QPP contributions are intended to fund a modest but dependable retirement pension.

About the Author
Gail Bebee is an independent personal finance speaker, teacher and the author of No Hype--The Straight Goods on Investing Your Money. She can be reached at; her website is

The oldest members of the huge baby-boomer cohort are beginning to draw CPP. As more and more boomers reach retirement age, the annual bill for CPP pensions will soar. Working Canadians may rightly wonder if, when they retire, there will be enough money to fund the CPP pensions they paid for.

The good news is that there is an organization, the Canada Pension Plan Investment Board, (CPPIB), which is well equipped to maximize investment returns without undue risk of loss in order to provide the money needed to pay CPP pensions.

A federal Crown corporation created by Parliament in 1997, CPPIB was born of the government's realization in the mid-1990s that the existing CPP funding structure was unsustainable. CPPIB's sole purpose is to invest all CPP contributions in excess of current pension requirements to finance future pensions.

CPPIB operates at arm's length from federal and provincial governments and is structured to prevent government interference. It is overseen by an independent 12-person board of directors. Several legal provisions -- including annual audits by independent external auditors, annual reports to Parliament and publicly available quarterly reports -- ensure that the board is accountable to the 18 million Canadians who are CPP participants.

The board made its first purchase in 1999 and initially employed a passive investment strategy. In 2006, it began to transition to an active strategy with the objective of outperforming a reference benchmark consisting of a composite of several broad market indices.

In addition to benefiting from CPPIB's investment expertise, individual investors can learn some valuable lessons from the board's comprehensive approach to money management. Among them:

  • Invest for the long haul.
  • Seek opportunities to profit from the temporary adversity of others.
  • Make regular contributions to your portfolio.
  • Understand the risks associated with every investment you own or plan to buy.
  • Take a disciplined approach to selecting investments and don't overpay.
  • Take advantage of your strengths. Individual investors can invest in stocks of companies that are too small for big players like CPPIB to buy.
  • Be rigorous in diversifying your portfolio.


CPPIB invests for the long term. Its investment managers can take advantage of opportunities in times of adversity when others fear to tread and investments are cheap. For example, the managers bought extensively during the 2008-2009 market crash. Known inflows of cash and a stable asset base facilitate efficient operations. There is no need to sell excellent investments to fund redemptions.

There is a robust, disciplined approach to managing risks. The board's portfolio approach is based on diversification by the risk-return characteristics of each investment rather than by asset classes. CPPIB managers will not pay more than what they have determined is the risk-adjusted value of a proposed investment.

The enormous size of the CPPIB fund offers efficiencies of operational scale, unique investment opportunities and the ability to forge strategic partnerships. On the flip side, some attractive investments are too small to be worthwhile, and the fund's trading activity can move public markets, making it more difficult for CPPIB to accumulate or divest positions.

CPPIB's portfolio is broadly diversified across asset classes and covers both public and private markets. As of March 31, the asset mix was 35.1% in foreign developed-market equities, 8.8% Canadian equities, 6.5% emerging-market equities, 25.8% bonds and money-market securities, 2% inflation-linked bonds, 5.4% other debt, 10.6% real estate and 5.8% infrastructure.

According to CPPIB chair Robert Astley, the board is delivering on its mandate. "CPPIB is financially sound and secure," he told the biannual public meeting held in June. He noted that as of the fiscal year ended March 31, CPPIB managed a record $161.6 billion in assets and returned 6.6% over one year, 2.2% over five years and 6.2% over 10 years.

Since the 2007 fiscal year, CPPIB has benchmarked its performance against a CPP Reference Portfolio of several broad market indices. The current composition of this hybrid benchmark is 55% global equities, 10% Canadian equities, 30% Canadian nominal bonds and 5% foreign sovereign bonds.

The CPP fund has outperformed its reference portfolio by two or more percentage points in four of six fiscal years and lagged it only in fiscal 2010. (See table.)

Fiscal yearCPPIB
return %
return %
Difference %
For fiscal years ended March 31
Source: CPPIB annual reports

The Chief Actuary of Canada stated in his most recent triennial report, issued in 2010, that the CPP should be sustainable throughout the 75-year projection period at the current contribution rate of 9.9% if the real return rate on its investments is 4%. He forecast that CPP contributions will exceed annual benefits paid until 2020. After that date, some of the income earned from investing CPP contributions will be needed to pay CPP benefits.

CPPIB is on track to meet the 4% real return required for CPP sustainability. However, if inflation exceeds the Chief Actuary's 2.0% to 2.3% estimate, or there are significant changes to other demographic and economic assumptions, future actuarial reports could be less comforting.

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