Report questions Canada Pension Plan Investment Board’s ‘active’ investing

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A new report is questioning the merits of the Canada Pension Plan Investment Board's (CPPIB) increasing use of "active" investments to boost returns.

Since 2006, the CPPIB has significantly broadened its holdings beyond traditional stocks and bonds to invest in areas such as international real estate and infrastructure projects.

Recent examples have included the purchase of a major stake in a Manhattan office building at One Park Avenue, an investment in a European car-park operator and a decision to triple the CPPIB's stake in a Peruvian gas transporter.

In a Fraser Institute report to be released Wednesday, former Statistics Canada chief economic analyst Philip Cross and Fraser Institute fellow Joel Emes express concern that these new investments come with much higher costs that should be more clearly explained. The report from the Fraser Institute, which generally advocates for smaller government, does not dispute the CPPIB's success.

The report – "Accounting for the true cost of the Canada Pension Plan" – argues the CPP is not necessarily the bargain that its supporters claim.

It notes that while the CPPIB reports annual operating expenses of $490-million in 2012-13, the true cost is arguably four times as high. The report questions why an additional $782-million for external management fees and $177-million on transaction fees related to investment decisions are reported separately. Further, the federal government spends $586-million a year collecting premiums and distributing cheques, bringing the total annual cost of the CPP to roughly $2-billion. The report said these total costs have grown from 0.54 per cent of assets to 1.15 per cent of assets over the first seven years that the new investing approach has been in place.

Michel Leduc, a CPPIB spokesperson, argued the agency is being transparent by reporting various costs separately, because they are "materially different."

In an e-mail, Mr. Leduc also stressed that active investments are focused on creating value "over an exceedingly long investment horizon" and aim to diversify the portfolio over multiple generations.

The Fraser Institute report comes amid a continuing debate over whether Canadians are saving enough for retirement and whether the CPP should be expanded to increase contributions to offer more generous benefits.

After entertaining discussions with the provinces for several years on the merits of such an expansion, the federal government has taken the view that now is not the time to impose additional costs on businesses, given that they must also make CPP contributions on behalf of their employees.

The government of Ontario has said that if Ottawa continues to reject an expanded CPP, it is prepared to launch its own, complementary plan. However, this provincial option is not scheduled to take effect until 2017. That timeline means the launch won't happen until after the next federal election, expected in 2015. Both the federal NDP and federal Liberals have said they support an expanded CPP as a low-cost option to boost savings rates.

Revenue raised from mandatory CPP contributions are transferred to the CPPIB, a Crown corporation that manages the pool of assets. As of March 31, the fund has grown to $219-billion, making it the largest pension fund in the country.

The fund made a 16.5-per-cent rate-of-return last year, its highest-ever annual gain in dollar terms.

"Its investment strategy is independent of government and has served Canadian workers well during the last seven years of financial market turmoil," the report states.

It does question, though, whether the cost of managing this new active investment approach is worth the added risk and expense.

"The benefits of the CPPIB's increasingly complex and costly investment strategy have to be weighed against the opportunity cost of a passive investment strategy and the potential costs of investing in more risky assets," it states.

In 2000, all of the CPPIB's investments were "passive," meaning they were a mix of stocks and bonds. However, as of 2014, the CPPIB reports that passive investments make up 50.7 per cent of assets and 49.3 per cent are active investments.