CPP Fund Returns 1.1% in Q1 of Fiscal 2020

The investment portfolio of the C$400.6 billion ($300.9 billion) Canada Pension Plan Investment Board (CPPIB) reported a mere 1.1% return net of costs for the first quarter of fiscal 2020 ended June 30, but had 10.5% annualized returns for the past five and 10 years.

The quarterly gain added C$8.6 billion to the fund’s asset value, which consisted of C$4.1 billion in net income after all CPPIB costs, and C$4.5 billion in net contributions.

“CPPIB’s investment programs performed well in the first quarter, achieving solid net income in local-dollar terms,” Mark Machin, CEO of CPPIB, said in a statement. “At the same time, the strengthening of the Canadian dollar against all major currencies in June dampened our returns overall, as the market responded to lower interest rate expectations in the US and Europe.”

The fund’s Total Portfolio Management department was the top performer, said CPPIB, which was attributed in part to gains in fixed income investments. Private equity and active equities also delivered positive results, which was bolstered by the improved sentiment in global equity markets.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

The fund said that every three years, the Office of the Chief Actuary of Canada conducts an independent review of the sustainability of the CPP covering the next 75 years. In the most recent triennial review, CPPIB said the chief actuary reaffirmed that as of the end of 2015, the base CPP remains sustainable at the current contribution rate of 9.9% for the next three quarters of a century.

The chief actuary’s projections are based on the assumption that the base CPP investments will earn an average annual rate of return of 3.9% above the rate of inflation, after all investment costs and operating expenses through the year 2090.

Among the first quarter investments, CPPIB agreed to acquire UK-based family entertainment company Merlin Entertainments for 455 pence ($5.50) per share in cash. It also closed a deal to invest £95 million ($114.8 million) in Visma, a provider of business management software and services in the Nordic and Benelux regions. The investment brought the fund’s total investment in the company to £200 million, which translates to a 4.7% ownership stake.

The CPPIB also signed a memorandum of understanding with Piramal Enterprises to co-sponsor a renewables investment trust that will acquire operating renewable assets in India. It said it will hold a majority stake, with an initial target investment of approximately C$300 million, with Piramal and other long-term investors holding the remaining interest.

Related Stories:

CPPIB Returns 8.9% in Fiscal 2019

CPPIB, Piramal to Launch $600 Million Renewable Energy Trust

CPPIB, Williams Form Infrastructure Joint Venture

Tags: Canada Pension Plan Investment Board, Fiscal 2020, Pension, Returns

The funded status of the 100 largest corporate defined benefit pension plans fell $11 billion in July as the funded ratio dropped to 87.9% from 88.4% at the end of June, according to consulting firm Milliman.

The Milliman 100 Pension Funding Index (PFI) showed that the funded status deficit grew to $216 billion from $205 billion at the end of June due to a drop in the benchmark corporate bond interest rates used to value pension liabilities. However, the decline in funded status was partially offset by moderate investment returns.

“July delivered a one-two punch to corporate pensions, with the Fed’s quarter-point interest rate cut and drop in the monthly discount rate,” said Zorast Wadia, co-author of the Milliman 100 PFI. “Investment returns overall this year have helped buoy funding—but with the market volatility seen over the past few days, August may turn out to be more ‘bust’ than ‘boom’ for these pensions.”

Between the end of June and the end of July, the projected benefit obligation (PBO) increased $15 billion, raising the Milliman 100 PFI liability value to $1.783 trillion from $1.768 trillion. The increase was due to an eight basis point decrease in the monthly discount rate, which declined to 3.37% for July from 3.45% in June. July’s discount rate is the third-lowest discount in the 19-year history of the PFI, Milliman said, and only July 2016 and August 2016 saw lower discount rates at 3.33% and 3.32%, respectively.

For more stories like this, sign up for the CIO Alert newsletter. 

July’s 0.56% investment return raised the Milliman 100 PFI asset value by $4 billion to $1.567 trillion, and for the past 12 months ending in July, the cumulative asset return for the pensions has been 6.42%, while the Milliman 100 PFI funded status deficit widened by $107 billion. Discount rates experienced a 74 basis point decrease over the last 12 months, falling to 3.37% at the end of July from 4.11% at the same time last year.

Milliman projected that if the companies in the Milliman 100 PFI were to achieve the expected 6.6% median asset return, and if the current discount rate of 3.37% were maintained during 2019 through 2020, the funded status of the surveyed plans would increase to a ratio of 89.3% and 93.0% by the end of 2019 and 2020, respectively. For purposes of the forecast, Milliman assumed 2019 and 2020 aggregate annual contributions of $50 billion.

Under an optimistic forecast with interest rates rising to 3.62% by the end of 2019 and 4.22% by the end of 2020, with annual asset gains of 10.6%, the funded ratio of the plans would climb to 94% by the end of 2019 and 109% by the end of 2020. However, under a pessimistic forecast that includes a discount rate of 3.12% at the end of 2019 falling to 2.52% by the end of 2020, with annual returns of 2.6%, the funded ratio would drop to 85% by the end of 2019, and 78% by the end of 2020.

Tags: Corporate Pension, Funded Status, Milliman, Pension