CPPIB Surpasses Caisse, Claiming Record High Valuation

(May 18, 2012) — The Canada Pension Plan Fund, which manages Canada’s national pension fund, has reached a record-high valuation.

The fund hit a value of C$161.6 billion ($160.2 billion) last year, adding more than $13 billion to its assets and surpassing the valuation of the Caisse de depot et placement du Quebec at its fiscal year-end December 31.

The CPPIB’s valuation makes it the seventh-largest pension fund in the world.

Despite declines on the Toronto Stock Exchange and other public markets, the CPPIB saw a 6.6% rate of return in fiscal 2012, with gains in US and foreign equity markets, fixed-income instruments, along with private markets, including holdings in infrastructure and real estate. Meanwhile, the CPPIB is eyeing opportunities in Western Europe, Asia, Latin America.

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“Overall our investment programs delivered a strong performance in fiscal 2012 despite the challenging global equity markets over the past year,” said David Denison, President and CEO, CPPIB. “While we witnessed dramatic fluctuations in global capital markets, our diversification of assets and growing number of global investments contributed to the Fund’s resilience.”

Denison added: “The fiscal 2012 performance of the Fund benefitted from our active management programs and private market holdings, which are less sensitive to the excessive volatility experienced by the public equity markets…As a longterm investor, we were able to take advantage of opportunities provided by market dislocations. We also expanded our global reach in order to participate in the growth and vitality of the world’s emerging markets.”

The fund benefitted from a total of 60 global deals in fiscal 2012, many as part of a consortium, including the US$6.1 billion acquisition of medical technology company Kinetic Concepts Inc and the purchase of a 24.1% stake in Norway’s Gassled gas transport infrastructure for C$3.2 billion.

“We are pleased that our 10-year annualized nominal rate of return of 6.2% is above the 4.0% prospective real rate of return that the Chief Actuary has incorporated in his latest report confirming the sustainability of the CPP, which was achieved even with the sharp declines in equity markets in recent years,” said Denison. “Although the recovery that began in 2010 and continued into 2011 faltered slightly this year, the 10-year return reinforces our confidence in the ability of the Fund’s current portfolio composition and our active investment strategy to generate the returns required to sustain the CPP at its current contribution rate over the longer term.”

(May 18, 2012) — Company bosses should implement business-management techniques to help control their pension fund risk and make better investment decisions, a study has claimed.

Enterprise Risk Management (ERM), which has usually been implemented to run companies more efficiently, should be applied to management of the associated pension fund, actuaries at Hymans Robertson have said.

In the latest edition of Placard, the magazine for the Association of Consulting Actuaries, Jon Hatchett, David Bowie and Nick Forrester wrote: “While actuaries have been helping pension schemes manage elements of their risk for decades, ERM provides a conceptual framework that can help inform the crucial management decisions in a consistent, transparent and effective way.”

The trio continued: “This framework is helpful in advising both trustees, whose governance has come under greater scrutiny, and sponsors where defined benefit pension schemes are increasingly viewed as financial risks rather than employee benefits.”

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Advantages of using this technique, according to Hymans Robertson, include being able to identify objectives and constraints, recognise, analyse, mitigate, and monitor risks and improve overall decision-making.

“Since any analysis is about the future, and so is ultimately subjective, ERM is as much art as it is science. Yet ERM can also reduce the costs of running a scheme, by allocating time and energy proportionately to the impact they can make, and reducing the need for fire-fighting,” they said.

The technique, in Hymans Robertson’s view, could help companies running pension funds to think about what they wanted to achieve and avoid, and what might stop them from doing so.

The group said businesses should remember that not all risk was necessarily bad and taking risk may represent the only way to have any prospect of achieving their objectives.

“The key is to make sure that these risks are well managed, and their potential consequence on the various constraints understood, without losing sight of the overall objective. The management process helps schemes assess which risks are likely to be rewarded, articulates for what reason the risks are being taken and ensures the scheme is not inadvertently over-exposed to particular risks or a particular scenario unfolding,” they said.

In their view, ERM offered pension funds a way of “thinking about what they want to achieve and want to avoid, what might stop them from delivering those successes, gathering the pertinent information coherently, analysing possible outcomes consistently and then implementing practical decisions. “

The ERM approach could help businesses link common sense with relevant analysis and effective governance arrangements to produce ‘dramatically improved decision-making’, which was ‘faster, more consistent and with an audit trail’, Hymans Robertson said.