2010 ANNUAL REPORT CORPORATE PROFILE The Canada Pension Plan Investment Board is a professional investment management organization that invests the assets of the Canada Pension Plan (CPP) not required to pay current benefits. Created by an Act of Parliament in December 1997 as part of the successful CPP reforms, the organization’s mandate is to help sustain the pensions of 17 million CPP contributors and beneficiaries by maximizing retu rns without undue risk of loss. According to the latest report by the Our disclosure policy states: With a mandate from the federal Chief Actuary of Canada, released “Canadians have the right to know and provincial governments, the in October 2009, the CPP, as why, how and where we invest their CPP Investment Board is a Crown constituted, is sustainable Canada Pension Plan money, who corporation accountable to throughout the report’s 75-year makes the investment decisions, Parliament and to the federal and projection period. The report what assets are owned on their provincial finance ministers who indicates that CPP contributions behalf and how the investments are serve as the stewards of the CPP. are expected to exceed annual performing.” This annual report, As an investment management benefits paid until 2021, providing together with our website and organization operating in the private- an 11-year period before a portion quarterly financial results sector investing non-government of the investment income from the disclosures, help to make this assets, it is not a sovereign wealth CPP Investment Board (CPPIB) is information available to Canadians. fund. Several key attributes, including needed to help pay pensions. As a an arm’s length governance model, result, the CPP Fund will grow In order to continue diversifying independent board and investment- significantly between now and 2021. the portfolio of CPP assets, the only mandate, distinguish the Beyond 2021 it will continue to CPP Investment Board invests in CPP Investment Board from the grow, but at a slower rate, as a small public equities, private equities, large pools of government assets portion of the investment income will real estate, inflation-linked bonds, under government direction generally be needed to help pay pensions. By infrastructure and fixed income identified as “sovereign. ” increasing the long-term value of instruments. Approximately funds available to the CPP, the CPP $54.9 billion is invested in Canada Headquartered in Toronto, with Investment Board will help the plan through a broadly diversified offices in London and Hong Kong, to keep its pension promise to portfolio, while the rest is invested the CPP Investment Board is Canadians. globally so that income from foreign governed and managed investments flows back to Canada independently of the CPP and at to help pay future pensions. arm’s length from governments. For more information on the CPP Investment Board, visit our website at www.cppib.ca. FINANCIAL HIGHLIGHTS ($ BILLIONS) 2010 2009 TOTAL CPP FUND 127.6 105.5 TOTAL CPP FUND INCREASE 22.1 (17.2) INVESTMENT INCOME (NET OF OPERATING EXPENSES) 16.0 (23.8) CPP NET CONTRIBUTIONS 6.1 6.6 CPP FUND BILLION BILLION $ $ TOTAL % TOTAL CPP FUND ONE-YEAR 127.6 CPP FUND 22.1INCREASE 14.9 RATE OF RETURN CPP FUND ASSET MIX CPP FUND $127.6 BILLION AS AT MARCH 31, 2010 AS AT MARCH 31 ($ BILLIONS) 150 14.5% Canadian equities 36.2% Foreign developed market equities 120 5.0% Emerging market equities 90 28.0% Bonds and money market securities 2.8% Other debt 60 5.5% Real estate 4.6% Infrastructure 30 3.4% Inflation-linked bonds 0 0807060504030201 09 10 CPP INVESTMENT BOARD 2010 ANNUAL REPORT | 1 CHAIR’S REPORT ROBERT M. ASTLEY CHAIR The Canada Pension Plan is one of our nation’s most important social programs and the cornerstone of retirement security for 17 million Canadians. This past year, Canada’s Chief Actuary reaffirmed his view that Canada’s national pension plan remains sustainable with a 9.9% contribution rate over the 75-year period covered by his most recent report. The health of the CPP is a source of strength for Canada. Since the creation of the CPP Investment Board (CPPIB) following the successful 1997 CPP reforms, the CPPIB is regarded as a model for sound management of other large pension plans around the world, At the CPPIB, our job is to help sustain the health of the CPP for the benefit of future generations. We do that by investing CPP assets not needed to pay current benefits with a mandate to maximize investment returns without undue risk of loss. Achieving that mission seemed relatively straightforward in 2005, 2006 and 2007. While investing is never easy and the challenges of building a global investment firm are significant, during these years the global economy was humming along, asset values were rising and the future looked bright. But as everyone knows, the mood turned considerably darker in 2008 and early 2009 when credit markets seized, asset values plunged and the global financial system seemed to be on the verge of collapse. These were very uncertain times and investors were under enormous pressure to cut their losses, even if that meant abandoning carefully conceived strategies that were designed to perform over much longer periods of time. In this context, and faced with steep quarterly declines in the value of the CPP Fund and significant uncertainty about what lay ahead, the CPPIB’s board of directors and management chose to ask some very tough questions about our strategy and the best way forward. I am very proud of the way those discussions took place. They were open, honest, fact-based, far-reaching and collaborative, both within the board of directors and across the organization. The fundamental question we asked was: What is the best way to achieve our mission of helping to sustain the Canada Pension Plan for future generations? After extensive analysis, discussions and debate, we concluded – with conviction – that our underlying principles and investment strategy are sound, our comparative advantages versus other funds are real, and our people and practices are world class. Rather than yield to the market pressure, the CPPIB crystallized its beliefs in our long-term strategy and emerged a stronger organization. While we fully expect there will be other times down the road when investment performance will be negative, the Fund benefited from this focus and conviction in the second half of the calendar year when global public equity values rebounded and the Fund increased by $22.1 billion to finish the fiscal year at $127.6 billion. 2 | CPP INVESTMENT BOARD 2010 ANNUAL REPORT CHAIR’S REPORT “Our underlying principles and investment strategy are sound, our comparative advantages versus other funds are real, and our people and practices are world class.” The CPPIB did more than just weather the storm during fiscal 2010. We emerged as one of the few large investment organizations able to capitalize on opportunities in the current environment to make investments that we believe will generate significant income for the Fund for years to come. David Denison speaks more about this in his accompanying letter. GOVERNANCE The CPPIB was established with a unique governance structure designed to strike a balance between independence and accountability. This structure was tested during the past few years. At a time when governments around the world were bailing out banks and taking other extraordinary actions (including actions involving their national pension plans), Canada was fortunate. Our financial system performed better than most. Further, CPPIB’s governance model, which was designed to ensure that the CPPIB could operate at arm’s length from governments and free of political interference, held firm. The CPPIB also received strong validation this past year for the quality of its operations and infrastructure. Under the Canada Pension Plan Investment Board Act, the CPPIB is required to submit to an independent Special Examination every six years. The purpose of this examination is to provide reasonable assurance that: • The assets of the CPP Investment Board and those of its subsidiaries are safeguarded and controlled; • The financial, human and physical resources of the CPP Investment Board and those of its subsidiaries are managed economically and efficiently; and • The operations of the CPP Investment Board and those of its subsidiaries are carried out effectively. This examination took place during fiscal 2010 and I am pleased to report that the CPPIB satisfied its requirements in all respects. A copy of the special examiner’s report was provided to the federal and provincial ministers of finance who serve as stewards of the CPPIB. Within the board of directors itself, we focused on four main priorities during the past year. I have already discussed the first, which was to reevaluate and, ultimately, to reaffirm our strategy. The second was ongoing oversight of the organization’s investment and enterprise risk management policies and practices. The CPPIB board sets policies and parameters that allow investment teams to pursue attractive returns within the Fund’s long-term objectives and risk profile. Specifically, each year, the board of directors approves an active risk limit which restricts how much the CPP Fund’s aggregate risk exposure can vary from the risk embodied in its benchmark, the CPP Reference Portfolio. This limit caps how much added risk our investment groups can take to earn additional returns. This is an area of significant board focus. We are confident in management’s ability to generate sufficient returns over time to help sustain the CPP and to continue to earn a reputation for the CPPIB as a world-class investment organization. CPP INVESTMENT BOARD 2010 ANNUAL REPORT | 3 CHAIR’S REPORT The third area of focus was the integration of several new board members into an effective and cohesive group.