ANNUAL REPORT 2013 People Purpose Performance Toronto London Hong Kong Corporate Profile Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization with a critical purpose – to help provide a foundation on which Canadians build financial security in retirement. We invest the assets of the Canada Pension Plan (CPP) not currently needed to pay pension, disability and survivor benefits. — CPPIB is headquartered in Toronto with offices in London and Hong Kong. We invest in public equities, private equities, bonds, private debt, real estate, infrastructure and other areas. Assets currently total $183.3 billion. Of this total, 36.7% or $67.4 billion is invested in Canada and the rest globally at 63.3% or $116.1 billion of the portfolio. Our investments have become increasingly international as we diversify risk and seek growth opportunities in growing global markets. Created by an Act of Parliament in 1997, CPPIB is accountable to Parliament and to the federal and provincial finance ministers who serve as the CPP’s stewards. However, we are governed and managed independently from the CPP, operating at arm’s length from governments with a singular objective: to maximize returns without undue risk of loss. The funds that we invest belong to the 18 million Canadians who are current and future CPP beneficiaries. We adhere to high standards of transparency and accountability. The CPP Fund ranks among the world’s 10 largest retirement funds. In managing the Fund, CPPIB pursues a diverse set of investment programs that contribute to the long-term sustainability of the CPP. The most recent triennial report by the Chief Actuary of Canada indicated that the CPP is sustainable over a 75-year projection period, and that contributions to the Fund will exceed benefits paid until 2021. The Chief Actuary also projected that the CPP Fund would reach $275 billion by 2020 and over $500 billion by 2032. Scale makes CPPIB a valued business partner, allowing us to participate in some of the world’s largest transactions. Scale also creates investing efficiencies and provides the capacity to build the sophisticated tools, systems and analytics that support a global investment platform. The certainty of cash inflows means we can be flexible, patient investors able to take advantage of opportunities in volatile markets when others face liquidity pressures. Our distinctive investment strategy, known as the Total Portfolio Approach, ensures that we maintain target risk exposures across the entire portfolio as individual investments enter or leave, and change in value, without regard to specified allocations to individual asset categories. Finally, our exceptionally long investment horizon is an increasingly important competitive strength. We invest for the next quarter century, not the next quarter. Accordingly, we can assess and pursue opportunities differently and stay the course when many cannot. Further, CPPIB’s long-term perspective makes patient capital available for commitments that can create value for the Fund over many years to come. Taken together, our clarity of mission, independence, scale, certainty of assets, investment strategy and long horizon set us apart from other pension funds and institutional investors, and from sovereign wealth funds. These advantages have earned CPPIB an international reputation, and help us attract, motivate and retain a world-class investment team. For more information, please visit our website at www.cppib.com. TABLE OF CONTENTS Financial Highlights 1 Key Operational Highlights 15 Compensation Discussion and Analysis 68 Chair’s Report 2 Management’s Discussion and Analysis 17 Financial Statements and Notes 81 President’s Message 4 Report of the Human Resources and Governance Practices of the Board of Directors 115 Senior Management Team 14 Compensation Committee 64 Ten-Year Review 122 Financial Highlights $183.3 BILLION $16.7 BILLION $ 77.2 BILLION CPP FUND INVESTMENT INCOME IN CUMULATIVE INVESTMENT AT MARCH 31, 2013 FISCAL 2013 INCOME FOR TEN-YEAR PERIOD ENDING MARCH 31, 2013 10.1% 4.2% 7.4 % FISCAL 2013 FIVE-YEAR ANNUALIZED TEN-YEAR ANNUALIZED RATE OF RETURN RATE OF RETURN RATE OF RETURN OUR CRITICAL PURPOSE is to help provide a foundation upon which Canadians build financial security in retirement. ASSET MIX RATE OF RETURN AS AT MARCH 31, 2013 FOR THE YEAR ENDED MARCH 31 (%) Infrastructure 6.1% Canadian equities 8.4% 20 Real estate 10.8% 10 Other debt 4.7% Foreign developed 0 Bonds and money market equities 34.9% market securities 28.4% -10 Emerging market equities 6.7% -20 2004 05 06 07 08 09 10 11 12 13 CPP INVESTMENT BOARD 2013 ANNUAL REPORT 1 Chair’s Report decisions. Following a solid year of performance of the CPP Fund, Robert M. Astley, its 10-year annualized rate of return is 7.4%, or 5.5% on a real Chair return basis over price inflation. Achieved through some very difficult conditions, this result exceeded the 4% real rate of return that is required to sustain the CPP under the demographic and other assumptions made by the Chief Actuary of Canada. THE MANAGEMENT OF RISKS Within the global direction, this year the Board focused particular attention on the management of risks. The Board is conscious that its two most critical investment responsibilities are establishment of The Board reaffirms its strong support the CPP Reference Portfolio, and determination of the “active risk for CPPIB’s strategic direction as the limit,” which is the limit on the level of risk that management may take by its active decisions to seek value-added. The Board CPP Fund grows and the world’s capital recognizes that its choice of CPP Reference Portfolio, both its markets become ever more integrated. equity/fixed income mix and its geographic constitution, has been and will be the dominant influence on the levels of future risks and returns of the CPP Fund. Higher fixed income content lowers risk, but increases the likelihood that future returns will be insufficient AT $183.3 BILLION, the CPP Fund is the largest single-purpose – especially under the prevailing very low level of government pool of capital in Canada, and a highly-regarded investor among bond yields. Higher equity content increases the expected return, pension funds worldwide. Fiscal 2013 marked a year of leadership but also increases the range of uncertainty of the value of the transition as Mark Wiseman assumed the role of President & CEO CPP Fund, even over the long term. The Chief Actuary is now of the CPP Investment Board (CPPIB) on July 1, 2012 from his conducting the triennial actuarial review of the CPP as of predecessor David Denison. The Board of Directors of CPPIB is December 31, 2012. Following the Actuarial Report expected later very pleased with the smooth transition and Mark’s leadership in this year, management and the Board will review the CPP Reference his first year as CEO. Portfolio in light of the report’s findings. As I noted last year, CPPIB has moved into the third stage The active risk limit is reviewed annually by the Board, balancing of its evolution – from its early years of index-based management the value-added opportunities anticipated in CPPIB’s risk budgeting of the assets of the CPP Fund in public market securities, through process against prudence in the degree of underperformance that the development since 2005 of diverse active investment may result by deviating from the CPP Reference Portfolio. A further programs including substantial investment in private assets, to oversight responsibility of the Board is the approval of major its current transition into a truly global investment organization. transactions and new external investment manager appointments – The Board reaffirms its strong support for this strategic direction this year saw the Board approve 12 such transactions totalling as the CPP Fund grows and the world’s capital markets become $8.4 billion, and 5 new managers. ever more integrated. ENTERPRISE RISK ASSESSMENT SUSTAINABILITY OF THE CPP While investment risk management is critical, the Board has The global investing strength of CPPIB will be critical in helping to broader responsibilities to ensure that all key risks of the CPPIB sustain the CPP. The provision of adequate retirement income, enterprise are identified, that effective processes are in place to to a growing population that is both aging and living longer, is vitally manage these risks, and that the processes are diligently executed important to Canadians. Reform of Canada’s pension structure is by management. This year the Board undertook an intensive review under consideration by federal and provincial governments, and of risk management across the enterprise, including four additional CPPIB will adapt as necessary to any legislated changes that might risk aspects – namely strategic, reputation, legislative/regulatory be made while maintaining the integrity of its long-term investment and operational. 2 CPP INVESTMENT BOARD 2013 ANNUAL REPORT The culture of CPPIB is by nature very risk aware, with staff performance benchmarks and incentive compensation structures constantly considering risks in their daily activities. Nevertheless, for active programs, which flowed from principles that the Board the Board carefully studied the enterprise review prepared by had adopted in fiscal 2012. management covering 38 specific risk elements spanning the five From a broader perspective, the governing legislation for CPPIB categories. For each element, the risk was ranked by its potential and the resulting structure of an independent investment corporation impact, the current level and direction of change was assessed, reporting to the stewards of the CPP, continue to be recognized as a and a statement of risk tolerance was outlined which will guide world-class standard for national pension plans and funds. Such future actions. Further detail on CPPIB’s comprehensive processes recognition has been confirmed again this year in contacts by other for managing the full range of risks of the enterprise is provided large funds from many parts of the world.