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An Analysis of the Canada Pension Plan Investment Board and Its Market-Based Investment Strategy

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An Analysis of the Canada Pension Plan Investment Board and Its Market-Based Investment Strategy THE RISK-LADEN APPROACH TO INVESTING CANADIANS’ PENSIONS: AN ANALYSIS OF THE CANADA PENSION PLAN INVESTMENT BOARD AND ITS MARKET-BASED INVESTMENT STRATEGY by Kyall E. Glennie Bachelor of Arts Honours, University of Regina 2005 M.A. PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS In the Political Science Department © Kyall E. Glennie 2009 SIMON FRASER UNIVERSITY Spring 2009 All rights reserved. However, in accordance with the Copyright Act of Canada, this work may be reproduced, without authorization, under the conditions for Fair Dealing. Therefore, limited reproduction of this work for the purposes of private study, research, criticism, review and news reporting is likely to be in accordance with the law, particularly if cited appropriately. Glennie Approval Name: Kyall E. Glennie Degree: Master of Arts, Department of Political Science Title of Project: The risk-laden approach to investing Canadians’ pensions: An analysis of the Canada Pension Plan Investment Board and its market- based investment strategy Examining Committee: Chair: Dr. Lynda Erickson, Professor Department of Political Science, Simon Fraser University ________________________________________ Dr. Marjorie Griffin Cohen, Professor Department of Political Science, Simon Fraser University Senior Supervisor ________________________________________ Dr. Patrick Smith, Professor Department of Political Science, Simon Fraser University Supervisor ________________________________________ Dr. Stephen McBride Department of Political Science, Simon Fraser University External Examiner Date Defended/Approved: April 20, 2009 ii Declaration of Partial Copyright Licence The author, whose copyright is declared on the title page of this work, has granted to Simon Fraser University the right to lend this thesis, project or extended essay to users of the Simon Fraser University Library, and to make partial or single copies only for such users or in response to a request from the library of any other university, or other educational institution, on its own behalf or for one of its users. The author has further granted permission to Simon Fraser University to keep or make a digital copy for use in its circulating collection (currently available to the public at the “Institutional Repository” link of the SFU Library website <www.lib.sfu.ca> at: <http://ir.lib.sfu.ca/handle/1892/112>) and, without changing the content, to translate the thesis/project or extended essays, if technically possible, to any medium or format for the purpose of preservation of the digital work. The author has further agreed that permission for multiple copying of this work for scholarly purposes may be granted by either the author or the Dean of Graduate Studies. It is understood that copying or publication of this work for financial gain shall not be allowed without the author’s written permission. Permission for public performance, or limited permission for private scholarly use, of any multimedia materials forming part of this work, may have been granted by the author. This information may be found on the separately catalogued multimedia material and in the signed Partial Copyright Licence. While licensing SFU to permit the above uses, the author retains copyright in the thesis, project or extended essays, including the right to change the work for subsequent purposes, including editing and publishing the work in whole or in part, and licensing other parties, as the author may desire. The original Partial Copyright Licence attesting to these terms, and signed by this author, may be found in the original bound copy of this work, retained in the Simon Fraser University Archive. Simon Fraser University Library Burnaby, BC, Canada Last revision: Spring 09 Glennie Abstract The Canada Pension Plan Investment Board (CPPIB) has introduced substantial risk into the investment of Canadians’ public pensions by moving assets from secure government bonds to market-based equities, real estate and hedge funds. This risk, because of the recent economic recession, has resulted in substantial losses to the Board’s portfolio assets of over $17.5 billion in this current fiscal year alone. Under the guise of its internally developed “Policy on Responsible Investing,” the CPPIB invests the assets without concern for corporate social responsibility, promising to engage with rather than divest from irresponsible corporations. This adherence to a market-based investment philosophy has resulted in Canadians’ pension assets being risked and lost. The CPPIB therefore eschews its fiduciary responsibility to protect Canadians’ pensions for the foreseeable future. Failing the implementation of better risk management strategies including the reallocation of assets, new contributions may be required to fund future pension liabilities. Keywords: pension investment - Canada; investment; public policy; Neoliberalism - Canada; Canada --- Politics and government iii Glennie Table of Contents Approval.................................................................................................................................. ii Abstract ................................................................................................................................. iii Table of Contents .................................................................................................................iv List of Figures and Tables ...................................................................................................v 1. Introduction .......................................................................................................................1 2. Research Approach: What frames the CPPIB’s conception of responsibility? ....4 3. Origins of the Canada Pension Plan Investment Board and its market-based investment strategy..........................................................................................................5 Why a pension fund investment board?...................................................................................................5 Secretariat-led consultations: seeking inputs on a market-based investment board ....................9 Secretariat findings propose a widely-accepted investment board implementation ...................11 A preferred outcome to a public policy problem..................................................................................13 Satisfying ideological considerations......................................................................................................15 4. The CPPIB’s market-based approach to economic security................................. 18 Fiduciary duty to increase pension assets..............................................................................................18 Performance of the CPPIB’s portfolio: high expectations, vastly missed targets .......................19 Poor performance relative to past practice: underwhelming returns .............................................22 Poor performance is a result of the asset allocations of the portfolio.............................................24 The high cost of operating the Investment Board ..............................................................................27 Risk assessment flawed: performance not meeting expectations.....................................................30 Actuary Reports on the CPP: High expectations for continued market success .........................31 Net result of poor performance: contribution rates may increase ...................................................32 Entrenched ideological underpinnings preventing reform ...............................................................33 5. Assessing the CPPIB’s market-based approach and opposition to corporate social responsibility....................................................................................................... 34 What is the social responsibility function of the CPPIB? .................................................................34 Socially responsible investing: Is it all about “engagement”?...........................................................37 No impetus to practice social responsibility has meant poor performance ...................................41 6. Conclusion: poor performance, market risk and pension instability................... 43 7. Works Cited.................................................................................................................... 47 iv Glennie List of Figures and Tables Figure 1: CPPIB Portfolio vs. Canada Premium bond performance, 1999-2009...................... 23 Table 1: Cost increases as percentage of earnings: 1994 Actuary Study vs. 1997 Reforms.. 20 Table 2: CPPIB Gains / Losses and Total net income from investments .................................. 22 Table 3: Asset types of the CPPIB Portfolio, 2000-2008.................................................................. 25 Table 4: Assets as percentage of portfolios, CPPIB vs. Statistics Canada "average" .............. 26 Table 5: Bonuses of top four CPPIB employees vs. Performance of portfolio, 2000-2008.... 29 v Glennie 1. Introduction The Canada Pension Plan Investment Board’s (CPPIB) market-based investment strategy has resulted in a loss, between April 2007 and December 2008, of over $17.9 billion of Canadians’ public pension assets. This is likely to have repercussions that could affect both contribution rates1 and future benefit rates. The CPPIB has a fiduciary duty to manage these pension contributions responsibly.
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