A Guide to the Canada Pension Plan Investment Board

October 12th, 2020

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The Canada Pension Plan Investment Board (CPPIB) is responsible for managing the assets contained within the Canada Pension Plan.

According to their website:

"By investing assets of the Canada Pension Plan that aren’t currently needed to pay pension, disability and survivor benefits, we help create retirement security for generations of Canadians."

This article will discuss the role of the CPPIB in the Canadian retierment system today.

What is CPP?

The Canada Pension Plan (CPP) is set up by the government of Canada. It acts as a replacement for part of your retirement income. As part of your retirement income, you will receive monthly CPP payments either directly deposited into your bank account or as a cheque.

All CPP contributions are placed in a fund managed by the CPP Investment Board, which in turn invests the funds in stocks, bonds, and other assets.

The CPP Investment Board

The Canada Pension Plan Investment Board (CPPIB) was created in 1997 as an independent, but accountable body to monitor and invest the funds held by the CPP.

The CPPIB has a professional board of directors to oversee the operations of the fund and has an enterprise risk management framework that ensures risks taken are commensurate with the long-term benefits achievable. It invests for 25-year timeframes with an active investment strategy.

It acts like any typical large fund manager, investing CPP contributions in various asset classes.  CPPIB invests the assets of the CPP with a singular objective – to maximize returns without undue risk of loss taking key factors into account that may affect the funding of the CPP.

CPPIB Investment Strategy

In 1997, the CPP fund was 100% invested in government bonds, but has since diversified to a wide array of investments.

CPPIB strives to deliver a well-balanced and globally diversified portfolio to maximize long-term returns. Their investments cover all major asset classes encompassing 30 distinctive investment programs and constantly track any risk factors affecting the overall market conditions. All investments are selected keeping the following factors in consideration:

  • Maintain a long-term view
  • Benefit from general economic growth by taking on an appropriate amount of risk
  • Choose investment programs and asset types with distinct underlying drivers of return and risk
  • Avoid being overly dependent on returns in any one country, currency, or region
  • Invest strategically as economic and market conditions change

Their total portfolio approach is the principal element of its overall investment strategy. It is designed to ensure that planned risk exposures at the total portfolio level are maintained as individual investments enter, leave, or change in value. Their approach tries to diversify all investments at the level of overall risk and return streams, rather than that of specific asset classes.

This approach requires continuous assessment to ensure unintended risk exposures are minimized. Working closely with each investment department, the total portfolio management team provides guidance, structured goals, targets, clarifies economic value, and helps identify opportunities that fit well within the entire portfolio composition. The strategy is structured to be resilient in the face of wide-ranging market and economic conditions.

To put things into perspective, the CPPIB holds investments in 55 countries with 283 global investment partners with a 10-year annualized rate of return of 10.7%. On June 30, 2020, the fund value is $434.4 billion with 16% of assets invested in Canada.

Active Management of Funds

CPPIB investment managers use a wide variety of strategies for buying, selling, and weighting investments to generate high returns during both rising and falling markets. It periodically adjusts the portfolio to reflect short-term or mid-term market opportunities. For example:

  • They anticipate broad trends using market pricing and fundamental ratios and can make “strategic tilts” accordingly
  • They anticipate relative price movements of currencies, equity markets, bond markets and commodities, and continuously make more tactical adjustments
  • They act as engaged and active owners of direct equity, real estate, and infrastructure investments, as well as through their long-term holdings in many public companies to promote enhanced governance, environmental, social, and operational corporate practices.

Sustainability of the CPP

As the average age and lifespan of Canadians is rising, it is important to plan for consistent retirement income. Every three years, the Chief Actuary issues a report that reviews the financial state of the CPP fund and measures its sustainability. The most recent report can be viewed here.

According to this report, the CPP is sustainable over a 75-year projection period. Projections of the Fund, being the combined assets of the base and additional CPP accounts, are based on the nominal projections from the 30th Actuarial Report on the Canada Pension Plan as on December 31, 2018.

Do you start receiving CPP Payments automatically?

No. CPP payments will not start automatically, and you must apply for them first. To apply online you will need a My Service Canada Account (MSCA).

Eligibility criteria to receive CPP Payments:

  • You must be 60 years or older and,
  • You must have made at least 1 valid contribution to CPP

Contributions can be made through automatic deductions from your paycheck set up by your employer.

If you fulfill both criteria, you can apply to receive CPP payments. The application can either be completed online or you can submit a paper application.

Are CPP Payments Taxable?

CPP retirement pension is considered as income and will be taxed at your marginal rate, which will depend upon your earnings. While it is likely that your earnings will be lower during retirement, putting you in a lower tax bracket, one strategy to lower your taxes is to share your pension with your spouse/common-law partner. This will reduce your taxable income and therefore lower the amount of taxes you pay.

How much CPP will you receive?

The amount of CPP pension you receive depends on various factors, such as:

  • The age you begin to receive your pension
  • How much you have contributed to CPP and for how long
  • Your average earnings throughout your life

In 2020, the maximum monthly amount you can expect to receive as a new recipient at age 65 is $1,175.83. The average monthly amount for March 2020 is $696.56. You can get an estimate of your CPP payments by accessing your account on MSCA. Additionally, you could also use the Canadian Retirement Income Calculator to estimate your payments.

If you want to learn more about the factors affecting your CPP payments when to start collecting CPP payments, and how to maximize them, you can read our article, CPP Pay Dates: How much CPP to Expect.

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