Memo To Mark Machin?
After 11 years at Canada Pension Plan Investment Board, CEO Mark Wiseman is handing the reins to the fund’s head of Asian investments, Mark Machin, effective June 13. The changing of the guard at the $279-billion fund comes as federal and provincial finance ministers prepare to gather in Vancouver later in June for talks aimed at enhancing CPP coverage. Against that backdrop, here’s the note Mr. Wiseman should leave for his successor:Although this comment was written tongue-in-cheek and was meant to be humorous, it propagates the exact same myths other lazy and clueless journalists from rival newspapers propagate.
To: Mark #2
From: Mark #1
Subject: CPPIB handover
Welcome to the top of the mountain! Well, the top of the heap in Canada. We both know I’m heading to the Mount Everest of funds at BlackRock, where they measure assets in trillions, not mere billions.
You’re probably arrived with a fancy 100-day plan for shaping CPPIB in your own image. I’ve got two pieces of advice that I humbly suggest will determine your success at CPPIB and, frankly, my legacy.
First: Get our house in order. CPPIB costs are too high. You know how that weighs on long-term performance. This needs to be a priority, because those holier-than-thou types at the Fraser Institute are all over us.
Second: Make CPPIB a true national resource. The good news on this front is you’ve got a unique opportunity, because the new guy in Ottawa is a pension fund geek who believes that bigger is better when it comes to money management. The bad news: Finance Minister Bill Morneau can be a bulldozer and he knows our business cold.
Oh, and as an aside, Beaudoin at Bombardier is going to ring you every morning to beg for a billion bucks. Just forward the call to Sabia at the Caisse.
On costs, you know I spent huge amounts of energy trying to streamline the fund. I didn’t do enough. You saw that Fraser Institute study: As a percentage of assets, CPPIB expenses are far higher than any of the big Ontario pension funds. Our costs are close to twice those of my old shop, Ontario Teachers, and our 10-year performance trails Teachers. Badly.
Running the CPPIB when we’re growing explosively is tons of fun. In less than two decades, we’ve gone from zero to 1,266 employees in seven countries. We’re running 25 distinct investment strategies. And we’re hanging with all the cool kids: We paid out $1.3-billion last year to external managers, and we have 219 global partners.
But the Fraser Institute is making things awkward by saying: “Developing intricate investment strategies and opening branches around the world may create a more interesting work environment for managers, but this does not guarantee the rate of return that results from higher efficiency and lower costs.”
You need to figure out if lower expenses come from moving assets to internal teams, or fewer, smarter strategies, or slashing fees paid to those legions of external managers. But CPPIB must act. Chairperson Heather Munroe-Blum defended CPPIB’s expenses in the 2016 annual report by explaining that the fund is investing for the future. But she also said the board and management “are committed to realizing efficiencies in CPPIB’s operations to help ensure expenses are appropriate.”
And wait till those Fraser Institute purists chew through that 2016 annual report and realize CPPIB board members voted themselves an 86-per-cent raise over the next two years.
Once you’ve got a handle on CPPIB expenses, you can dream big. The Finance Minister wants to beef up CPP benefits, and as long as they can find someone else to shoulder the cost, every provincial premier wants to deliver a bigger pension payment to aging voters who forgot to open RRSPs.
Recall that back in 2012, when he was still an obscure benefits consultant, Morneau wrote a white paper for the Ontario government that recommended smashing together over 100 smaller public-sector pension plans to create one monster $50-billion fund. He argued that approach could potentially improve investment returns, while saving $100-million annually by cutting costs.
In the pension fund world, that Ontario report was hugely controversial, in part because it proposed saving money by cutting reams of white-collar jobs. Morneau knew that he’d be attacked for that recommendation, and he wasn’t fussed. The politicians didn’t follow through back in 2012, but timing is everything in politics.
Morneau also had a politically sensible approach to consolidating fund managers. When he was working for Ontario, he recommend creating a pooled fund framework, similar to the Caisse in Quebec, and successful provincial funds in Alberta (AIMCo) and British Columbia (bcIMC). Different employers and unions contribute assets and one central manager invests all the money.
CPPIB could be that national pooled fund, drawing additional capital to pay for enhanced CPP benefits, plus adding assets from small funds that want access to global expertise. If Morneau sets this goal, he’s got the smarts and stamina to get there. Be warned: he’s shown that he’s willing to jettison those who stand in his way.
So here’s my advice: CPPIB needs to get more credible on expenses. Then you need to be a central player in the debate on how to provide Canadians with a better retirement. Do both and you make me look like a moron for going to BlackRock.
Here's what I think happened. Andrew Coyne and Andrew Willis met up at some pub in Toronto recently to exchange notes over a few beers:
To: Andrew #2I can go on and on but it's a nice day and I have a lunch to enjoy with someone who appreciates my blog and actually subscribes to it.
From: Andrew #1
Subject: CPPIB's Bloated State
Hey, did you read my hatched job on CPPIB's bloated state? Some blogger in Montreal with a funny sounding Greek name ripped it apart but most clueless Canadians don't read his blog. I think you should follow up and keep spreading myths on the costly CPP using that sham report from the grossly biased Fraser Institute which loves to question whether Canadians are getting a good bang for their CPP buck.
Never mind if that report was deeply flawed and discredited by real pension experts at CEM Benchmarking, the Fraser Institute sounds so Canadian, so reputable that the enlightened readers of the National Post and Globe and Mail will lap it up and keep asking for more.
Nothing gets regular hard working Canadians going more than reading about how much money Canada's pension plutocrats are raking in even if they are delivering long term results. Never mind CPPIB's fiscal year 2016 results which were actually much better than the headline number suggests as it gained 3% and recorded a record year with $11.2 billion of net dollar value-added compared to the Reference Portfolio of public market indexes which experienced a -1.0% decline. According to me, that Reference Portfolio is a fraud and active management is a fraud too, so better off just indexing everything and pray to God we never have another 2008 ever again!
Oh, throw in something about CPPIB's Board jacking up their compensation. We all know they aren't accountable to anyone (except the federal and provincial governments).
What else? Compare the long-term results of CPPIB with those of Ontario Teachers and highlight how "badly" they performed on a relative basis even if you're comparing apples to oranges. Also, make no mention that since implementing active management strategies, CPPIB has generated cumulative value-added over the past 10 years which totals $17.1 billion, after all CPPIB costs and more importantly, CPPIB’s 10-year annualized net nominal rate of return of 6.8%, or 5.1% on a real rate of return basis, was comfortably above the Chief Actuary’s 4.0% real rate of return target over that period.
Also, throw a bone to Bill Morneau, he's working hard trying to fix our pension system by finally doing the right thing and enhancing the CPP once and for all since RRSPs, TFSAs and defined-contribution plans are a total and utter failure (Actually, scratch that, we don't want to piss off banks, insurance companies and mutual funds making an honest living milking Canadians dry on fees as they deliver mediocre returns based on schizoid public markets).
So here's my advice: keep harping on the CPPIB and some day you'll be a moron like me and make regular appearances on national television sounding really smart even though I haven't the faintest idea of what I'm talking about!!
That reminds me. My memo to Mark Machin and the rest of the leaders of Canada's Top Ten: Your subscriptions are due and while I appreciate your financial support (at least from some of you), I think I'm worth a hell of a lot more. I feel like the Rodney Dangerfield of pensions; either that or I'm the biggest pension moron of all.
Below, once again, Leo de Bever, the former head of the Alberta Investment Management Corporation, discusses why it makes sense to appoint Mark Machin as the new head of CPPIB. Listen very carefully to Leo's comments as I think this is one of his best interviews ever (watch it here if it doesn't load below).
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