Has CPP Investments Lost Its Ethical Compass?
When it comes to performance, Canada’s national pension fund rightfully boasts impressive results. Over the past decade, the Canada Pension Plan Investment Board (CPPIB) achieved an annual rate of return of 10 per cent on our CPP fund, one of the highest rates among global pension funds.
But those stellar results rely in part on a questionable practice: tax avoidance.
CPPIB manages assets worth $570 billion, of which only a small part (about 14 per cent) is invested domestically. On its Canadian investments, it is exempt by law from paying taxes. But on its international investments, where taxes are due, CPPIB works very hard to minimize tax payments.
CPPIB is so adept at using legal strategies to minimize taxes that over the past year (fiscal 2023), its total tax bill was a mere $186 million on gross income of $15.6 billion — an effective tax rate of just 1.2 per cent.
To help achieve this, CPPIB has established a vast network of at least 30 subsidiaries in the Cayman Islands, the tax haven capital of the world.
For DT Cochrane, an economist with Canadians for Tax Fairness, an Ottawa based non-profit group, the use of offshore tax havens is deeply worrisome. “My instinct is that when you start to see these complex ownership structures, it’s just an immediate red flag,” he tells me.
Ironically, this is all done while Canada’s finance minister — who heads up the legal owner of CPPIB — says the government is serious about cracking down on loopholes that allow tax avoidance.
Brigitte Alepin, professor of taxation at Université du Québec en Outaouais, and one of the most influential tax experts in the world, acknowledges the big gap between CPPIB’s use of tax havens and the official stance of the Canadian government.
“The Canadian government supports the global tax reform, of which one of its objectives is to impose limits on the use of tax havens by companies. How can we explain and demand from Canadians and Canadian businesses to respect the global tax reform if CPP seems to be using tax havens without any limit?” she wrote in an email.
But when asked about the conflict, Freeland’s press secretary referred all questions to CPPIB. “The CPP is guided by an independent board of directors and operates at arm’s length from the federal government,” she said. “As such they are best placed to provide further comment.”
When contacted by the Star, Michel Leduc, CPPIB’s global head of public affairs and communications, said the CPPIB maintains there is nothing wrong with using legal means to minimize the taxes paid on international investments. “We are unapologetic about our prudent tax planning,” he wrote in an email.
Leduc said CPPIB operates with the goal of helping “our hard-working contributors and beneficiaries achieve lifetime financial security,” and added that “very few national retirement funds are solvent over the long haul.”
But what about the ethics of using offshore tax havens and other strategies to reduce taxes to the point where they are much lower than those paid by most Canadian citizens and companies?
Leduc argues that the CPPIB is competing for deals “against trillion-dollar behemoths” (other large sovereign wealth and pension funds) and needs to use every tool at its disposal.
“Every dollar in foreign taxes we pay comes at the expense of the returns we generate for our 21 million contributors and beneficiaries. The notion of us voluntarily keeping one hand tied behind our back is a non-starter and we have full confidence Canadians support us in this effort,” he adds.
I have three comments on that.
First, CPPIB is arguably one of the more aggressive wealth funds when it comes to tax avoidance. Just because its international tax planning is legal doesn’t mean it’s ethical.
Quebec’s pension plan, Caisse de dépôt et placement du Québec, which is similar in size (it manages $402 billion in assets), has no subsidiaries in tax havens at all, and other Canadian pension funds, such as PSP Investments and the Ontario Teachers’ Pension Plan, use tax havens on a smaller scale.
Second, Canada is one of the richest countries in the world. At least some of the foreign tax CPPIB avoids paying would have gone to much poorer countries such as India and Brazil, where it has massive investments.
Lastly, how can CPPIB have “full confidence [that] Canadians support” its tax avoidance practices? After all, they are well-hidden, never shared with contributors and beneficiaries, and are rarely (if ever) publicly discussed.
CPPIB claims that it is a highly transparent organization. Its website reads: “we believe transparency is the foundation of trust with our stakeholders.” But it discloses none of its complex financial structure to its 21 million contributors and beneficiaries on its financial reports.
In my opinion, while CPPIB’s genuine commitment to fulfilling its mandate “to create value for workers over the long run” is appreciated, its obsession with achieving ever-higher returns has caused it to lose its ethical compass.
High returns are important, but at what cost? There is always a tradeoff, and CPPIB’s returns don’t necessarily have to be as high as they are. According to the most recent Actuarial Report on the Canada Pension Plan, if CPPIB’s average annual rate of return for the next 75 years was 5.75 per cent — much lower than the 10 per cent it has made over the past decade — it would still be well funded until the end of the century.
As things stand now, there is considerable inconsistency, even hypocrisy, between Canada’s official call to crack down on loopholes that allow tax avoidance and the way its national pension fund operates.
Freeland should not hide behind the argument that CPPIB operates at an arm’s length from the government. She needs to send a clear message that CPPIB should pay its fair share of taxes — just as you and I and most Canadian corporations are expected to do.
It's Monday and I read this article in the Toronto Star and think it's important to tackle this issue once and for all.
First, CPP Investments is governed by the federal and provincial ministers of finance so Chrystia Freeland is right, she can't unilaterally impose anything on the Fund.
Behind the scenes, I guarantee you she's asking a whole lot of questions and I'm pretty sure some senior bureaucrat has already contacted Michel Leduc to ask what this is all about.
Now, let's get to the issue at hand, the aggressive use of tax havens and whether CPP Investments is overdoing it, losing its moral and ethical compass in the process.
These are big proclamations but they are utterly meaningless in the grand scheme of things.
The truth is CPP Investments is run like a business -- like a Brookfield and Blackstone -- and they are all right to use legal tax loopholes to lower their tax bill.
In fact, I would argue if CPP Investments wasn't doing so, it's failing to meet some basic requirements of its fiduciary responsibility to its contributors and beneficiaries.
Second, we are mostly talking about international taxes here and Barnea states:
[...] Canada is one of the richest countries in the world. At least some of the foreign tax CPPIB avoids paying would have gone to much poorer countries such as India and Brazil, where it has massive investments.
Well, he's right that CPP Investments invests massively in India and Brazil but fails to acknowledge those investments create a lot of jobs and these people pay income taxes to their government.
And let's not forget, the bulk of the investments are made in the US and Europe where there are bilateral tax treaties that govern pension plans.
Third, he states the following:
Quebec’s pension plan, Caisse de dépôt et placement du Québec, which is similar in size (it manages $402 billion in assets), has no subsidiaries in tax havens at all, and other Canadian pension funds, such as PSP Investments and the Ontario Teachers’ Pension Plan, use tax havens on a smaller scale.
He doesn't provide figures and fails to remember that CDPQ also used to use tax havens extensively (and I'd be shocked if it still doesn't) and it invests in tax haven countries.
Again, all of this is legal, and in my opinion part of their mandate is to reduce the tax bill to ensure their members are accruing most of the returns.
Alright, what about ethical argument that CPP Investments is a responsible investor and uses its size and clout to proxy vote on many issues, from executive compensation, to board diversity, to you name it.
Shouldn't it lead by example?
Again, what does that mean? Pay a lot more international taxes to lower its return and the return that accrues to Canadians counting on a pension later on?
I found this paragraph specious:
High returns are important, but at what cost? There is always a tradeoff, and CPPIB’s returns don’t necessarily have to be as high as they are. According to the most recent Actuarial Report on the Canada Pension Plan, if CPPIB’s average annual rate of return for the next 75 years was 5.75 per cent — much lower than the 10 per cent it has made over the past decade — it would still be well funded until the end of the century.
So because CPPIB can have a lot lower returns it should pay more in international taxes?
I'm hardly convinced; in fact, this is a very weak argument.
As a pension expert, I can tell you the solvency of any plan including CPP is a ot more fragile than most realize so take these figures with a grain of salt.
If CPP Investments runs into trouble and experiences a very bad decade, things will change fast.
That's why I prefer having a cushion, just in case it does run into trouble.
I find it a lot more problematic when BCI invests directly in a private company like ZEDRA which helps the world's rich & famous and god knows who else (criminals?) skirt their taxes even if that's done legally.
I think there is a much bigger moral issue when Canadian pension funds invest directly in such companies.
What else? Recall it was a year ago when Amir Barnea raised the issue of CPP Investments' out of control pay.
He went after the Board of Directors and mentioned some executives as well.
Here, I will state that there's a larger systemic issue at Canada's large pension funds.
To be blunt, there are a lot of guys & gals making outrageous sums and a lot of them don't deserve it.
And I'm not talking about CEOs and CIOs, even if some of them are outrageously overpaid, I'm talking about senior directors, managing directors and senior managing directors.
If I was Pension God for a day, and clearly I'm not, I would force all these public pensions including HOOPP (private trust but it's really public), CAAT, OPTrust and smaller plans to publicly disclose the total compensation of all their employees by name.
I'm talking about real radical transparency on compensation every single year.
This would ensure women aren't getting paid less than men, blacks and other minorities less than whites and more importantly, there would be real accountability and transparency at our public pension funds.
So, for example, the neurosurgeon in Victoria British Columbia making $700,000 a year and seeing a senior director at BCI pulling in that same income might rightly ask: "What the hell is that all about?"
The same with Ontario teachers, nurses, police officers, firefighters, they have a right to know how much everyone across public and private markets is pulling in every year and whether they're really worth it.
Don't hold your breath, our large pension funds have mastered the art of massaging their benchmarks (some are worse than others) to justify their grossly over-generous compensation but this topic isn't discussed in detail because compensation is a touchy subject and the minute you bring it up, the executives scream at you: "We need to pay for talent, there is a talent war."
To a point, there is, the truth is I saw something recently from BCI that just floored me, and it's not just there.
A lot of people working at Canada's large pension funds are making a lot of money, $500K to $1 M and up and you have to really wonder whether they all earn their keep.
But as far as CPP Investments paying its fair share of taxes, I think Barnea is barking up the wrong tree and making a mountain out of a molehill.
If he wants to argue for transparency, he should focus on radical compensation transparency at the Maple Eight, Nine, Ten and Eleven.
And he needs to do this analysis properly by understanding the risks of their portfolios and how they get compensated and over what time frame.
There's a lot to unpack there but that requires serious work.
Alright, it's Monday, I know there are other topics to cover but I wanted to share my thoughts on this.
Below, is estimated that up to $80 billion leaves Canada every year, untaxed. Much of it is siphoned off to Canadian-made offshore tax havens. This film documents the birth of the Canadian Tax Fairness movement and examines the issue of tax avoidance, exposing the sophisticated corporate strategies and tax loopholes commonly used to legally avoid tax.
Watch this documentary, it's eye-opening and shows you tax avoidance is flourishing in Canada and why the system is hopelessly unjust, favoring the wealthy few who are able to “legally” skirt taxes.
Also, Senator Clement Gignac asks Senator Marc Gold a good question on pension funds using offshore tax havens (in French, June 13, 2023).
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