CPP Investments' CEO on Why Canada Has a Decided Advantage

John Graham, President and CEO of CPP Investments wrote a comment on a national pension promise:

We live in tumultuous times. Wars in Ukraine and the Middle East, a global pandemic, and rapid technological change have all challenged us in ways we couldn’t have imagined five years ago.

It can be easy to forget, given the speed of these disruptions, that one of our greatest challenges has been building slowly for generations.

“Demography is destiny” is a phrase often used to draw a foreboding link between population dynamics and a nation’s fate. In periods of uncertainty, demographics can also be a signal for what’s ahead and provide the visibility to prepare for the challenges we’ll face in the future.

In Canada, one of our most powerful tools to collectively shape that future is our strong, stable, resilient pension fund, one built for the specific demographic hurdles we’ll face as a country.

Indeed, patterns of aging suggest nations will face vastly different challenges in the years ahead. India, which overtook China last year as the world’s most populous nation, now has 1.4 billion people, 68 percent of whom are of working age (between 15 and 64). In sub-Saharan Africa, the working-age population is expected to increase by 740 million by 2050, more than doubling its current level, according to the World Bank.

In developed nations, decades of declining birth rates and rising life expectancies have put an opposite set of forces in motion. By 2030, 1.4 billion people across the globe will be aged 60 or older—a figure that will double by 2050, according to the World Health Organization. This trend is particularly powerful in nations like Japan, where 30 percent of the population is already in the 60-plus age group.

It’s also present in Canada, where by 2043, one in four Canadians will be over the age of 65—and where fewer people of working age will be there to support a growing retired population. In 1990, there were six people aged 15–64 for every one person over the age of 65. Today, there are 3.5 people of working age for every person over 65. The tighter this ratio gets, the more acute economic and fiscal strains will become.

In this landscape, countries with strong pension funds have a decided advantage—and Canada is among them. In the mid-1960s, the Canada Pension Plan (CPP) was introduced to address increased life expectancies and declining family support. But in the 1990s, when the federal and provincial governments realized that these changing demographics would materially impact what the CPP was on track to provide, several changes were made, notably the creation of the Canada Pension Plan Investment Board (CPP Investments).

For the past 25 years, our singular mission has remained clear—invest the CPP to achieve a rate of return high enough to help sustain pension payments for millions of people today and tomorrow. And in a time when other pension plans are struggling, our fund is among the world’s strongest. With a 10-year annualized rate of return of 10.9 percent from fiscal 2013 to 2022, CPP Investments ranked first among national pension funds (according to Global SWF).

Every three years, the chief actuary of Canada conducts a financial review of the CPP. Last year, the review concluded that the existing benefit levels are sustainable for 75 years.

What contributes to our long-term success? First, we operate at arms-length from federal and provincial governments using a platinum-grade governance framework. Second, we have a clear mandate: to maximize returns without undue risk of loss, while considering the factors that may affect the funding of the CPP. Third, we’re global, investing across all asset classes in most major markets. Finally, we think long-term. In a world where investment philosophies often veer from one quarter to the next, our highly qualified investors are trained to look decades ahead.

Demographics tells us there are significant challenges in the future. CPP Investments is proof that a bold promise to generations is achievable if we collectively shape it.

This article was originally published by The Milken Institute’s Power of Ideas collection.

This is a good comment to start the week as geopolitical tensions are on the rise and people are worried about their retirement savings.

In his comment, John Graham highlights the demographic forces shaping our world and why now more than ever it's important to have a strong national pension fund to ensure that as more and more Canadians retire, they do so in dignity and security.

John also highlights the factors that have contributed to CPP Investments' long-term success: 

First, we operate at arms-length from federal and provincial governments using a platinum-grade governance framework. Second, we have a clear mandate: to maximize returns without undue risk of loss, while considering the factors that may affect the funding of the CPP. Third, we’re global, investing across all asset classes in most major markets. Finally, we think long-term. In a world where investment philosophies often veer from one quarter to the next, our highly qualified investors are trained to look decades ahead.

This might all sound trivial but the real devil is in the detail, in the execution of their strategy like how they implement a Total Portfolio Investment Framework.

Managing a pension fund to generate generational wealth isn't simple and there's no one size fits all.

Canada's large pension funds do have an advantage, their governance framework, which allows them to attract talent to manage more assets internally to reduce the drag from external fees.

They have the capabilities to do a lot internally and when they don't, they will partner up with world-class partners to take advantage of those opportunities wherever they lie.

I bring this up because the FT recently reported that in a widely anticipated move, the Norwegian government has once again nixed the $1.6tn sovereign wealth fund’s desire to add LBOs to its investment mandate:

This wasn’t entirely unexpected, given that every CEO of Norges Bank Investment Management has at some point asked if they can invest in private equity, but been turned down by various governments. Perhaps this is just a rite of passage that NBIM’s podcaster-in-chief Nicolai Tangen had to go through.

NBIM is mostly a massive index fund, and adding private equity to the mix (in an overwhelmingly social-democratic country like Norway) was always going to be a big ask. Moreover, there were more fundamental financial issues that weighed against the decision, as FT Alphaville detailed earlier this year.

In its annual white paper to parliament on the country’s two main wealth funds — the smaller domestic Government Pension Fund Norway and Government Pension Fund Global (which is managed by NBIM) — the Norwegian finance minister instead decided to punt the private equity issue to a new committee.

An expansion to unlisted equities would entail investments that have to be managed in a manner that is substantially different from the current investment management. The Ministry of Finance therefore wishes to gather more information about both financial and non-financial aspects of such investments. The Ministry intends for a new, external expert council for the Fund, as suggested by the Sverdrup-committee, to be established in 2024. Among the new council’s assignments shall be to assess different aspects of unlisted equities.

The Government does not wish to open for unlisted equities now. This is an important decision, and we must allow time to consider it carefully. We wish to establish an independent expert council for the GPFG, and with input from this council we will get a better decision basis and broader debate about all aspects of investments in unlisted equities, says the Minister of Finance.

(Norwegian speakers can read the full “fondsmeldingen” here. The main private equity section is 3.1)

Espen Henriksen, a finance professor at the Norwegian business school BI and a sharp observer of the SWF, told FTAV that shunning private equity was a “a very wise decision”.

The recipe for managing the Government Pension Fund Global has been broad and systematic risk diversification and economies of scale in open public markets. Private equity would have been concentrated bets and diseconomies of scale in closed private markets. It would thus have been the opposite of and a departure from what has made the management of the GPFG a success.

Private equity titans, who have been quietly courting NBIM to get some of the massive river of fees that would flow from the mooted $80bn PE allocation, might be praying that this is merely a “not now” rather than a “forget about it”.

The white paper will now be debated in parliament. At the press conference finance minister Trygve Slagsvold Vedum mostly ducked and weaved when it came to the issue, sticking to the message that there was no rush and something like this needed time to be considered. And who knows, maybe things will change.

NBIM itself said:

We think it is positive that the Ministry of Finance wants to further evaluate the option of including unlisted shares in the fund’s mandate.

We look forward to meeting the Finance Committee in parliament later this month to answer questions on the topic.

But several Norwegian governments have set up similar (if periodic) external committees to examine the SWF’s strategy, and the attitude to private equity has always been a bit lukewarm.

Most importantly, even if this new permanent “expert council” were to recommend the addition of private equity at some point in the future, it is still hard to see how it could get past the Norwegian parliament, which would have to bless any changes to the mandate.

Still, this seems like a smart move. Never say never, etc, (even if scepticism is warranted) and having a permanent committee of external advisers and observers rather than occasional ad hoc ones could be a valuable addition to the fund’s governance.

Now, without getting into too much detail, I don't disagree with the decision to deny Norway's GPIF to adopt private equity at this time but not because of the reasons the academic cited.

He doesn't have a clue of what he's talking about. How do I know? Well, CPP Investments has 33% of its assets invested in private equity and it's the best-performing asset class over the long run.

The critical difference however is CPP Investments is run like a business, it has the capabilities of setting the compensation right to attract top talent in all asset classes and in private equity especially, this is critical to get the approach right.

If you don't have the right approach -- investing in top funds and co-investing alongside them on bigger transactions to reduce fee drag and maintain a sizable allocation -- don't bother doing private equity.

Why? Because the fees will eat away at your performance over the long run.

Keep in mind, NBIM which manages the GPIF does invest in unlisted real estate but there they have the right partnerships, people and structure to do so properly.

They can and should invest in private equity but to do this properly they need a plan, they need to hire experienced people all over and there they may run into governance issues as the Norwegian government has too much of a say in their daily operations (still has excellent governance and is extremely transparent).

I'm just saying for private equity, you need the right approach and Canada's large pension funds have all adopted it led by CPP Investments, the largest private equity investor in the world (or one of the largest).

Alright, let me wrap it up there, just remember why Canada has a decided advantage, it's not because we have the best governments in the world (we certainly don't, especially at the federal level), it's because we have the best pension funds in the world led by our national pension fund.

Below, John Graham has a clear mandate. As CEO of Canada Pension Plan Investments, he oversees the retirement savings of 20 million Canadians, with the goal of achieving the highest possible returns without undue risk. Listen to this conversation with Goldy Hyder.