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“One of the most profound things that I have learned in the last year and a half since moving here (Toronto) is that the strength of the country’s pension system is probably one of the country’s best kept secrets … when I go around Canada I find very few Canadians really know that they have a world-class investment institution working for them. And really troubling, there are very few Canadians who have the confidence that the Canada Pension Plan itself is sustainable.” – Mark Machin

 

Mark Machin

If reality tells one story but perception another, what do you do? Well, if you are Mark Machin, President and CEO of the CPPIB, and you want Canadians to know they can depend on their national pension plan, you hit the road to sell its merits.
The message is clear, supported by facts and figures: the Canada Pension Plan (CPP) is on solid ground, well funded and managed, and will be there for Canadians when they need it. However, that message isn’t resonating with a significant portion of the population who cling to the stubborn belief that the plan is in such dire straights it will run out of money by the time it’s their time to collect benefits.
“One of the most profound things that I have learned in the last year and a half since moving here (Toronto) is that the strength of the country’s pension system is probably one of the country’s best kept secrets,” Machin told an audience of influencers at a Nov. 20 session hosted by the Economic Club of Canada, titled CPPIB Invests for Canadians: Here’s How.
“When I go around Canada I find very few Canadians really know that they have a world-class investment institution working for them. And really troubling, there are very few Canadians who have the confidence that the Canada Pension Plan itself is sustainable.”
The CPP, part of the Canadian model that has gained global praise as being a revolutionary approach to the accumulation and delivery of retirement income, is not only stable today, it’s sustainable over the next 75 years, says Machin, who has led the Canada Pension Plan Investment Board (CPPIB) since June of 2016.
Prior to that he was the board’s first President for Asia, appointed in 2012. He came to the CPPIB following a 20-year career with Goldman Sachs.
Evidence of the high regard for the Canadian model includes a recent report by the World Bank Group titled The Evolution of the Canadian Pension Model. The report, prepared by Toronto-based Common Wealth, details 14 key lessons relating to the provision of adequate retirement income and identifies several success factors. Its intent is to help lower-income countries improve their retirement systems.
Those factors include strong collaboration between stakeholders, independent governance, a business-like approach with a focus on delivering the pension promise, internal investment and management, and recruiting top talent.
“The CPP and the CPPIB itself are held up repeatedly around the world as living proof of innovation and world-class pension management … and Canada, unlike virtually every other industrialized county around the world, has actually solved its national pension solvency issues,” said Machin.
The board, he continued, periodically conducts surveys of what Canadians think about the CPP, and the CPPIB specifically. The most recent one, from December 2015, found that 64 per cent of Canadians “either don’t believe or don’t know whether the CPP will be there for them.”
Despite the lack of confidence in the national plan, 42 per cent of Canadians of working age expect to rely “to a great extent on the CPP when they retire.” That’s an increase of 13 per cent since tracking began 15 years ago.
“So if you combine these two things it shows great uncertainty about the CPP being there with a growing reliance on it … that’s a really disturbing trend,” said Machin.
It’s clear, he added, that Canadians lack confidence in being able to accumulate adequate retirement income, and that can “cause you to freeze and be overwhelmed.” Combined with a low level of financial knowledge, it can be easier to ignore the problem than confront it “and that’s a pretty powerless position for Canadians generally to be in.”
To counter that and get the message out to Canadians that they can rely on the CPP, the board decided to engage with the public across the country, and meet with influencers at sessions like the one held in November.
There are three main components to that message: the CPP will be there when Canadians need it; the plan can withstand bad years; and that the CPP by itself, for most Canadians, will not be enough to sustain a pre-retirement lifestyle – Canadians will still need to have other income sources like work pensions or personal savings.
Canadians, he continued, don’t need to take his word alone about the sustainability of the plan.  The country’s chief actuary completes a report every three years with the most recent one, Actuarial Report on the Canada Pension Plan (2015), determining it to be sustainable over the next 75 years.
The actuary assumes a real rate of return, over inflation, of 3.9 per cent. The board has consistently beat that assumption, with the actual 10-year real rate of return coming in at 5.3 per cent “and our five-year, and yes it has been a great five years, real rate of return of 10.3 per cent,” related Machin.
Today, the fund contains $325 billion and is ranked among the top 10 largest in the world. It is structured to be completely independent of government, meaning it can’t be accessed by politicians for other purposes, protected by the Act of Parliament that created the CPPIB in the mid-90s. The fund, said Machin, is solely for the benefit of Canadian workers and retirees.
Structural protections make it extremely difficult to access the fund for political priorities, including an agreement from all the provinces and the federal government to do so, and a change in the act itself that would require the agreement of seven provinces representing two-thirds of the population.
“It’s a pretty high bar so I think it’s quite unlikely that would happen.”
The CPPIB’s long-term objective, continued Machin, is to maximize returns without undo risk or loss. With that, Canadians should not be overly concerned with headlines about losses in any particular year or period.
“In order to build the fund over many decades, we are going to see losses from time to time … if we never lost money we wouldn’t be taking enough risk and we wouldn’t be executing on our mandate to maximize returns.”
When asked why Canadians seem to be so pessimistic about CPP’s sustainability, Machin points to the mid-90s when headlines blazed that left as it was, the fund would run out of money. The government of the day increased contributions to ensure that would not happen, but the perception seems to have stuck.
“What’s really is surprising to me though is that when that happened there was this amazing political consensus that pushed the provincial and federal governments together to restructure the pension system, increase the contributions and also to create the CPPIB as a standalone to invest money.
“That part of the story is much less known … the general population just saw the terrible headline and not the solutions.”
Of the board’s investments, 80 per cent are global and 20 per cent Canadian, including real estate, infrastructure and a toll highway (the 407 in Ontario). The 20 per cent still represents a significant commitment to Canada, which accounts for less than three per cent of global market.
Before the creation of the CPPIB the investment strategy was “basically 100 per cent Canada and loans to the provinces.”
The more recent increase in CPP contributions targets benefits, increasing them from about a current maximum of $13,000 to around $20,000. Although sufficient to lift retirees out of poverty if they don’t have other sources of income “for many people it’s not enough to avoid a drop in their lifestyle. Canadians clearly need to save as well,” said Machin.
However, when all is said and done, though, he added that Canadians “can be really proud that this system is world class and actually provides a really solid foundation” of retirement security.

 

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