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What can you learn from the Canada Pension Plan?
Commentary by the Patenaude Schafer Group.
Have you ever wondered how the world’s smartest money is invested? Think of the Bill & Melinda Gates Foundation, University endowments or pension plans around the globe.
Let’s examine a pension that hits us all very close to home, the Canada Pension Plan (CPP). The CPP invests retirement assets for Canadians to earn predictable returns without risking capital.
The investment board of the CPP was established to ensure its long-term sustainability. Today the CPP Investment Board (CPPIB) manages over $116 billion with a $200 billion target. There was a time in the 1990s, when the future of the CPP was very much in question. Premiums went up and the CPP established a ‘side fund’ to ensure there would be money to meet increased withdrawal demands from baby boomers in the future.
According to the 2006 annual report, the ‘side fund’, has averaged 9.84% annually since inception 7 years ago, including a decline of 1.50% in 2002 when equity indexes suffered double-digit losses. Few individuals fared as well in 2002. Then consider to the end of 2006, the 10 year annualized return of Canadian equities (TSX) was 9.97% with 2001 and 2002 both posting almost 14% losses. Unfortunately the CPPIB does not have a 10 year track record, however since inception it has achieved similar returns to equities with much lower volatility, an objective shared by many investors.
Each year CPP contributions are spread over a diversified allocation made up of different asset classes using specialist managers. Approximately 65 per cent is invested in equities, 25 per cent in fixed income with the remaining 10 per cent in inflation sensitive investments. The investment policy is set and does not change drastically with the market. An investment team monitors performance to ensure everyone is doing their job properly and efficiently.The accountability and scrutiny is unmatched. The goal of achieving superior returns while minimizing risk is obvious. The CPPIB is not reinventing the wheel, nor should it. According to the Watson Wyatt 2007 Global Pension Study, over $23 trillion in pensions are invested with an average allocation very similar to the CPP. Ultimately it is the process of these institutions which allows them to achieve historically above average returns (9% - 10%) while protecting capital through market volatility. They do not chase performance, time the market or compare their performance to the day’s hottest performing asset class.
Now look at your own personal investment strategy. Do you have a written investment policy? Does your strategy resemble that of a billion dollar program?
Fortunately, there are many options that allow the average investor, whether you consider yourself wealthy or not, the opportunity to implement these same proven investment strategies into your savings plan.
The information contained herein is derived from sources believed to be reliable but Wellington West Capital Inc. makes no representation that this information is accurate or complete. Wellington West Capital Inc. is a member CIPF.
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