Canada Pension Plan posts annual loss of $1.1B

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Canada Pension Plan posts annual loss of $1.1B

Toronto Star, May 15, 2003

The Canada Pension Plan lost $1.1 billion in its latest fiscal year, representing a return of negative 1.5 per cent, the CPP Investment Board reported today while making plans to invest more aggressively in the future.

The $1.1 billion decline was caused primarily from the prolonged slump in stock prices and compared with a gain in the previous year of $2.3 billion, or 5.7 per cent. In the latest period, the stock-invested portion of the CPP portfolio slumped by 21 per cent.

The loss was mitigated by the fact that the government-controlled portion of the fund — two-thirds of the $55.6 billion in assets on hand at fiscal year end March 31, 2003 — was in relatively safe fixed-income investments.

However, as the Toronto-based investment board takes control of the entire fund over the next three years, it plans to invest more in riskier — and, traditionally, higher yielding — stocks.

"The year-end results reflect the combined impact of strong bond markets that were more than offset by negative results in the equity portfolio," John MacNaughton, CEO of the CPP Investment Board, said Thursday in a conference call.

"It's important to note . . . that the recent results of the CPP portfolio were better than those of most other pension funds given the higher proportion of fixed-income investments in the CPP portfolio and the relatively low equity weight."

Other giant pension funds, ranging from the Caisse de depot et placement du Quebec, the Ontario Teachers Pension Plan Board and OMERS, the municipal government retirement system in Ontario, have all been hit hard by slumping stock markets in their latest reporting periods.

Of the total CPP assets, 69 per cent consisted of $38.1 billion in fixed-income securities administered by the Department of Finance in Ottawa.

The other 31 per cent, or $17.5 billion, was in equities, real estate and other assets managed by the Toronto-based CPP Investment Board for the federal public pension plan.

The 2002 loss does not affect current retirees or those planning to retire in the near future. The investment board was created in 1997 and proceeds from its investments won't be drawn on until 2021.

However, the board needs a return of four per cent annually to meet or exceed the needs of retiring Canadian workers, MacNaughton said. To do that, fund managers will be changing the fund's asset mix to a more aggressive 50 per cent investment in fixed-income securities and 50 per cent in equities and real estate, instead of its current holdings of two-thirds fixed-income securities and one-third equities and real estate.

"Over the long term, and despite greater volatility including short term periods of negative performance, history tells us equities provide higher returns than bonds do to compensate for the greater risks assumed," MacNaughton said.

"The challenge for us then is to develop a diversified portfolio of CPP assets, one that earns appropriate returns and meets or exceeds the four per cent real return requirement."

Canada's chief actuary has said the CPP is sound for the next 75 years.