Canada Pension Plan Reached for Indexed Benchmarks – Center for Retirement Research

Canada’s experience highlights the challenge of defeating low-income investments.

I’m a big fan of the Canada Pension Plan (CPP) and often cite it as a great example of how you can add equity to trust fund investments. However, CPP’s latest annual investment report shows that returns from this much-lauded effort have lagged behind the program’s core “Reference Portfolio” – an 85%/15% mix of global equities and Canadian government bonds. The fact that even CPP can’t beat indexed investments underscores the point that US state and local pension plans should review their commitment to active management of other investments.

It’s a small background. The CPP was originally established in 1966 as a pay-as-you-go program with a set amount, similar to the US Social Security system. However, within a few decades, low birth rates, longer life expectancy, and declining real wage growth led to increased program costs. To improve intergenerational fairness and ensure the long-term financial sustainability of the system, Canada enacted legislation in 1997 that increased the contributions to its long-term target rate and began investing some of the fund’s collection in stocks.

To implement the investment strategy, the law created the CPP Investment Board. The Board’s mission is to invest CPP revenues that are not required to pay current benefits to achieve high returns, without facing the risk of reversal, for the sole benefit of CPP contributors and beneficiaries. Initially, Canada followed a simple equity/bond strategy, but, in 2006, decided to switch to more complex investments and active management. Since then, the CPP Investment Board has built a broad portfolio that includes not only stocks and bonds, but also real estate, infrastructure projects, and private equity (see Figure 1).

Although the CPP Investment Board has one fund, it has six departments that invest and manage assets. Internal managers are the most highly compensated people, and the global workforce has grown from 100 in 2006 to 2,125 in 2024. The fund has earned 8 percent on its investments through 2024 and has had an annualized return of 9.2 percent over the past 10 years. (see Figure 2).

Although the returns look good, they are still in the 85/15 main Reference Portfolio of the Board. The difference was more pronounced in 2024, as US stocks, which account for half of the equities in the Reference Portfolio, rose (see Figure 3). Because of these impressive gains, over the entire 2006-2024 period the Reference Portfolio outperformed the Fund by 0.1 percent. That is, by not investing in an 85/15 mix of indexed stocks and bonds, the fund lost CAD 42.7 billion since the start of active management in 2006. .

The intention here is not to criticize the performance of the CPP Investment Board. It follows strict fiduciary standards, uses its influence in the private sector only to improve long-term returns, and the President’s letter in the 2024 Report reversed pressure from Alberta to increase investment in Canada. The board seems to be doing everything right, and has been ranked as one of the best performing pension funds in the world for 10 years. The problem is that it can be very difficult to beat a portfolio with low payouts. What happened in Canada should be a cautionary tale for all investors and especially those who manage defined benefit plans.