Chasing returns of heavily concentrated market indices may work in the moment, but it isn't a strategy built to last, according to John Graham, CEO of CPP Investments. In an opinion piece, he emphasizes that protecting the Canada Pension Plan (CPP) requires a long-term perspective on investment returns.
The Bold Creation of the CPP
Every July 1, Canadians reflect on bold actions that shaped the nation. In 1965, the national maple leaf flag was adopted, and the Canada Pension Plan was created to secure collective financial futures. The CPP was a big, bold idea: Canadians would be safer and more secure in retirement by working together and looking after one another.
For 30 years, the CPP prospered and helped reduce seniors' poverty. However, demographic shifts threatened its sustainability, prompting Canadians to come together again. In 1997, the federal and participating provincial governments increased contribution rates and created CPP Investments to focus on the unique investment needs of the CPP Fund, ensuring it would endure for generations.
Remarkable Performance Since Reforms
That bold move continues to pay off. More than 25 years after the reforms, the CPP is one of the top-performing national pension funds globally and is financially sustainable for decades. Without the reforms, the CPP was projected to be insolvent by 2015. Instead, it now stands at more than $800 billion.
Canadians work hard for their CPP contributions and expect prudent management so the fund is there when needed, adjusted for cost of living throughout retirement. As the investment manager, CPP Investments knows its critical responsibility is to keep that promise and deliver on Canadians' expectations.
Mandate and Risk Management
CPP Investments has a clear mandate: maximize returns without undue risk of loss, considering factors affecting CPP funding. The pursuit of higher returns must not compromise long-term sustainability. Resilient growth is the target, and the fund has delivered, growing year-over-year in 26 of the last 27 years.
That risk-reward balance sets managing a national pension fund apart from individual portfolios. A bad investment by an individual affects them and their family; long-term impairment of the CPP Fund could affect millions of Canadians, their retirement income, and contributions of workers still paying in. This asymmetry of risk shapes everything CPP Investments does.
Diversified Portfolios for Long-Term Resilience
CPP Investments manages this risk with well-diversified portfolios built to deliver through cycles and over time. In recent years, indices heavily concentrated in large U.S. technology companies have dominated and delivered returns beyond any diversified portfolio. CPP Investments accepts that short-term outcome because the CPP must remain resilient across many possible futures, not just the one that recently prevailed. The fund persists in building an enduring portfolio not with unrealistic expectations of immunity to volatility or geopolitics, but with a view to preserving the pension promise in all circumstances.
