The head of Canada Pension Plan Investment Board is taking a cautious approach to infrastructure investments in Canada as it retools its portfolio to manage the challenging investment environment.
Executives from the country's largest pension fund spoke to the House of Commons finance committee on Tuesday to explain the fund's investment strategy, its need for independence and evolving approach to risk. The discussion comes ahead of the planned increase to the Canada Pension Plan contributions that workers and employers will make to fund their retirement years, in order to boost the benefits they will receive. That is set to begin in 2019.
On the topic of infrastructure – a major, multibillion-dollar federal government spending priority – the pension fund said it would need to see investment opportunities that meet its specific criteria in order to participate in the spending boom.
CPPIB, which is set to announce next week that its assets now exceed $300-billion, currently makes equity-driven investments in infrastructure. It buys portions of toll roads, shipping ports and pipelines in may parts of the world and receives a relatively steady flow of fees in return. The fund also needs to write cheques for more than $500-million to make these investments manageable and worthwhile. These are conditions rarely satisfied by the infrastructure assets available in Canada, although the largest infrastructure investment the pension fund owns is in Canada – the Ontario Highway 407 toll road.
"That's been one of the biggest challenges in Canada, and around the world, is there's just not been enough of those scale opportunities in size, but also that are prepared for our type of investments," Mark Machin, CEO of CPPIB, told the committee. He noted that the pension fund likes to by operational assets, rather than investing in constructing new projects from scratch.
When it comes to creating an infrastructure bank, as was proposed in a report to the Minister of Finance by the Advisory Council on Economic Growth two weeks ago, Mr. Machin said that "the devil would be in the details of how everything's implemented." The report was penned in part by committee members Mark Wiseman, former CPPIB CEO, and current Caisse de dépôt et placement du Québec CEO Michael Sabia.
When pressed on the stress that changes in government and policies would put on an infrastructure investment years in the future, Mr. Machin said this would be one of the major risks.
"Infrastructure investments are, by nature, very long-term investments. And therefore the stability of regulatory regimes [and tax regimes] around those investments is very important," Mr. Machin said.
Mr. Machin was also asked extensively about the pension fund's risk exposure in the rest of its investments, and the expectation that returns will be "lower for longer" – a theme outlined by the Bank of Canada in recent months.
"It's a challenging investment environment globally, given central banks' activity, whether in Japan or in the U.S., Canada and other countries," Mr. Machin said. CPPIB is trying to further diversify the investments of the fund around the world, to different sectors and strategies to combat this pressure. The fund still has 20 per cent of its investment portfolio in Canada, even as the country represents less than 3 per cent of the global market index.
CPPIB is planning to increase its investment risk tolerance over the next three years, equivalent to a portfolio containing 85-per-cent global equities. But the fund would take a more conservative approach with the money set to come from the expanded CPP contributions. That portfolio will have a lower risk tolerance because it relies more on investment income to pay pensions years into the future than contributions from employees.