Michel Leduc is senior managing director for public affairs and communications at the Canada Pension Plan Investment Board.
This year marks the 50th anniversary of the Canada Pension Plan and the 10th anniversary of a defining strategic decision by CPP Investment Board (CPPIB), which manages the CPP Fund. That decision was to actively manage the money in the CPP Fund, rather than leave it sitting in basic bonds and stock indexes. The goal was the same then as it is now: to ensure Canadians can also celebrate the CPP's 100th anniversary as a secure and sustainable source of retirement income. As we announce the appointment of our fourth chief executive officer, Mark Machin, who takes over from Mark Wiseman on June 13, this remains unchanged.
During its first three decades, the CPP Fund was invested in Canadian government bonds. In 1997, CPPIB was created, and in subsequent years, it began broadening the portfolio's investments, starting with stock indexes. In this context, CPPIB's 2006 decision to adopt an active strategy was not made lightly. We knew it would require resources tailored to operating in a complex global marketplace.
We pursued this approach in order to apply CPPIB's comparative advantages. First, given our exceptionally long investment horizon, we expect, and can withstand, substantial short-term volatility in pursuit of enhanced long-term returns. The CPP Fund's cash flows and future asset base are stable and certain, further enabling us to ride out short-term market fluctuations when other investors can't. Our scale (roughly $280-billion in assets) allows us to invest substantially in private assets and use public-market strategies not available to most investors.
CPPIB has contributed $125.6-billion in cumulative net investment income to the fund over the past decade after all CPPIB costs. More than 57 per cent of the fund's cumulative assets are now the result of investment income. We compare our active management strategy against a "reference portfolio" of public-market indexes that represent a passive management strategy. It is basically the path not taken, and is a reasonable comparison of a portfolio that we strive to outperform. Our reference portfolio has changed, and will continue to change, to better reflect our strategy and provide a guide-post for our risk tolerance.
Over the past decade, we've added $17.1-billion to the CPP Fund after all costs, or 80 basis points per year above the annual returns of our Reference Portfolio. Every last cent of that extra $17.1-billion can be used to pay for benefits in the future, and would not have been available if we had chosen to stick with a passive strategy.
Our active management strategy is also creating greater resiliency for our portfolio. We are diversifying to ensure that we are not overly exposed to any single currency, asset class or region. This year, the reference portfolio lost money, but due to our strategy, we ended up with a $9.1-billion (3.4-per-cent) return.
Most importantly, CPPIB remains on track in supporting the sustainability of the CPP Fund through our investment returns. Our 10-year net real return of 5.1 per cent – that includes the severe global recession of 2008/9 – is well above the Chief Actuary of Canada's assumption of 4 per cent for the CPP to remain sustainable over 75 years. This 4-per-cent assumption in future decades is comparable to the average historical real rates of return for large pension plans over the past 50 years. We are beating that average in a tough investment market that included the largest recession since the Great Depression.
While no investment strategy or prospective rate of return is a slam dunk, we are confident that our approach is prudent and appropriate. Our 10-year results bear this out.
The world of investing is not static, and neither is CPPIB. We will continue to adapt and innovate in order to fulfill our mandate to present and future generations.