After 11 years at Canada Pension Plan Investment Board, CEO Mark Wiseman is handing the reins to the fund's head of Asian investments, Mark Machin, effective June 13. The changing of the guard at the $279-billion fund comes as federal and provincial finance ministers prepare to gather in Vancouver later in June for talks aimed at enhancing CPP coverage. Against that backdrop, here's the note Mr. Wiseman should leave for his successor:
To: Mark #2
From: Mark #1
Subject: CPPIB handover
Welcome to the top of the mountain! Well, the top of the heap in Canada. We both know I'm heading to the Mount Everest of funds at BlackRock, where they measure assets in trillions, not mere billions.
You're probably arrived with a fancy 100-day plan for shaping CPPIB in your own image. I've got two pieces of advice that I humbly suggest will determine your success at CPPIB and, frankly, my legacy.
First: Get our house in order. CPPIB costs are too high. You know how that weighs on long-term performance. This needs to be a priority, because those holier-than-thou types at the Fraser Institute are all over us.
Second: Make CPPIB a true national resource. The good news on this front is you've got a unique opportunity, because the new guy in Ottawa is a pension fund geek who believes that bigger is better when it comes to money management. The bad news: Finance Minister Bill Morneau can be a bulldozer and he knows our business cold.
Oh, and as an aside, Beaudoin at Bombardier is going to ring you every morning to beg for a billion bucks. Just forward the call to Sabia at the Caisse.
On costs, you know I spent huge amounts of energy trying to streamline the fund. I didn't do enough. You saw that Fraser Institute study: As a percentage of assets, CPPIB expenses are far higher than any of the big Ontario pension funds. Our costs are close to twice those of my old shop, Ontario Teachers, and our 10-year performance trails Teachers. Badly.
Running the CPPIB when we're growing explosively is tons of fun. In less than two decades, we've gone from zero to 1,266 employees in seven countries. We're running 25 distinct investment strategies. And we're hanging with all the cool kids: We paid out $1.3-billion last year to external managers, and we have 219 global partners.
But the Fraser Institute is making things awkward by saying: "Developing intricate investment strategies and opening branches around the world may create a more interesting work environment for managers, but this does not guarantee the rate of return that results from higher efficiency and lower costs."
You need to figure out if lower expenses come from moving assets to internal teams, or fewer, smarter strategies, or slashing fees paid to those legions of external managers. But CPPIB must act. Chairperson Heather Munroe-Blum defended CPPIB's expenses in the 2016 annual report by explaining that the fund is investing for the future. But she also said the board and management "are committed to realizing efficiencies in CPPIB's operations to help ensure expenses are appropriate."
And wait till those Fraser Institute purists chew through that 2016 annual report and realize CPPIB board members voted themselves an 86-per-cent raise over the next two years.
Once you've got a handle on CPPIB expenses, you can dream big. The Finance Minister wants to beef up CPP benefits, and as long as they can find someone else to shoulder the cost, every provincial premier wants to deliver a bigger pension payment to aging voters who forgot to open RRSPs.
Recall that back in 2012, when he was still an obscure benefits consultant, Morneau wrote a white paper for the Ontario government that recommended smashing together over 100 smaller public-sector pension plans to create one monster $50-billion fund. He argued that approach could potentially improve investment returns, while saving $100-million annually by cutting costs.
In the pension fund world, that Ontario report was hugely controversial, in part because it proposed saving money by cutting reams of white-collar jobs. Morneau knew that he'd be attacked for that recommendation, and he wasn't fussed. The politicians didn't follow through back in 2012, but timing is everything in politics.
Morneau also had a politically sensible approach to consolidating fund managers. When he was working for Ontario, he recommend creating a pooled fund framework, similar to the Caisse in Quebec, and successful provincial funds in Alberta (AIMCo) and British Columbia (bcIMC). Different employers and unions contribute assets and one central manager invests all the money.
CPPIB could be that national pooled fund, drawing additional capital to pay for enhanced CPP benefits, plus adding assets from small funds that want access to global expertise. If Morneau sets this goal, he's got the smarts and stamina to get there. Be warned: he's shown that he's willing to jettison those who stand in his way.
So here's my advice: CPPIB needs to get more credible on expenses. Then you need to be a central player in the debate on how to provide Canadians with a better retirement. Do both and you make me look like a moron for going to BlackRock.