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For anyone who owns Canadian Stocks if you don't think this could effect you, think again
Friday December 10, 1999
CPP gets green light to play the
market
Eric Beauchesne
The Ottawa Citizen
Federal and provincial finance ministers have decided to let the Canada Pension
Plan investment board play the stock market more actively with a fund that could
be worth as much as $90 billion within seven years.
The ministers also agreed to Alberta Treasurer Stockwell Day's request for an
"aggressive" review of the CPP to further ease investment restraints on what is
expected to be the largest pension investment fund in the country by 2007.
The new investment strategy, agreed to at yesterday's pre-budget meeting of
finance ministers, entails more risk for the funds in the pension plan, but it also
offers the chance to earn a greater return, government and private-sector
analysts agreed. It was also enough, at least for now, to keep Alberta from
pulling out of the fund.
"So I haven't given notice that Alberta is going to withdraw from the fund," Mr.
Day said after the meeting ended.
Finance Minister Paul Martin said: "Canadians can rest assured that the CPP will
continue to provide the retirement pensions and other CPP benefits that they
depend on" without pushing premiums beyond the 9.9-per-cent ceiling they will
reach in 2003.
Two years ago, the federal and provincial governments agreed that CPP funds,
which until then had been invested solely in low-yielding but safe provincial
bonds, could earn a better return in the stock market. They appointed an
arm's-length board to oversee management of the fund but put strict restrictions
on where it could be invested. Yesterday, they agreed to ease those restrictions,
allowing the CPP investment board to "actively invest" as much as 50 per cent of
the assets it manages in domestic stocks, rather than limiting investments to a
broad stock-market index, such as the TSE 300 Composite index.
"Investing in bonds, you're kind of locked into a rate of return," said one Finance
Department official. "When you're in equities, there's some upside. But there's
some higher risk as well."
The amount available for such active investment will be about $2 billion next
year. But it's expected to grow to as much as $35 billion by 2007.
Of the $33 billion in the CPP fund this year, $32 billion is still tied up in provincial
bonds, leaving only $1 billion for other investments, of which as much as 20 per
cent can be in foreign equities with no restrictions, with the rest being held in an
index fund.
But under the new rules and by 2007, the fund could have as much as $90 billion
in assets if the provinces don't roll over their bonds when they mature. That
would make the CPP the largest pension investment fund in the country.
Of that $90 billion, as much as 20 per cent, or $18 billion, could be in foreign
investments, an amount that could be even more if the foreign content rule on
pension funds is raised as is expected.
Alberta wants the foreign content ceiling eliminated.
Of the remaining $70 billion, $35 billion could be actively invested in Canadian
stocks which, along with the $18 billion in foreign investments, would put up to
$53 billion in CPP pension funds in active play in stock markets here and outside
the country.
The remaining $35 billion, under the new rules, would still have to be invested in
an index fund, or similar investment, where returns will match the returns of the
index.
But the finance ministers said a further easing of investment restrictions on the
CPP will be considered next year.
Ted Carmichael, with Morgan Bank Canada, applauded the easing of the
restrictions. He said there's more risk in investing in equities but also a chance
for a greater return.
He also dismissed concerns that the increased flow of money into Canadian
stock markets would be too much for domestic markets to absorb.
Canadians are increasingly investing outside Canada, a flow that will increase if
the foreign content on RRSPs is raised, he noted.
"Many mutual fund companies have already figured out ways in which they can
effectively skirt the Canadian-content requirement," he noted.
The change to CPP investment rules followed the first formal review of the
plan's performance by finance ministers since reforms they agreed to in 1997
were implemented at the start of last year.
"The actuarial report prepared for this review found that the CPP's financial
health is sound," they said in a statement.
The easing of the investment rules was the only solid announcement to come out
of the meeting, which began Wednesday. Provincial finance ministers arrived at
the meeting demanding the federal government fully restore payments it makes to
them to fund health, education and social programs, an amount that the
provinces put at more than $4 billion.
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