Source: The Canadian Press

The Canada Pension Plan Fund ended the third quarter of fiscal 2011 with record holdings of $140.1 billion, buoyed by strong stock markets around the world.

That’s up from the previous record of $138.6 billion at the end of the second quarter, when a rebound in stock markets enabled the fund to push beyond its pre-recession high.

The CPP Investment Board — which invests surplus money from employer and employee contributions that aren’t required to pay current retirement benefits — attributed the $1.5 billion increase to an improvement in investment income, driven by a three per cent return for the three months ended Dec. 31.

“Equity markets were very strong, particularly strong here in Canada, but every public equity market virtually around the world had very solid positive performance in the third quarter,” said David Denison, President and CEO of the CPP Investment Board.

However, the gain was slightly offset by $2.4 billion in CPP benefits payouts, due to a seasonal trend.

“We tend to get large payments into the Canada Pension Plan in the first part of the year and then, when people hit their maximum contribution amount, they stop contributing and later in the year we generally take some of the excess contributions from the first nine months and return them to Ottawa,” he said.

The CPP fund had reached a record high of $127.7 billion in assets in June 2008, just months before a crisis in the U.S. financial industry sparked a major global recession and sent stock values plunging by about a third.

The fund had been trying to make up ground lost in the recession ever since.

The CPPIB’s investment performance is key to ensuring that future generations of Canadian have access to CPP payouts, even when the number of contributors declines in relation to pensioners as baby boomers retire and the workforce ages.

Retirement security is a growing concern as the demographic heavy-weight baby boom generation retires in droves and outnumber working Canadians who are paying into the fund.

In 1966, when the CPP was launched, there were 6.5 workers for every retiree. In 2005, that ratio dropped to five workers per pensioner and by 2055, it is projected there will be only two workers for every retiree.

The federal and provincial governments have been meeting to consider a number of potential reforms including an enhanced role for the Canada Pension Plan or private sector alternatives to ensure future generations can retire comfortably.

The Chief Actuary of Canada reaffirmed in a November report that the CPP will remain sustainable at the current contribution rate of 9.9% for a 75-year period.

The report also indicated that CPP contributions are expected to exceed annual benefits paid out until 2021, meaning that income from CPPIB investments won’t be required to help pay pensions for 10 years.

“The fact that Canada’s national pension scheme is absolutely rock solid and sustainable is a wonderful story,” Denison said.

“We are in a very select group of countries around the world that can claim that,” he said.

In the nine months ended Dec. 31 the Fund has increased by $12.5 billion, with the vast majority, or about $10 billion, of that coming from investment returns and about $2 billion made up of contributions.

The Board has been busy investing in privately held assets, focusing on real estate and infrastructure investments in the past nine months. Still, publicly traded stocks make up about 39% of its equity portfolio, while private equities are about 15%.

“We only do private investments if we think they’re going to give us a better return per dollar invested than we can in the public markets,” Denison said.

The acquisition of British construction firm Tomkins, the largest private equity transaction globally in calendar 2010, is an example of such thinking, he said.

CPP also recently took up a 40% stake in Ontario’s busy 407 express toll highway in two separate transactions.

Denison expects solid equity market returns over the next three to five years and said those conditions are also ripe for private acquisition opportunities.

IE