What Does the Canada Pension Plan Invest In?

I occasionally participate in an online forum of retirees or near-retirees. Judging by the comments, many are suspicious of the Canada Pension Plan. It seems to boil down to three responses:


  1. The government is raiding our retirement nest egg – there will be nothing left for us.
  2. The CPP is on a poor financial footing and will run out of money – there will be nothing left for us.
  3. The CPP is invested in risky stocks; there will be a crash – there will be nothing left for us.


Let’s discuss these one at a time.


The government is raiding our retirement nest egg

There seems to be some confusion about the nature of the Canada Pension Plan. Yes, the CPP was established by government legislation. However, it is not funded by government revenues and therefore it cannot be “raided by the government” to fund expenditures.


Perhaps it is because on our paystubs and T4s we see CPP deductions as a line item that we view it as a tax. We would do better to regard it the same way we might see the line item on our paystub for group RRSP or company pension plan deductions. In other words, the money is going into an account on our behalf. Anytime between age 60 and 70 we can begin to receive monthly payments from that account that will last the rest of our lives.


The CPP is on a poor financial footing and will run out of money

The Canada Pension Plan was established by legislation in 1965 in an effort to address poverty among Canada’s seniors. Benefits depended on current contributions. In other words, retirees in those first few decades were having their payments funded by ongoing contributions by those who were still in the workforce.


As people began to live longer and the percentage of the population in retirement steadily increased, the sustainability of CPP began to be raised. The target of covering 25 percent of a worker’s average lifetime earnings began to look increasingly difficult to maintain.


I suspect that continuing suspicion about the sustainability of the CPP dates back to this period and that many people are unaware of what was done to address this impending crisis.


In 1997, when Jean Chretien was Prime Minister and Paul Martin was Finance Minister, reforms were made to the CPP, doubling the percentage of income to pay into the plan to 9.9%, creating a reserve fund, and establishing the CPP Investment Board to manage that fund. This decision has put the CPP on a much more solid financial footing.


Every three years, the Chief Actuary of Canada reports on the sustainability of the Canada Pension Plan. The latest report projects that it is sustainable for the next 75 years.


The CPP is invested in risky stocks; there will be a crash

I will address the second clause first. There will be a crash (in the stock market). Yes, undoubtedly. In the last 20 years there have been three major crashes. In the early 2000s there was a tech bubble crash. In the spring of 2000, the NASDAQ Composite Index, the listing home for most of the major technology-related stocks in those days hit 5,000. By the autumn of 2002 it had fallen to 1,200 and did not get back to 5,000 until the spring of 2015.


In the late spring of 2008, the TSX Composite Index, Canada’s main stock market index, exceeded 15,000, it’s highest-ever level. Less than a year later, in March 2009, it had dropped to a low of under 7,500. The Canadian stock market had been cut in half. In the US, the decline was similar, although a bit more protracted. In the fall of 2007, the S&P 500 Index was over 1,500, but dropped to under 700 in March 2009. This period from 2007 to 2009 became known as the Great Financial Crisis or GFC for short.


The third major crash occurred just last year. In February 2020, the TSX Composite Index was just a few points shy of reaching 18,000. By late March it had fallen below 11,200, a 38% drop. The S&P 500 behaved very similarly, hitting a high just below 3,400 before falling to under 2,200, a 35% drop, a few weeks later.


Where are these indices now? As I write this, on Monday, July 19, 2021, the NASDAQ is at 14,200, the TSX is at 19,700, and the S&P 500 is at 4,200, all comfortably above their highs in February 2020.


So, yes, there have been crashes and there will be crashes again. This is why you will hear from advisors that one of the most important things you can do is to diversify your investments across different assets after reflecting carefully on the amount of risk you are willing to take, that you are able to take, and that you need to take, to reach your investment goals. The adage about not putting all your eggs in one basket applies.


What about the CPP, then? What does it invest in? The average retail investor usually invests in some combination of cash or cash equivalents, bonds, and equities. Our personal investments, though, depending on our age and other circumstances, might run from a few thousand dollars to perhaps a few million. The CPP has a balance of nearly 500 billion dollars. Furthermore, it is not investing for the end of an individual’s life, like we might with our RRSPs, that we might hope to use up in 30 years give or take. The Canada Pension Plan is investing for generations into the future.


CPP Investments divides its assets into four categories: Private Equity, Real Assets, Active Equities, and Capital Markets.


Private Equity

Private equity means taking an ownership stake in private companies. As these companies are not listed on an exchange, they are likely to be quite obscure to the average person. Among the private equity investments are 99¢ Only Stores in the US, Accordia Golf in Japan, aiBank in China, Benevity in Canada, and Alpha Consumer Group in France.


Real Assets

Real assets include commercial real estate, the energy “chain,” and infrastructure. Real estate includes investments like Bullring Shopping Centre in the UK, DEXUS Office Trust Australia, a portfolio of 20 office buildings, and the Richmond-Adelaide Centre in Toronto. With regard to the energy chain, the fund focuses on sustainable energy. Investments include ChargePoint in the US, Cordelio Power in Canada, and Maple Power in Europe. Infrastructure includes assets like toll roads, telecommunications networks, and shipping ports. Among the infrastructure investments are Arco Norte in Mexico, Arqiva in the UK, and Pacific National in Australia.


Active Equities

This is the category that most clearly belongs to the area that the average retail investor can identify with, since the assets invested in here are the common stocks of publicly traded companies around the world. You could think of this category as being like an actively managed mutual fund in the way they invest, using what is referred to as fundamental, or bottom-up, analysis. In other words, they focus on the individual business in their analyses. Businesses they invest in include well-known names like Alphabet (Google) in the US, Intact Financial Corporation in Canada, and Samsung Electronics Co Ltd. In South Korea.


The CPP investment managers also engage in what they refer to as “relationship” investing, in which they make significant minority investments in companies that can serve as a catalyst for growth. Investments are as varied as a cellphone tower operator (Cellnex Telecom S.A. in Spain), a video game developer (Embracer Group AB in Sweden), and a food business (Premium Brands Holdings Corp in Canada).


Yet another active equity style is thematic investing, which is also a kind of fundamental analysis, but it begins at the macroeconomic level, looking for long-term trends, and then works its way down toward the individual company. This is also referred to as top-down analysis. The majority of the investments listed are from the US and include Katerra a tech company that works in the building and construction industry, Perfect Day a “flora-made” (i.e., made from plant matter and therefore vegan and lactose-free) dairy producer, and Snowflake, a cloud-based storage and analytics services company.


Capital Markets

This category refers to areas in which CPP Investments places the pension plan fund’s money with external investment managers in North America, Europe, and Asia. Among the firms listed are AQR Capital Management in the US, BlackRock (owner of the iShares brand of ETFs), Melqart Asset Management in the UK, Ebisu Capital Inc. in Japan, and Connor, Clark & Lunn in Canada.


Asset Allocation

The following charts are from CPP Investments’ Annual Report for the fiscal year ending March 31, 2021. In these two circles you get an image of how your pension contributions are invested.




If you and I were to try and replicate this portfolio in our own investment portfolio, we would probably combine Government Bonds, Cash and Absolute Return Strategies (9.6%) with Credit (13.5%) to buy a bond mutual fund or ETF that would make up 23.1% of our portfolio. For Real Estate (8.7%), Infrastructure (8.3%), and Other Real Assets (4.0%), we might consider a Real Estate Investment Trust (REIT) mutual fund or ETF in combination with a fund that focuses on Infrastructure to make up another 21% of the portfolio. For the remaining 55.9% of the portfolio in public and private equities, a global equity fund in combination with an emerging market fund to get the appropriate 79% developed and 21% emerging split (see the left chart) would do the job.


Below, I’ve used some of the most widely available ETFs in Canada to create an approximation of the CPP investment portfolio.




This is not a recommendation that you invest using these five ETFs to create your own version of the Canada Pension Plan. First, it may not be a suitable asset allocation given your personal circumstances. Second, just because you invest in a manner that approximately mirrors CPP assets, doesn’t mean you have the guaranteed income provided to a CPP recipient. Think of it as an interesting exercise.


I was inspired to write this post because of suspicions some people have about the investments inside the Canada Pension Plan. Columnist Andrew Coyne is often critical of the active investment strategy employed by CPP management, which has made it much more expensive to operate compared to a purely passive approach. The CPP also invests a significant portion of its assets in Chinese companies, many of which benefit from the forced labour of Uyghurs. The Globe and Mail recently published an article by Irwin Cotler and David Kilgour calling for this investment in China to stop. They make a good point.


If you earn an income over $3,500 in any given year, you must contribute to the CPP. The security of your retirement may depend on it. Fortunately, while far from perfect, it will be there for you when you need it.


This is the 107th blog post for Russ Writes.


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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.