When Fixing The Future was first published nearly a decade ago, it had
been roughly ten years since federal and provincial governments in Canada had
come together to fortify our nation’s public pension plan and return it to a
sustainable footing. Bruce Little’s documenting of that process, combined with
his analysis of the implications and consequences in the years after is every
bit as relevant and resonant today as it was upon release of his book.
Indeed, the issues that
Canada struggled with two decades ago are matters that countries around the
world continue to confront at present: How to prepare and provide for an aging
population that is living longer? What policies will serve the important cause
of intergenerational sharing and fairness? How to ensure that public pensions
are sustainable and actuarially sound? What tools should be used to manage and
build pension fund equity? How should investment of public pension funds be
undertaken and overseen?
These are questions Canada
addressed in a transparent and ambitious way in 1997. The answers we arrived at have not solved all
of our challenges when it comes to retirement savings and seniors. But they
have served us well and allowed policymakers to work from a position of
strength, rather than crisis. For all these reasons, the book’s translation
into Chinese is an exciting and welcome
In order to truly understand
the story of the Canada Pension Plan (CPP) and the Canada Pension Plan
Investment Board (CPPIB) it is important to begin with the fiscal and economic
situation that confronted Canada in the early 1990s.
In 1993, when our government
came to power, Canada’s fiscal situation was in dire straits. It had been almost
thirty years since the federal government had delivered a balanced budget. The
deficit was skyrocketing. The national debt was growing. Nearly 36 cents of
every dollar the federal government raised was committed to servicing our debt,
meaning those funds were unavailable to invest in critical social services such
as health care and education or in initiatives to boost our future economic
Action was required and
after broad consultations with the public we introduced the 1995 federal budget
to turn the situation around. Happily, our efforts were successful and within
four years, the fiscal deficit had been transformed into a surplus and we were
able to reinvest in key priorities. Canada’s debt-to-gdp ratio went from being
one of the worst in the G7 to the best.
In taking on the nation’s
deficit however, we had addressed only one of the ticking time bombs that
threatened Canada’s financial future. The other concerned our retirement income
By 1997, the CPP was showing
definite signs of strain. Created as a cooperative initiative of federal and
provincial governments in the 1960s, the CPP was founded to help combat poverty
among seniors and establish a modest but guaranteed pension benefit to all
working Canadians. As a tool of public policy, the CPP was a great success. It
helped to lower the number of seniors living in poverty drastically and quickly
became one of the pillars of Canada’s retirement income system. Thirty years
later, however, the CPP was struggling. Year after year, it was paying out more
than it was taking in, reaching the point where its unfunded liability had
grown even larger than our national debt.
This not only meant that the
CPP had grown perilously unsustainable, it had begun to suffer from badly
eroding public confidence. Our own research showed that younger Canadians had
moved from pessimistic to fatalistic about their retirement prospects. It was
simply assumed that by the time of their own retirement there would be no
public pension available to them.
The remedy was obvious, but
politically unappealing. Governments of competing political orientation would
need to come together and collectively impose higher premiums on workers and
businesses in order to refurbish the actuarial solvency of the CPP. After the
enormous sacrifice required to balance the federal budget, there was some
reluctance to plunge into another significant structural reform. But, as
finance ministers, we felt strongly that CPP reform had to be tackled. To knowingly
permit the CPP to fail would not only let down future generations of seniors,
it would undo all of the hard work we had achieved in balancing the federal
budget. It would surrender all of Canada’s newly won credibility both at home
and around the world.
Politicians in modern
democracies are often accused of ignoring long-term challenges to serve the
short-term cause of re-election. In this
case, finance ministers across the country rose to the moment. Reforms
implemented saw a gradual increase in premiums, the sustainability of the CPP
leveled and public pensions returned to health. Our essential goal was
There was a further
challenge however. To avoid a repeat of history, we would need to better manage
its funds for the long term and ensure that we created institutional structures
to encourage growth.
These were the goals that
led to the creation of the CPPIB. The idea of an independently operating
investment board for a public pension had few precedents. It seemed almost
anathema to governments who, after all, usually prefer to maintain direct
control over large sources of funds and important economic policy levers.
However, we became convinced
that such an approach was precisely what we needed in order to foster public
confidence and reliable investment returns. Our ambition was to have the
pension fund managed at arms-length from government, by proven financial
professionals and completely unconstrained by political or electoral
considerations. In retrospect, this model of independence proved utterly vital
to the CPP’s success. We also quickly determined that it would not be enough to
say that the CPPIB would operate independently. We had to prove it.
That effort began by
appointing a board that was thoroughly qualified and demonstrably apolitical.
In fact, we went one step further. To underline our determination to recruit an
independent board of directors composed of private sector professionals, we
effectively delegated the appointment process so that it was yet another step
removed from politics. A nominating committee of respected Canadians was
established and it, in turn, identified and recruited the new CPPIB board. The
new board set exactly the tone of professionalism we had hoped for and began
immediately to recruit a management team drawn from the financial industry’s
best and brightest.
Having proven to capital
markets that we were serious when it came to professionalizing the new
investment board, we faced one more important decision: how to shape the new
To all those seeking to
understand the reasons for the success of the CPPIB, this issue deserves
attention above all others. The assumption made by most observers was that we
would place artificial conditions on the mandate of the investment board – that
the fund would be diverted and divided to serve a variety of political and
policy goals. Would we instruct it to invest solely in Canadian enterprises?
Might the funds be used for purposes other than pensions? Would investment
returns be placed under the direction of politicians?
In our view, the answer to
all these questions had to be no. We were determined to serve one – and only
one – policy objective with the CPPIB’s creation: The health and sustainability
of the CPP. For this reason, we gave the
investment board a concise, uncluttered and very clear mandate and we
prescribed it in legislation: “to maximize returns without undue risk of
simplicity of this mandate has, in my view, been the cornerstone of the CPPIB’s
success. By placing the focus on maximizing returns, all other potential
distractions are eliminated. Markets don’t need to fret that investments are
being guided by political considerations. Managers are liberated to pursue the
best possible financial strategies. And pensioners can be reassured by the fact
that the CPP will be used to benefit retirees – and only retirees.
extension, additional positives are achieved. Maximizing returns means that the
size and success of the fund has grown substantially. In turn, this attracts
the very finest financial and investment managers available, giving Canada’s
pensioners the backing of the most sophisticated financial and placement
strategies. And, yet again, this creates the additional benefit of opening up
new exclusive investment opportunities available only to the largest and most
refined financial players in the marketplace.
The results since speak for
themselves. The CPPIB has grown into one of the world’s largest and most
reliably performing pension funds. At present it commands approximately $300
billion in assets, which stands well ahead of projections that once suggested
that mark would not be met for years. Such size and scope lends it the freedom to explore strategies
inaccessible to even other institutional investors. For example, the CPPIB was
among the first western pension funds to become active in China. Today, that
legacy continues generating benefits to both economies.
Above all else, the
financial sturdiness that the CPPIB has lent our public pension plan has helped
to serve the cause of a more secure retirement for millions of Canadians. Most
important of all, the fund has been deemed actuarially sound for at least a
period of 75 years into the future.
For all of these reasons,
the creation of the CPPIB is a decision that most Canadians support – and many
of us involved at the time are immensely satisfied with the results.
years after the reforms described in this book were undertaken, federal and
provincial governments in Canada again came together. With the benefit of an
actuarially sound CPP, the debate was not focused on saving public pensions or
taking difficult decisions to ensure future sustainability. Instead, thanks in
part to the health and success of the CPPIB, it was decided that CPP benefits
would be enhanced to further bolster the retirement income of Canada’s
seniors. In many ways, that is the
greatest legacy that could be imagined for the decisions we took two decades
ago – which the book you are about to read recounts in such outstanding detail.
To all those who ask,
what is the secret to the CPPIB’s success: There is no secret. It is the
independence of the board combined with the crisp and unconfused language
created to describe the investment board’s mandate.
Listen to Paul Martin, former Prime Minister of Canada,
describe reforms made to the Canada Pension Plan and the creation of the CPP