Various pension plans in Canada are assuring members of the fund’s stability. The Canada Pension Plan (CPP) is in the limelight because 20 million Canadians are anchoring their financial security in retirement on the plan. But how solvent is the CPP to live up to its obligation?
The fund manager
If there is one entity that should be under scrutiny, it must be the Canada Pension Plan Investment Board (CPPIB). The CPPIB is the private organization responsible for filling up the well upon which retirees could draw from for sustenance during retirement.
The mandate of the CPPIB is clear. Invest the CPP fund and achieve a maximum rate of return without undue risk or loss. While the board operates independently of the CPP, it’s accountable to the federal government and provincial ministers – the stewards of CPP.
The CPP fund
As of the third quarter of fiscal 2020 (ended December 31, 2019), the CPP investments net assets total stands at $420.4 billion. The fund grew by 2.66% from $409.5 billion in the previous quarter. All investment departments reported positive results during the quarter.
CPPIB’s investment strategy is to build a well balanced and globally diversified portfolio. Hence, the investments are scattered in public equities, private equities, bonds, private debt, real estate, infrastructure, and other areas.
As the investment horizon is long term, the board chooses publicly traded equities that offer the best opportunities for growth. Among the top investments is WSP Global (TSX:WSP). This $6.53 billion professional service consulting firm is the CPPIB’s fifth-largest stock holding on the TSX (as of March 31, 2019).
The value of most of the assets in CPPIB’s stock portfolio is falling due to the market sell-off. WSP, for instance, is down 30.51%. Last year, the gain was 54.95%.
The coronavirus outbreak has halted the growth momentum in 2020. However, a stock rally is not farfetched when the situation normalizes.
In the fiscal year 2019, WSP reported impressive results. Revenue and net revenue grew by 12.7% (to $8.9 billion) and 14.4% (to $6.9 billion), respectively, versus 2018. Last year was the first year of the company’s 2019-2021 Global Strategic Plan. WSP expects up to 5% organic growth in 2020 but because of the pandemic, it might be lower.
Talks are ripe that the merger between WSP and U.S.-based Aecom is almost a certainty. Negotiations are stalling due to the market volatility. If the deal to acquire its rival is approved, WSP would have a bigger share of the professional services industry in America.
The sustainability of the CPP is the utmost concern of retirees and would-be retirees due to the possible dire consequences of COVID-19. The retirement security for generations of Canadians is under threat.
In the most recent triennial report by the Chief Actuary in Canada, the CPP is sustainable over a 75-year projection period. By 2040, the combined assets of the base and additional CPP accounts should be around $1.75 trillion.
The CPPIB is well aware that the coronavirus and oil price crash presents a stress scenario. According to CEO Mark Machin, rather than panicking, people should gauge the board on its investment record.