Wednesday, April 29, 2009

Politics threaten CPP Investment Board integrity

Posted by on Globe & Mail StreetWise by Andrew Willis:

Canada runs a pension plan that's the envy of the world, crowned by a well-funded, professionally staffed, independent fund manager in the CPP Investment Board.

The integrity of that fund manager is in danger.

The problem is money – bonus money. CPPIB recruited top executives on the strength of two promises: They could make their own investment decisions, free from political interference, and their compensation would be comparable to peers in the private sector. On the basis of those guarantees, professionals left lucrative private sector jobs to run the country's retirements savings.

There is now pressure to break that second promise.

Grandstanding Liberal, NDP and Bloc members of Parliament grilled CPPIB executives yesterday over the bonus payments they will likely receive, despite expected losses at the fund this year. The $109-billion CPPIB fund was down 13.7 per cent or $13.8-billion in the first nine months of the year ended March 31, 2009.

The strongly-worded advice from a few MPs was to turn down long term bonus payments.

Bad idea, on every level.

The populist posturing from MPs could derail a very good thing for the Canadian people.

First, the CPPIB board worked long and hard to set up a compensation system that is largely focused on long-term performance – a big chunk of paycheques reflect the fund's results over four years. That encourages the long-term investment thinking a pension fund demands – managers have no incentive to swing for the fences to make short-term targets.

Second, the comp structure was set out in employment contracts. Companies don't tear up these contracts with employees without suffering grave consequences. Sticking with the swinging-for-the-fences analogy, a big league slugger with big-time guaranteed money still gets paid, even if the team doesn't win the World Series.

Compensation is a matter to be decided by the CPPIB's board, not by an MP in Ottawa.

And what seems lost on the MPs, who have their own gold-plated pension plan, is that CPPIB is likely going to outperform benchmarks. Yes, they will have lost money last year. Welcome to the club. But the team likely lost less than peers, or their performance standards.

If CPPIB executives are forced to turn down bonus payments, despite meeting performance goals, the best people on this team should quit, and some will quit. The fund's ability to recruit will be destroyed. That would be an enormous setback for Canada.

Why is it MPs can't step back from Parliament's partisan poison, and recognize that CPPIB fund managers did a decent job in a lousy market? Is everything in Ottawa about scoring points?

If you're wondering, here's how compensation broke for CPPIB chief executive officer David Denison in 2008: $475,000 salary, $1.2-million annual bonus, $1.9-million LTIP.

(See also the Pension Pulse commentary.)


Anonymous said...

If you are losing money, maybe you should lose your bonus. If the rest of the financial world doesn't work this way, maybe it should. Maybe it is time to suffer and get by on $475,000. Face it,it is tough out there - ask a worker forced into retirement and taking up to a 30% cut in their CPP payments. If you are an at home investor, and you had split your RSP money between just two TD mutual funds - the Canadian Equity fund and the Canadian Bond fund - you'd have enjoyed a better return over the past decade than the CPP. Check the CPP stated mandate when it comes to the fund and you will find that they did not live up to their own goals. A simple little balanced fund like the TD Monthly Income also bested them over the past decade. Maybe it is time to rethink bonus payments, and not just to CPP board members. And when done with that, let's have a look at those MP gold-plated pensions . . .

Anonymous said...

Please correct the spelling of Denison in my comment which was posted moments ago. Thank you.

Anonymous said...

I went back and checked how a simple two ETF portfolio of XIU and XSB would have performed over the last CPP full financial year. David Denison, et al, got whomped by index investing. The simplified couch potato outperformed them. Now, tell me again why these people earned their bonuses.