Principles and Practices of Governancefor

Public Pension Funds

Presentation byJohn A. MacNaughton

President and Chief Executive OfficerCanada Pension Plan Investment Board

World BankSeptember 24, 2001

OVERVIEW

• principles for effective governance

- Canadian pension system

- investing in capital markets

- our governance principles

CANADA

• federal state

• 10 provinces

• 3 territories

CANADA PENSION PLAN

• joint federal/provincial responsibility

• founded in 1966 as pay-as-you-go scheme

• indexed to inflation

• mandatory contributions by all employees and employers

CANADA PENSION PLAN

By 1996

• $17 billion paid in benefits

• $11 billion collected in contributions

• $6 billion deficit

A MATURING PENSION PLAN

1966

TODAY

2030

PLAN CHANGES

create independent corporation to manage reserve assets

•

increase contribution rates and improve plan administration

•

build assets from 8% to 20% of liabilities by 2017

•

increase contribution rate gradually to 9.9% by 2003

•

after 2003, hold contribution rates steady indefinitely

•

PLAN CHANGES

contributions should exceed benefits for at least 20 years

•

CREATION OF CPP INVESTMENT BOARD

• invest excess CPP funds in capital markets

• corporation independent of government with professional managers to make investment decisions

• CPP Investment Board launched in October 1998

OBJECTIVES

OBJECTIVES

CANADIAN DISTINCTIONS

We are NOT required to :

• buy government bonds

• make loans to state-owned firms

• follow a social investment policy

• support other public policy objectives

CHIEF ACTUARY’S EXPECTATION

• earn 4% real rate of return = approximately 7% nominal

HISTORICAL STOCK MARKET PERFORMANCE

50

40

30

20

10

0

-10

-20

-30

-40

-50

(%)

4% Real Rate

Real Rates of Return

Based on Fiscal Years Ended

1966 2000989589 9286838077747168

ASSETS AVAILABLE TO CPP

• portfolio of federal and provincial bonds

• 20-year terms at preferential rates

• renewable for further 20-year term at market rates

• proceeds flow to CPP Investment Board

ASSET MIX POLICY

$43 billion fixed-income portfolio

ASSET MIX POLICY

At June 30, 2001

Stocks20%

Fixed-Income 80 %

INVESTING IN EQUITIES

• balance the CPP bond portfolio

• attractive returns for risks incurred over long term

• invest 70% in Canada and 30% in foreign markets

INVESTING IN EQUITIES

• within Canada

- primarily TSE 300 Index

• in foreign markets

- S&P 500 Index

- MSCI EAFE Index

PRIVATE MARKET INVESTMENTS

• allocation

• initial investments

- private equity

* ventures

* buyouts

• prospective investment

- real estate

15% and possibly more

CURRENT SITUATION

• investing several billions of dollars annually

• buying stocks at much reduced prices

• expect appreciation in coming years

• assets to exceed $130 billion over next years

HISTORICAL STOCK MARKET PERFORMANCEBased on Fiscal Years Ended

The

Virtual

Corporation

THE VIRTUAL CORPORATION

Create Systems

Launch Investment Plan

Build Corporation Manage Costs

Communicate

Develop Strategies

Measure PerformanceRecruit Team

SUMMARY OF BACKGROUND

2. contributions will exceed benefits for next 20 years

3. CPP Investment Board invests excess CPP funds in capital markets

4. fixed-income assets included in our asset mix policy

partially funded1. pay-as-you-go

SUMMARY OF BACKGROUND

5. invest solely in equities:

- fixed–income assets

- 20-year investment horizon

6. 30% of funds outside Canada

7. starting to actively manage public and private equities

8. lean virtual corporation

GOVERNANCE PRINCIPLES AND PRACTICES

• widely accepted views

• CPP Investment Board views

positive outcomes

by

defining responsibilities and accountabilities

GOVERNANCE PRINCIPLES AND PRACTICES

good governance

RESPONSIBLITIES

• Directors

- represent best interest of stakeholders

- review and approve policies and strategies

- provide oversight of management

- compensate management according for performance

RESPONSIBLITIES

• Management

- develop policies, strategies, business plans, budgets for board approval

- all aspects of the operations

ACCOUNTABILITIES

Stakeholders

Directors

Management

OUR CORPORATE GOVERNANCE MODEL

• professional competence

• independence from government

• separation of responsibilities

• codes of conduct/conflict of interest

• commitment to transparency

CPP Investment

Board

CanadaPension

Plan

Invest in Capital Markets

Surplus Funds

Pay Curre

nt

Pensions

Pensioners

Contributors

Future Pensions

INDEPENDENCE

APPOINTMENT OF DIRECTORS

BOARD OF DIRECTORS

• expertise supports objectives

• no director may be an officer

• independence to make objective investment decisions

• culture of transparency

APPOINTMENT OF DIRECTORS

Nominating Committee

Select

Board of Directors

Appoint Directors

Provincial Finance Ministers

Federal Finance Minister

Recommend Candidates

ROLE OF DIRECTORS

• investment policies, standards and procedures

• codes of conduct/conflict of interest policies

• risk management policies

• management’s performance

ROLE OF DIRECTORS

• committees

- audit

- human resources and compensation

- governance

ROLE OF DIRECTORS

• board evaluates its own performance

• policies and practice codified in governance manual

• recruits and appoints president

ROLE OF MANAGEMENT

• develop operating and investment policies and procedures

• develop business plan and budget

• implement policies, procedures and plans

• manage day-to-day operations

• report to board on regular basis

ROLE OF MANAGEMENT

• investment professionals recommend all major investment policies and initiatives

• management makes actual investment decisions

INVESTMENT DECISONS

investment decisions made by full-time professionals

politicians or government officials

NOT

AMENDING OUR MANDATE

• requires

- federal/provincial consensus

- broad public support

CODES OF CONDUCT/CONFLICT OF INTEREST

• public documents

• two key aspects:

- controls on personal investing

- disclose real or potential conflicts of interest

ADDITIONAL CHECKS AND BALANCES

• independent auditing firm

• procurement policy

• external custodian

• signing authorities and limits

TRANSPARENCY AND REPORTING

• annual report

- distribution to federal and provincial finance ministers

- members of federal parliament and provincial legislatures,

- stakeholder groups

- public libraries

- post on Web site

TRANSPARENCY AND REPORTING

• annual report content

- audited financial statements

- statement of corporate governance

- duties, objectives and mandate

- board committees

- decisions requiring board approval

- board performance review

- expectations of management

TRANSPARENCY AND REPORTING

• annual report content

- objectives for past year and how they were met

- objectives for coming year

- total compensation of top-five officers

Disclose Disclose Disclose

TRANSPARENCY AND REPORTING

• rates of return

• market value of assets

• conference calls

• educating the public

• quarterly reports

• public meetings

TRANSPARENCY AND REPORTING

conducting a broad dialogue and reporting

campaign with Canadians coast to coast

TRANSPARENCY AND REPORTING

GOVERNANCE MATTERS

• good governance:

- defines responsibilities and accountabilities

- protects investment-decision making

- protects assets

- builds public confidence