The Tortoise and the Hare
Some newspapers have paid some well-deserved attention to the multi-million dollar bonuses recently handed to the executives of the Canada Pension Plan Investment Board (CPPIB) after they lost $24 billion of Canadian workers’ pension savings with their investments last year.
What has received less attention are the low long-term rates of return that the CPPIB has earned in the ten years since it was first established: an annualized rate of only 4.3% since 1999.
Before the CPP Investment Board was created, Canada Pension Plan savings were invested entirely in government bonds. Â Canadians were told that we could make higher returns on these savings if they were invested in the stock market and in private investments instead. Â The labour union I work for, CUPE, was one of the few organizations that opposed this move.
So what has this meant over the long-run — and how would have those investments fared if they had left them in boring old government bonds for the past ten years? Â
The recently published annual report of the CPPIB shows that they have had very good rates of return in some years: 17.6% in 2004 and 15.5% in 2006. Â It also boasts that it has earned $23.8 billion in investment income over ten years, even after last year’s losses. Â But don’t expect them to tell us what we could have earned if these savings had been left in long-term government of Canada bonds over these years. Â Â
Out of interest, I calculated what these returns would have been if the initial investment had been left in government bonds and if these funds and all the further net transfers to the CPPIB had been reinvested in long-term government of Canada bonds at their yield for each year since 1999.
These calculations show that leaving these investments in long-term bonds would have earned about $36.5 billion over the past decade: $13 billion more (and 50% higher) than the CPP Investment Board earned. Â
(This may seem like a surprising result, given that the average long-term bond yield over the past ten years was 5%, only 0.7% higher than the CPPIB’s annualized rate of return. Â But it is explained by the fact that bond rates were higher than the CPPIB’s return in early years and the CPPIB also lost a lot when its asset base was larger.)
Â Many will no doubt argue that this past year was an anomaly and that returns will be much stronger in future years. However, interestingly, these poorer results aren’t just because of this past year’s disastrous returns.Â In five out of ten years the yield on long-term government bonds out-performed the CPP Investment Board’s investments and in each of those five years the size of the fund would have been larger.Â
Last year it cost $189 million to operate the CPP Investment Board. Â There would be an average of about $1,000 more in the fund for each of the 13 million contributors to the CPP if the CPP Investment Board had never been established.
Don’t get me wrong: I believe that the CPP is much preferable to private pensions plans and it also costs a lot less to operate. Â I just think public pensions should be invested directly in public debt and thereby used to fund public investments. Â It appears we’d all be better off if things had been kept that way.
Slow and steady wins the race: five times out of ten, and big time in the end. Â
That’s my investment advice, worth $13 billion over ten years, and it doesn’t cost a dime.