1. Principles and Practices of Governance for Public Pension Funds Presentation by John A. MacNaughton President and Chief Executive Officer Canada Pension Plan Investment Board World Bank September 24, 2001

2. O VERVIEW principles for effective governance - Canadian pension system - investing in capital markets - our governance principles

3. C ANADA federal state 10 provinces 3 territories

4. C ANADA 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

5. C ANADA PENSION PLAN By 1996 $17 billion paid in benefits $11 billion collected in contributions $6 billion deficit

6. A MATURING PENSION PLAN 1966 TODAY 2030

7. P LAN 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

8. increase contribution rate gradually to 9.9% by 2003 after 2003, hold contribution rates steady indefinitely P LAN CHANGES contributions should exceed benefits for at least 20 years

9. C REATION 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

10. O BJECTIVES

12. C ANADIAN 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

13. C HIEF ACTUARY’S EXPECTATION earn 4% real rate of return = approximately 7% nominal

14. H ISTORICAL 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 196620009895899286838077747168

15. A SSETS 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

16. A SSET MIX POLICY $43 billion fixed-income portfolio

17. A SSET MIX POLICY At June 30, 2001 Stocks 20% Fixed-Income 80 %

18. I NVESTING IN EQUITIES balance the CPP bond portfolio attractive returns for risks incurred over long term invest 70% in Canada and 30% in foreign markets

19. I NVESTING IN EQUITIES within Canada - primarily TSE 300 Index in foreign markets - S&P 500 Index - MSCI EAFE Index

20. P RIVATE MARKET INVESTMENTS allocation initial investments - private equity * ventures * buyouts prospective investment - real estate 15% and possibly more

21. C URRENT 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

22. H ISTORICAL STOCK MARKET PERFORMANCE Based on Fiscal Years Ended The Virtual Corporation T HE VIRTUAL CORPORATION Create Systems Launch Investment Plan Build Corporation Manage Costs Communicate Develop Strategies Measure PerformanceRecruit Team

23. S UMMARY 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

24. S UMMARY 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

25. G OVERNANCE PRINCIPLES AND PRACTICES widely accepted views CPP Investment Board views

26. positive outcomes by defining responsibilities and accountabilities G OVERNANCE PRINCIPLES AND PRACTICES good governance

27. R ESPONSIBLITIES Directors -represent best interest of stakeholders -review and approve policies and strategies -provide oversight of management -compensate management according for performance

28. R ESPONSIBLITIES Management -develop policies, strategies, business plans, budgets for board approval -all aspects of the operations

29. A CCOUNTABILITIES Stakeholders Directors Management

30. O UR CORPORATE GOVERNANCE MODEL professional competence independence from government separation of responsibilities codes of conduct/conflict of interest commitment to transparency

31. CPP Investment Board Canada Pension Plan Invest in Capital Markets Surplus Funds Pay Current Pensions Pensioners Contributors Future Pensions I NDEPENDENCE

32. A PPOINTMENT OF DIRECTORS

33. B OARD OF DIRECTORS expertise supports objectives no director may be an officer independence to make objective investment decisions culture of transparency

34. A PPOINTMENT OF DIRECTORS Nominating Committee Select Board of Directors Appoint Directors Provincial Finance Ministers Federal Finance Minister Recommend Candidates

35. R OLE OF DIRECTORS investment policies, standards and procedures codes of conduct/conflict of interest policies risk management policies management’s performance

36. R OLE OF DIRECTORS committees - audit - human resources and compensation - governance

37. R OLE OF DIRECTORS board evaluates its own performance policies and practice codified in governance manual recruits and appoints president

38. R OLE 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

39. R OLE OF MANAGEMENT investment professionals recommend all major investment policies and initiatives management makes actual investment decisions

40. I NVESTMENT DECISONS investment decisions made by full-time professionals politicians or government officials NOT

41. A MENDING OUR MANDATE requires - federal/provincial consensus - broad public support

42. C ODES OF CONDUCT/CONFLICT OF INTEREST public documents two key aspects: -controls on personal investing -disclose real or potential conflicts of interest

43. A DDITIONAL CHECKS AND BALANCES independent auditing firm procurement policy external custodian signing authorities and limits

44. T RANSPARENCY 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

45. T RANSPARENCY 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

46. T RANSPARENCY AND REPORTING annual report content -objectives for past year and how they were met -objectives for coming year -total compensation of top-five officers

47. Disclose Disclose Disclose T RANSPARENCY AND REPORTING

48. rates of return market value of assets conference calls educating the public quarterly reports public meetings T RANSPARENCY AND REPORTING

49. conducting a broad dialogue and reporting campaign with Canadians coast to coast T RANSPARENCY AND REPORTING

50. G OVERNANCE MATTERS good governance: - defines responsibilities and accountabilities - protects investment-decision making - protects assets - builds public confidence