1. The CPPIB Risk Return Accountability Framework
A Realistic Approach to National Pension Fund Management

2. Three principals of 1997 Reforms
Intergenerational fairness
Higher rates now, lower rates in the future
Fully fund future benefit improvements
Affordability
Legislated rate should not exceed 9.9% (hopefully)
Reduced future CPP benefits
Capital market returns help lower future rates
Sustainability
Mid-course plan design adjustments, if required
Self-correcting “fail-safe” adjustment if political process stalls

3. Charting the Path to Sustainability
Partially funded, legislated rate of 9.9%.
1997 reforms

4. Managing the Contribution Rate
Agree on the mechanism to change the contribution rate before you need it
Have independent monitoring of the contribution rate
Have independent means of changing the contribution rate

5. The CPP restructuring of 1997
Increase contribution rate to build up surpluses
Reduce costs by both reducing benefits and by investing surpluses in risky assets
Created default mechanism to make any necessary changes to the contribution rate

6. The CPPIB mission Maximizing returns without undue risk of loss,
having regard to the factors
that may affect
the funding of the CPP

7. Managing your objectives
Know your objective
Remove influences and constraints that may compromise meeting your objectives
Align your organization with your objective.
Make it easy for stakeholders to assess performance

8. Investment earnings are needed to meet future liabilities

9. CPPIB Investment Strategy
Take Advantage of CPPIB’s Unique Situation
Capture Attractive Sources of Alpha
Increasing Value Add
Build a Better Beta Portfolio
Choose CPP Reference Portfolio
Estimate Net Liabilities

10. Model dynamics make a difference
State variables (eg inflation)
Security prices
Fund wealth
Portfolio returns
 = set of portfolio weights
Net contributions
Market volatility

11. Estimating optimal financing
Formulate the stochastic dynamic control problem (Hamilton Jacobi Bellman)
Portfolio weights are the control variable
Minimize the probability of failing to fulfill the pension promise at some time in the future

12. The optimal portfolio strategy
The optimal strategy minimizes the probability of restructuring the fund in the future
The optimal portfolio is a combination of mutual funds
A risk free fund
The optimal growth portfolio
A mutual fund for each state variable
The optimal portfolio strategy specifies security weights conditional on fund wealth, time and the value of the state variables

13. Fund wealth affects portfolio allocation …

14. … And the probability of restructuring.

15. Summary Optimal financing requires Alignment
a clear statement of objectives
Align governance and organization with fund objectives
The CPPIB is developing innovative models to inform its investment decisions.
Align financing strategies with these objectives
Default mechanism to make any needed contribution rate changes
Optimal financing aligned with Stewards risk and return expectations