Canada Pension Plan: How a country of 3.82 crore has a C$575 billion pension fund?

Canada's economy might be dwarfed by its southern neighbour, but when it comes to pension funds, the Canada Pension Plan (CPP) is an absolute heavyweight. With a staggering valuation of C$575 billion ($427 billion), one might wonder how a nation of 3.82 crore has amassed such a huge asset size under its pension plan.

Prudent measures taken by Canadian government

More than two decades ago, the Canadian federal and provincial governments united with a shared mission to establish a robust retirement plan for future generations. The initial seed of C$12.1 million from the Canada Pension Plan (CPP) sowed the beginnings of a vast financial empire. Currently, CPP Investments boasts over C$575 billion in assets, tirelessly managed in the best interests of contributors and beneficiaries. The Canada Pension Plan caters to the retirement needs of over 2 crore citizens in the country.

The Fund's spectacular growth didn't happen overnight. World-class governance, a no-nonsense approach to political interference, and investment opportunities from a global perspective have been the backbone of its success. This approach was validated by international consulting firm Global SWF, which ranked CPP Investments as one of the decade's best-performing pension funds globally.

Success of Canada Pension Plan

Behind the colossal success of the CPP lies a blend of strategic thinking, governance, and investment foresight. Three pillars have driven the fund's growth: a strict directive to boost the returns of the CPP Fund without unwarranted risks, independence from governmental interference, ensuring that investment choices remain unbiased, and a long-term vision, prioritising stability and growth over reacting to short-lived market fluctuations.

It's noteworthy that the Office of the Chief Actuary of Canada (OAC) found in its 2022 assessment that the CPP is set to be financially sustainable for over 75 years. Contrasting this to its 1995 report, the recent findings are truly remarkable. Over the last two decades, the CPP's assets have surged from a mere C$36 billion to an astounding C$575 billion.

The Canadian model's success, as outlined in a McGill-led study, relies on an integrated business model. This model allows Canadian funds to invest more in each asset class, focusing on strategic assets while being more cost-effective than peers. Another key factor is the indexation of pension plan liabilities.

Canada Pension Plan investments in India

Despite the recent escalating tensions between India and Canada, notably the expulsion of diplomats in the aftermath of the alleged Indian involvement in the killing of Khalistani terrorist Hardeep Singh Nijjar, experts remain optimistic. With the CPP operating at arm’s length from the government and its massive investment in India, the fund is unlikely to pull its investments from the country.

The Canada Pension Plan Investment Board (CPPIB), the governing entity of the mammoth pension fund, disclosed a notable investment of $21 billion (Rs 1.74 lakh crore) in India just last year. This includes a significant stake in Mumbai's Kotak Mahindra Bank and investments in nearly 70 other publicly traded Indian firms. Further, records from the June-quarter shareholding pattern on BSE reveal that the Canadian Pension Fund possessed a 6 per cent stake in Delhivery and stakes in other major Indian entities like Paytm, Nykaa, Zomato, and Indus Tower.

Challenges and Road Ahead

However, it's not all smooth sailing for CPP. A recent study suggested that Alberta, one of Canada's provinces, might benefit from transferring out of the CPP. Such a move would significantly dent the CPP's assets and revenue stream. But, as Michel Leduc, senior global communication director for CPP Investments, points out, the complexities of such a withdrawal make it a risky proposition.