Sunday, February 15, 2009

CPP Investment Board — Playing The Stock Market With Your Money

And losing big:
The Canada Pension Plan Investment Board reported Friday an $8.5-billion drop in the value of the CPP Fund during the October-December quarter to $108.9 billion, as plummeting stock markets caused an investment loss of 6.7 per cent.

For the first three quarters of the fiscal year, the CPP Fund's assets shrank by $13.8 billion. A nine-month investment loss of $17.4 billion or 13.7 per cent was partly offset by worker and employer contributions of $3.7 billion.
This is not the first time the CPP Investment Board loses money on the stock market. Back in 2000-01 they invested in Nortel; the very same company whose shares plummeted from $125 to 69 cents in a little more than 2 years - with predictable consequences for the CPP surplus funds. Too bad that taught them nothing, so they stuck to their stock market gambling.

Instead of playing the stock market, they could have invested the CPP surplus funds in government securities, practically turning Canada's public debt into Canada's retirement savings. That would be far more secure than investing in stocks and at the same time, the interest rate, which is currently paid on public debt (7.5% per annum,) is comparable to the rate of return from a balanced mutual fund.

Had the CPP management used those $120B surplus funds to buy back Federal government bonds, the CPP would have owned ~26% of Canada's public debt. At least $9B of taxpayers money (out of $33B currently spent on interest payments) would have been going to the nation's retirement fund. That revenue, combined with future CPP surpluses, would have allowed us to keep at least $60B of the projected accumulated deficit ($85B over 5 years) as well as about 70% of the extra interest payments in the hands of Canadian taxpayers - in form of future retirement benefits...

That however is unlikely to happen. Not only because the CPP Investment Board strategy left us with a $17B loss and a faint hope to get some dividends on the global market; but also because even after having lost money at least twice, they are unwilling to learn from their mistakes:
The fund has 48.7 per cent of its assets in Canada and 51.3 per cent invested globally, and Denison said the foreign proportion will expand in future years.
And then Mr. Denison & Co will once again be blaming global economy when yet another "tiger" goes belly up. But why should they worry? If something happens - they'll come crying to the government, asking for billions of taxpayers' dollars in bailouts and foreign aid; the government just couldn't refuse to save the troubled markets from collapse if the lion share of our CPP surplus funds is invested there. So, from their prospective - it's win-win. But what about the taxpayers' prospective?

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