Canada Pension Plan & Skype: Madness

[August1991]

The CPP Investment Board is contributing US$300 million to the deal, giving it a 15 per cent overall stake in Skype.

"This is an exciting deal for us," Mark Wiseman, senior vice-president for private investments at CPPIB, told The Canadian Press.

"I think it's important to understand what we're purchasing here," Wiseman said. ". . . This is not your 1999 dot-com deal: You know, no revenues, not earnings, no nothing."

"This is a blue chip Internet company. In fact, one of the leading brands on the Internet and one of the leading Internet communications companies with close to half a billion unique users (and a company) with real revenues and real profits."

Wiseman said the CPPIB saw the deal an opportunity to acquire an interest in a leader in the growing Internet telecom market and doing it through "one of the most strategically valuable Internet brands."

...

The CPP board invests the surpluses generated by premiums paid by employees and employers to the federal Canada Pension Plan, which pays benefits to 17 million Canadians when they retire. The board operates separately and is managed independently, currently overseeing $116.6 billion in assets at the end of June.

CTV

All (poor) Canadians are required to contribute 5% of their income (below $40,000) while their employer contributes another 5%. Since this contribution is obligatory, it amounts to a payroll tax.

Now then, what does the government do with these revenues? It gives them to an "independent" group which invests it on our behalf.

This is madness. There are so many things that can go wrong.

1. We don't finance our health system this way. 2. It is always dangerous to concentrate power in a few hands. 3. The CPPIB has no market oversight. 4. We just saw what happened with the Caisse in Quebec.

As a minimum, the CPPIB should return to holding government bonds and let the politicians decide how to spend our money. At least politicians are answerable to voters in elections.

Edited September 2, 2009 by August1991

[Smallc]

Last I heard, the CPP was doing quite well....unlike the Caisse.

Edited September 2, 2009 by Smallc

[Bonam]

I don't think it's unreasonable for the government or its agencies to invest money held in CPP. That is how it can grow fastest. We all know that the stock markets outperform bonds in the long term, and CPP certainly is long term. It's not like they are recklessly investing in just Skype, this is only 0.3 billion out of 116.6, I'm sure they have a diversified range of stocks, bonds, and cash.

Of course, I think it would be much better if the CPP didn't exist and people were instead charged with saving for their own retirement, rather than expecting the government to do it for them. But unfortunately being responsible for one's own financial well-being is apparently too much to expect of most Canadians these days. So if the government must take our money and save for our retirement whether we like it or not, it may as well invest in a way that is likely to provide decent returns, rather than barely keeping pace with inflation.

[Riverwind]

This is madness. There are so many things that can go wrong.

And there are many things that can go wrong with private asset managment companies - just ask the investors in Madoff or AIG. Frankly, I don't see why you think that private firms should have a monopoly on managing savings - especially after the industry has been exposed as a pack a lemmings that is easily sucked into the bubble du jour.

[Riverwind]

Of course, I think it would be much better if the CPP didn't exist and people were instead charged with saving for their own retirement, rather than expecting the government to do it for them.

A significant number of people cannot manage their own cash flow - nevermind planning for retirement. Forced savings via the CPP will ultimately reduce the amount of senoir welfare that needs to be paid in the future - that is a factor that cannot be overlooked.

[Topaz]

The investors are probably trying to make back the 25 Billion they loss in the stock market this past year. The saying "what goes up must comes down" proved it point and they could get burned again in the future. Remember the investments for the computer industry shot up from 1100 to 4500 and one day they dropped.. I do I lost big time. Of course, the investors don't have any rules to go by as we have seen this past year and if they lose money they still get their bonuses! BTW, if they are making so money and getting these bonuses, why don't they raise the 2500 for death benefit up to $7000 to bury people?? 2500 doesn't cut it.

[Smallc]

They've already made back a large chunk of the money they lost.

[msj]

Now then, what does the government do with these revenues? It gives them to an "independent" group which invests it on our behalf.

This is madness. There are so many things that can go wrong.

As a minimum, the CPPIB should return to holding government bonds and let the politicians decide how to spend our money. At least politicians are answerable to voters in elections.

You obviously do not understand anything about risk.

You know, like the risk of government bonds returning less than a mix of investments in private equity, bonds, stocks, real estate etc....

Yes, many things can go wrong - like investing in only one asset class and seeing that asset class do dick over the 50 or so years that the CPPIB has to invest these funds.

[Renegade]

A significant number of people cannot manage their own cash flow - nevermind planning for retirement. Forced savings via the CPP will ultimately reduce the amount of senoir welfare that needs to be paid in the future - that is a factor that cannot be overlooked.

It is true that a significant number of people cannot manage their own cash flow, but a forced savings plan penalizes those who can. For some people, they would be financially better off putting the savings toward their debt rather than toward future pensions.

If the existance of senior welfare programs provides incentives for people not to save for their retirement, then perhaps we should consider reducing those incentives.

[Riverwind]

It is true that a significant number of people cannot manage their own cash flow, but a forced savings plan penalizes those who can. For some people, they would be financially better off putting the savings toward their debt rather than toward future pensions.

They would be better off not incurring the debt in the first place. A forced savings program reduces the amount of disposal income and should, in theory, reduce the amount of debt that people are willing to take on in the first place.

If the existance of senior welfare programs provides incentives for people not to save for their retirement, then perhaps we should consider reducing those incentives.

Incentives are irrelevant. People who have problem managing their finances are usually people who are not motivated by what might happen next year or 30 years from now. But that was not my point. My point was seniors are a politically influential group and society will be on the hook for senior welfare programs no matter what seniors did when they were young. For that reason a forced savings program is good because reduces the burden on future taxpayers.

[crazykai]

CPP is doing whatever any smart investor does... not put all of it's eggs in on basket. They should be in both the bond and equity market. They are a good market of scale to give Canadians a good return, though they shouldn't expect to put all of their eggs in that baskets for retirement, and help stabilize both the market and retirees with investments and savings.

[August1991]

Last I heard, the CPP was doing quite well....unlike the Caisse.

This entirely misses the point.

And there are many things that can go wrong with private asset managment companies - just ask the investors in Madoff or AIG.

Yes, but the investors voluntarily chose to give their savings to AIG, Madoff and Earl Jones. What happensd when someone like Madoff gets a hold of the CPPIB? (Trust me Riverwind, it will happen.)

You obviously do not understand anything about risk.

You know, like the risk of government bonds returning less than a mix of investments in private equity, bonds, stocks, real estate etc....

Yes, many things can go wrong - like investing in only one asset class and seeing that asset class do dick over the 50 or so years that the CPPIB has to invest these funds.

msj, I understand far too much about risk - and that in essence is the basis of my point.

Is it not risky to put billions of savings into the hands of a small group of so-called "independent professional investors"? That strikes me precisely as putting all one's eggs in one basket.

To put this in perspective, the market capitalization of the TSX is about $2.1 trillion. The Caisse, the CPPIB and Ontario Teacher's have together over $400 billion under management. This is far too great a concentration of power.

Moreover, the portfolio managers in these bureaucracy face no market discipline. Their clients are a captive audience who by force of law must contribute to the funds.

------

There's a graver error here and it can only be understood in the context of long-term macroeconomic growth theory. The relatively small portion of current production put aside and saved is the basis of future growth. This investment adds to our capital stock and makes technological innovation possible.

The critical decisions of how to allocate our savings - in effect, pick winners - should not be left to government bureaucrats. History is rife with examples of what happens when a society lets a small group make critical decisions for everyone. As a minimum, government bureaucrats need direct oversight.

I am not against the State forcing people to put money aside. (That is the essence of taxation.) I'm also not against the State transferring money between citizens. (That is the essence of welfare, EI and our State pension schemes.) I object to the State making critical private investment decisions. Let the State invest in public works - bridges, roads and the like. IMV, the CPPIB & Caisse should hold only government bonds so that in effect politicians would decide how to use this money.

Canada, the country, is not a business. The CPPIB should not seek the highest market rate of return anymore than the Canadian government should aim to make a private profit.

------

ISTM, that Paul Krugman has become increasingly partisan and irritating since Obama's election and I never always agreed with him but he has written a seriously slanted but nevertheless wonderful piece about the history of modern macroeconomic theory, and among other things, the implications for modern finance theory.

The theoretical model that finance economists developed by assuming that every investor rationally balances risk against reward — the so-called Capital Asset Pricing Model, or CAPM (pronounced cap-em) — is wonderfully elegant. And if you accept its premises it’s also extremely useful.

....

By October of last year, however, Greenspan was admitting that he was in a state of “shocked disbelief,” because “the whole intellectual edifice” had “collapsed.”

...

Economics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system. If the profession is to redeem itself, it will have to reconcile itself to a less alluring vision — that of a market economy that has many virtues but that is also shot through with flaws and frictions.

...

First, many real-world investors bear little resemblance to the cool calculators of efficient-market theory: they’re all too subject to herd behavior, to bouts of irrational exuberance and unwarranted panic. Second, even those who try to base their decisions on cool calculation often find that they can’t, that problems of trust, credibility and limited collateral force them to run with the herd.

NYT

The point here is that the neo-classical, CAPM, mathematically inclined, efficient market hypothesis experts that Krugman rails against are precisely the kind of bureaucrats that the CPPIB, the Caisse and Teacher's have making portfolio decisions.

Apart from the inevitable likelihood of corruption, what if these expert-bureaucrats are simply wrong?

There are some people who think that Quebec Inc is a great idea. I'm not one of those people.

Edited September 4, 2009 by August1991

[msj]

msj, I understand far too much about risk - and that in essence is the basis of my point.

Given that the CPPIB's mandate is to get a real return of about 4% I don't think you really know much about how the CPPIB works and the risk minimizing that is inherent in the system.

The fact that they are expected to get such a low rate of return, and the fact that it is built in at such a realistic level (unlike a NJ State pension plan that is still counting on 8% real returns) demonstrates just how conservative this system is.

Sure, we can all point to the folly of diversification and say, with hindsight, that we should have invested in Gold in the 70's, bonds in the 80's, stocks in the 90's, oil during most of this decade etc...

But that's hindsight.

Government bonds run the risk of providing a return, after inflation, of less than 4% as compared to investing in a portfolio of investments where assets are picked based on their expected return.

At one point in time cash is king. At another point in time it is commodities, and still another it is public companies.

I want the CPPIB to try their best to pick the best assets at the most opportunistic times as to get the best rate of return while adhering to their mandate.

Is it not risky to put billions of savings into the hands of a small group of so-called "independent professional investors"? That strikes me precisely as putting all one's eggs in one basket.

And simply picking one asset class is supposed to be better?

Oh, and you do realize that not all of the assets go into the CPPIB's hands, right?

To put this in perspective, the market capitalization of the TSX is about $2.1 trillion. The Caisse, the CPPIB and Ontario Teacher's have together over $400 billion under management. This is far too great a concentration of power.

You do realize that the CPPIB invests in private equity, real estate and invests in investments in foreign countries?

The CPPIB has about $54 billion in public companies which is in 700 Canadian and 2,200 international companies.

45% of their real estate investments are outside of Canada.

Only 4.5% of their private equity is invested in Canada.

Now compare that to the market capitalization of the entire world and get back to me....

Oh, and I wonder what complaints people would find if these pensions owned a 70%+ share of the Canadian government debt market? Surly the complaint would be the crowding out of individual investors from this market as I mention below.

Moreover, the portfolio managers in these bureaucracy face no market discipline. Their clients are a captive audience who by force of law must contribute to the funds.

Oh, you mean like anyone subject to a pension plan - whether it be forced through CPP or a government employee pension plan or even a private pension plan.

That's why there is a board of directors, a set of rules/guidelines upon which to operate, and, most importantly, rules to keep the politicians hands away.

There's a graver error here and it can only be understood in the context of long-term macroeconomic growth theory. The relatively small portion of current production put aside and saved is the basis of future growth. This investment adds to our capital stock and makes technological innovation possible.

This is too funny. I love how it underestimates and undervalues the investment of unpaid "sweat equity." I also find it funny at how it undervalues the great contributions to long-term growth thanks to government investment in education, infrastructure, basic R&D etc....

The critical decisions of how to allocate our savings - in effect, pick winners - should not be left to government bureaucrats. History is rife with examples of what happens when a society does this. As a minimum, government bureaucrats need direct oversight.

The problem is not with the CPP. It is when the politicians get involved, hence the Caisse.

Keep the politicians away, put up rational rules to follow and step the hell out of the way and let the professional money managers do their job.

There is oversight. It's called a board of directors.

I am not against the State forcing people to put money aside. (That is the essence of taxation.) I'm also not against the State transferring money between citizens. (That is the essence of welfare, EI and our State pension schemes.) I object to the State making critical private investment decisions. Let the State invest in public works - bridges, roads and the like. IMV, the CPPIB should hold only government bonds.

And crowd out private savings from private investors who may prefer to buy "risk free" government bonds?

Rather hypocritical of you.

Better to water down the decisions of the CPPIB by allowing them to invest in the larger investment world (various asset classes and in various countries around the world). Then they act just like any other investment firm - chasing the best investment return under the rules provided by their contributors (or, in this case, via the Government of Canada).

It is not the government that is investing this money - it is professional money managers who would be doing the same thing for Goldman Sachs.

That is the real reason why one should be concerned - if it wasn't for all of their political connections GS would have gone broke a year ago. But that's what happens when you are TCTF (too connected to fail).

Of course, individual investors track records are no better, and often worse, than the professionals. It's just that individual investors only have enough connections to force things like pension splitting for seniors and special one-time RRIF re-contributions - but only when a minority government is in power and has to carefully listen to the powerful geezer crowd.

Herd mentality is a problem of the human race - not just a select group of bureaucrats, politicians, or professional money managers.

Indeed, just look at some people's reactions in early 2008 to all of the evidence of the US entering a recession to see many fine examples of the herd mentality being applied to justify all the media hype, optimism, and cheer leading....

[August1991]

Better to water down the decisions of the CPPIB by allowing them to invest in the larger investment world (various asset classes and in various countries around the world). Then they act just like any other investment firm - chasing the best investment return under the rules provided by their contributors (or, in this case, via the Government of Canada).

It is not the government that is investing this money - it is professional money managers who would be doing the same thing for Goldman Sachs.

That is the real reason why one should be concerned - if it wasn't for all of their political connections GS would have gone broke a year ago. But that's what happens when you are TCTF (too connected to fail).

What you don't seem to understand msj is that the CPPIB and the Caisse are Goldman Sachs, officialized - all three have the State stamp of approval, and the State's power to tax behind them.

My concern is not whether GS partners (or Caisse bureaucrats) get large bonuses or not, or how we treat bureaucrats at the Caisse different from GS players.

I am afraid of the consequences of concentrating such power in such hands, and letting them off easily when they make mistakes. And I wonder whether such experts can pick winners.

msj, I am surprised that GS offends you but you happily defend the CPPIB. In your view, what's the difference? Both apparently benefit from a State guarantee, at least in your view.

Oh, and I wonder what complaints people would find if these pensions owned a 70%+ share of the Canadian government debt market? Surly the complaint would be the crowding out of individual investors from this market as I mention below.

If the Caisse/CPPIB owned 70% of government bonds, it would mean that democratically elected politicians would decide how to spend 70% of our State pension savings.

If you believe in democracy, democratic politicians should decide how to spend our collective savings - not "independent" bureaucrats.

More pointedly, I think the State should use (forced) public savings to invest in public infrastructure. CPP/QPP contributions are a tax by any other name.

Returning to my OP, it is madness for the CPPIB to invest in Skype. Canadian governments should invest in Canada.

Edited September 4, 2009 by August1991

[Bonam]

Returning to my OP, it is madness for the CPPIB to invest in Skype. Canadian governments should invest in Canada.

Why? The Canadian government, when it invests money, should invest wherever it believes that money has the greatest potential to grow (given the risks involved), just like any other organization that invests money.

[Renegade]

They would be better off not incurring the debt in the first place. A forced savings program reduces the amount of disposal income and should, in theory, reduce the amount of debt that people are willing to take on in the first place.

Not necessarily true. Debt such as mortgage may be "good" debt as is may be better than the alternative (renting). Forced savings doesn't offset the fact that most people take on debt.

My point was seniors are a politically influential group and society will be on the hook for senior welfare programs no matter what seniors did when they were young. For that reason a forced savings program is good because reduces the burden on future taxpayers.

Yes true, and unfortunately there are very few curbs that prevent a politically influential group from compelling others to support them. Thus I have mixed feelings about forced savings programs. On one hand forced savings restrict our ability to choose for ourselves, on the other hand it also reduces the opportunity for non-savers to demand that taxpayers support them.

[msj]

What you don't seem to understand msj is that the CPPIB and the Caisse are Goldman Sachs, officialized - all three have the State stamp of approval, and the State's power to tax behind them.

My concern is not whether GS partners (or Caisse bureaucrats) get large bonuses or not, or how we treat bureaucrats at the Caisse different from GS players.

Interesting how you have to shift the focus back to the Caisse.

We are talking about the CPPIB which, unlike the Caisse, is not interfered with by banana republic politicians.

I am afraid of the consequences of concentrating such power in such hands, and letting them off easily when they make mistakes. And I wonder whether such experts can pick winners.

The experts tend to pick them better than the average Joe.

More importantly, there are the reasons that Riverwind has mentioned that justify a "forced savings" plan.

msj, I am surprised that GS offends you but you happily defend the CPPIB. In your view, what's the difference? Both apparently benefit from a State guarantee, at least in your view.

The difference is the political interference.

The government is hands off with the CPPIB and has put into place practices that should keep it hands off thanks to restrictive rules to prevent the politicians from interfering and a conservative rate of return which means that the CPPIB should not have to go back to the taxpayers to beg for more money.

If only GS didn't get all that money funneled through AIG thanks to their political connections but that is a separate story.

If the Caisse/CPPIB owned 70% of government bonds, it would mean that democratically elected politicians would decide how to spend 70% of our State pension savings.

If you believe in democracy, democratic politicians should decide how to spend our collective savings - not "independent" bureaucrats.

Politicians should keep their hands off our forced savings. If anything, this would increase the risk to the CPPIB because some wing nut politicians would argue that they are simply "investing our own money" into whatever political pork du jour.

They would further argue that government interest rates are lower than the private sector and this is all self-financing etc....

IOW, you want to insulate the government further from the real world.

Government, to some extent, should compete with the market place rather than be insulated with a circular chain of taxation.

Worse yet, is that the CPP be turned into the US SS - a system where the operating budget "borrows" from the SS trust so that the only assets left in the SS trust are loan receivables back from the government operations.

The CPPIB is proof of actual net worth in our future public pension plan rather than one government arm showing a loan receivable while another shows a loan payable.

More pointedly, I think the State should use (forced) public savings to invest in public infrastructure. CPP/QPP contributions are a tax by any other name.

And I prefer the state to invest in infrastructure and pay for it either directly by having the taxpayers foot the bill immediately or to finance it over the useful life of the project.

If the CPPIB can earn a better return elsewhere then they should have the leeway to earn that return elsewhere rather than sit as a slush fund to be used willy nilly by politicians for their political purposes.

Returning to my OP, it is madness for the CPPIB to invest in Skype. Canadian governments should invest in Canada.

Canada competes in the global economy.

This means that even the government should not be insulating Canadians, their forced savings plan, or even their own government operations from the real world.

If the government wants the CPPIB to invest in infrastructure then provide a market rate of return that is worthwhile for the CPPIB to invest in it as opposed to investing elsewhere.

[August1991]

Bump.

[msj]

Bump.

Why are you bumping this?

Per the CPPIB:

The acquisition of Skype by Microsoft, as announced in May 2011. When completed, the transaction will crystallize a substantial gain on CPPIB’s initial investment of $329 million.

According to this story it looks like that $329 million investment turned into close to $1.1 billion (give or take).

[Jerry J. Fortin]

I don't think it's unreasonable for the government or its agencies to invest money held in CPP. That is how it can grow fastest. We all know that the stock markets outperform bonds in the long term, and CPP certainly is long term. It's not like they are recklessly investing in just Skype, this is only 0.3 billion out of 116.6, I'm sure they have a diversified range of stocks, bonds, and cash.

Of course, I think it would be much better if the CPP didn't exist and people were instead charged with saving for their own retirement, rather than expecting the government to do it for them. But unfortunately being responsible for one's own financial well-being is apparently too much to expect of most Canadians these days. So if the government must take our money and save for our retirement whether we like it or not, it may as well invest in a way that is likely to provide decent returns, rather than barely keeping pace with inflation.

Just curious, where did you stand with the bailout of Detroit, or the bailout of Wall Street?

[msj]

Just curious, where did you stand with the bailout of Detroit, or the bailout of Wall Street?

There is a difference between investing and bailing out.

There is a difference between setting up an independent investment board with a board of governance that is expected to get an investment return of 4% over the next 75 years versus politicians handing out money based on how their constituents may vote in the next election.

[Jerry J. Fortin]

There is a difference between investing and bailing out.

There is a difference between setting up an independent investment board with a board of governance that is expected to get an investment return of 4% over the next 75 years versus politicians handing out money based on how their constituents may vote in the next election.

It should be clear that having governments bailout business failures is contrary to the basic principles of capitalism and in fact it reeks of corporate governance. The very essence of our political and economic infrastructure will be viewed under a microscope, and be seen to reveal corruption and incompetence.

Just knowing that the Government of Canada is involved in an investment strategy gives me pause for concern. The citizens of the nations, from one end of the world to the other, are being taxed to cover the banks and the business failures that we continue to see pop up here and there. Entire nations are yoked with debt burdens to those same banks and business efforts.

Hopefully sooner rather than later, those folks in charge of things need to start an effort within its own group to consider a general debt amnesty. If you ever wanted to gain public approval of a policy, this is the way to do it.

It is time to rethink the things that have been done in order to avoid doing other things.

[Smallc]

[bleeding heart]

It's time to start doing what's needed, so we can see what isn't wanted.

[August1991]

According to this story it looks like that $329 million investment turned into close to $1.1 billion (give or take).

And in 1760, the French monarchy looked supreme too.

The US constitution was written around the same time with the intention to diversify "power".

---

The CPPIB and the Caisse seem to me like the 18th century French royalty - a concentration of power. It works at first, and then it doesn't.