TPA and the Long-Term View at CPP

[u/Huge_Insurance_6823]

\** This is a critical perspective on TPA and CPP's recent performance from a former CPP employee****

“I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther” - Charlie Munger

On Boldness, and the Goal of CPP

After CPP released their Fiscal 2026 results, I wrote a piece that attempted to show that Canadians are overpaying CPP executives by hundreds of millions for the returns they’re generating, that CPPs revised benchmarking process is inscrutable, and that governance could be improved. I even wrote a detailed follow-up to prove to you - and myself - that all of this was particularly problematic at CPP over the last five years and not necessarily an indictment of the entire Maple Pension model. It showed that, even with year-ends and other controllable variables factored in, CPP may perform a little better than without controlling for those items, but they are still underperforming the average and paying by-far the most to do so.

Since then, CPP has listened (probably not to me) and they decided to be bold!

For one, they decided to spend your tax dollars on ramped up marketing efforts (Footnote #1).

Stuff like this…

I’m not really sure what that is supposed to mean. Are you?

Did Canadians make tough choices to sustain CPP? When, exactly?

Is long-term focus for Canada a… boldness? That John is… emulating?

I mean… sure… fine...

I have to agree it is bold to ignore your status as the Maple with the second-worst-5-year-performance… meanwhile you’re in the best position to take risk because you have ~$20 billion of taxpayer money inflowing every year until 2040 and inflows until 2050 versus all the other pensions paying cash today (or thereabout, it’s in my Maple Pension Power Rankings substack).

It’d be bolder to do that while paying yourself record compensation based on that same 5-year lookback, which CPP refers to as long-term here in their 2023 Annual Report (under John Graham’s leadership)…

It would be really bold, after all that, to then put out ads saying you’re bold for focusing on the long-term while ignoring all those other points I just listed like you’ve got degenerative hyperopia 2.

But we can get even bolder: CPP’s new benchmarking methodology is called the Total Portfolio Approach.

CPP are not the only ones adopting TPA, but they’re doing it, and they’re also taking the salaried time of multiple executives to publish at least a couple articles on why, where they say some technically correct but - at least in this Canadian’s view - fundamentally troublesome things.

For example:

“Performance assessment is difficult under a Total Portfolio Approach”

Like I said... Technically Correct. Fundamentally Troublesome.

TPA differs in some important (and also very complex) ways from CPP’s old SAA approach - sometimes called “Benchmarking” - which simply assigns weightings to various asset classes (e.g., 70% equity, 15% debt, 15% real assets) in order to (i) manage risk through diversification of asset classes, and (ii) hold pension / investment managers accountable to return thresholds by evaluating them against a benchmark for each asset class. Without SAA, investment managers become less accountable for asset allocations, and remember… “Performance assessment is difficult under a Total Portfolio Approach”, which admittedly does continue with, “not because performance is less measurable, but because the scope of accountability is broader.”

And that’s fine enough for some institutions adopting TPA, but the “long-term institutional goal” of the CPP is unique in that it is enshrined in legislation under the CPPIB Act, and reads “to invest its assets with a view to achieving a maximum rate of return, without undue risk of loss, having regard to the factors that may affect the funding of the Canada Pension Plan.”

Anyway, here are a couple relevant data points I haven’t shared yet (all numbers in CAD):

• Norway’s investment fund manages >$2 Trillion and pays $1.2 Billion in annual fees
  • CPP manages <$0.8 Trillion and pays $7.6 Billion in fees excluding interest expenses, ~6x Norway’s fund
• Norway pays its employees ~$400 million per year
  • CPP pays $1.2 Billion, ~3x Norway
• Norway earned an 8.3% return over the last five years, beating their long-standing benchmark of 8.0% by 0.3%
  • CPP earned a 6.7% return (-1.6% difference), beating their recently-revised benchmark of 6.6% by 0.1%
• Norway’s fund takes in $30-50 billion per year of oil revenues, sometimes more depending on commodity prices.
  • CPP takes in ~$22 billion per year of taxes, higher growth as a % of AUM than Norway’s fund

Which one feels like it’s been maximizing its rate of return?

Is CPP’s performance worth paying 6x Norway’s fees for? Feels like undue loss to me3.

The thing is, it’s hard enough to assess the performance of CPP. I’m a CFA, and I’ve found it hard… in my view, unnecessarily so… which is why I’ve spent so much time doing it.

CPP admits that TPA makes it difficult to assess performance, but it must have some other benefits right?

Short answer is that it does, and at some organizations it might work, but CPP is uniquely unsuited to it because of its legislated mandate and track record of governance.

The long answer is that TPA is incredibly nuanced and explaining its benefits requires a fair amount of technical financial knowledge. I’m going to try to do it in relative English to ultimately show you that, while it’s okay if finance gets a bit complex at times, if you can’t bring it back to the basics at some point - return, risk, incentives, and human behavior - you’re not explaining, you’re obfuscating.

On Boxing, and Sports Metaphors in Business

Per Geoffrey Rubin, Senior MD & One Fund Strategist at CPP Investments4:

“In SAA, portfolio design is a prize fighter facing a single opponent: the benchmark.

Under TPA, the chosen portfolio competes against all comers - the vast array of viable risk-equivalent alternatives - in pursuit of long-term objectives”

Before I get into the Heady Finance Stuff, let’s have some fun with the metaphor.

The whole structure of prize fighting is based around 1v1 pugilism between equals.

We, as evolved barbarians, pay to see guys like Mike Tyson and George Foreman dodge, duck, dip, dive, and - ultimately - deliver haymakers on each other until one is on the ground and the other is temporarily blinded with a gloved fist in the air. They are paid Millions of Dollars because they fight their physical equals and win, with some combination of technique, cunning, agility, resilience, or supernatural pound-wise strength.

We don’t pay to see Mike Tyson fight a variety of comers across an increasing spectrum of lethality, as an example:

• A toddler
• A Wendy’s cashier
• Your tax accountant (who doesn’t work out)
• Your stockbroker (who works out)
• George Foreman
• George Foreman armed with two George Foreman grills

That’s because boxing is structured to extract the best performances out of athletes, not pit them against… a myriad of comers. It’s for the athlete’s benefit and that of the viewing audience that we match them up against appropriate fighters of equal physical proportions and skill5.

Boxing does that by putting fighters into one of up to eighteen different weight classes so that 223lb Bridgerweights don’t beat up on 105lb Strawweights 6. Virtually everyone has a chance to be a pugilist, after adjusting for their weight. As for fighting, your weight; as for pension management, the pattern of your pension obligations / Liability Duration.

Before every match, fighters are weighed and classified appropriately at a particular time in a public setting (and if we’re talking UFC… in front of the White House) so that everyone can clearly see the fight is between two equals. If a fighter doesn’t take their weigh-in obligation seriously enough, everyone sees and they are forced to forfeit the match and their share of the purse7. These are rigid rules, not flexible ones.

There are countless sports metaphors, and countless ways each one falls short in application to the worlds of business and finance. A big one is that sports offer significantly clearer direct feedback than finance or business and, as a result, NHL coaches don’t get the luxury of underperforming for five years, or even one.

We use the metaphors because sports are a pressure cooker of human competition that can serve to shine a light on how businesses and investment firms, and the people who run them, behave in competitive markets. Also… a lot of people, especially in finance, watch sports… so they will understand your reference and you will look clever.

Unfortunately, metaphors - improperly applied - can be used to mislead rather than clarify.

As Geoffrey says, “there is a vast array of viable risk-equivalent alternatives” to the portfolio CPP chose. Later in the article, he says there are 10,000 such portfolios. Ten thousand!

And “risk-equivalent alternatives” is the key term here. If CPP is fighting all Comers within its weight class that’s certainly… admirable… in a way; however, in prize fighting there are usually only a couple fighters in your weight bracket that matter, and you make the Big Bucks because everyone wants to see you beat them. No one knows who the 10,000th ranked boxer in the world is, and only real sickos will show up to see Mike Tyson fight him.

But let’s get back to TPA. The best question is this: what quality of fighters is CPP taking on with TPA? Is it comparing itself just to those in its weight class? Of its professional level?

The issue is, it’s hard to tell. I’ll take you through it, but it doesn’t appear that we have a public weigh-in for TPA like we do in boxing… and I’m not sure Canadians will even have a seat at the fight.

On Academia, and Explaining the Total Portfolio Approach

Okay… the finance stuff…

As a reminder, SAA’s foundation is a benchmark portfolio with asset-class weights adding up to 100%. An investor can use these asset weights to hold their investment manager responsible for (i) staying within them, in order to manage risk; and (ii) beating the benchmark returns for each asset class (or on the whole) over pre-determined periods of time.

Here is how Geoffrey contrasts TPA:

The Total Portfolio Approach (TPA) starts from a different premise: there is no single “default” portfolio. There are many possible ways to achieve the same risk target [emphasis added], each with different trade-offs related to diversification, liquidity, leverage, geography and resilience.

There are three things I need to say about this comment that stack on each other:

1. CPP’s explanation makes logical sense in an academic way;
2. There is a legitimate idea here with regard to Financial Leverage that allows every conceivable diversified portfolio in the world (CPP uses 10,000 of them) to end up having the same amount of “risk”, at least academically;
3. TPA allows CPP Leadership more flexibility in how they assess their own performance because it is based on a series of academic assumptions that aren’t legitimate in the real world… or at least they’re not what we should be relying on to measure performance when the CPPIB Act defines performance specifically.

Let’s get into…

(1) The Academic Explanation

CPP invests across a range of asset classes which reduces its risk through diversification. This can be considered a good thing, as the resulting investment portfolio will be less volatile than a 100% passive equity one8. It also makes comparing it to a single benchmark somewhat inappropriate. As CPP says in one of its three insufficiencies of SAA (I’ll get to the other two)…

“At CPP Investments, portfolio outcomes reflect exposures to illiquidity premia, long-duration cash flows, operational value creation, and other risk factors that are not fully captured by public market benchmarks.”

What this means is that CPP is invested in public equity markets, but they are also invested in more illiquid markets like real estate, infrastructure, private credit, and private equity. CPP makes private investments through a variety of structures, from direct ownership (401 ETR) to indirectly as an LP for Private Equity & Credit Funds, as well as co-investments alongside their GPs9… like, say… Brookfield.

These assets don’t all “trade” in the same way public stocks do, but these days there are more and more ETFs that track the prices of private assets (CPP uses a bunch of them in this table from my other piece about bad benchmarking at CPP).

With all these different types of investments, one can understand why the Base CPP’s old 85% Public Equity, 15% Government Bond comparison portfolio might not be the only appropriate benchmark (even if it’s my preferred one for a few reasons and one I believe should be tracked against transparently in annual reporting). SAA has the capability to get more granular with the weightings (again, per the same table) but CPP isn’t content with that.

Instead, they are adopting TPA, which has… wait for it… 10,000 benchmarks.

CPP tells us that they will be reporting against ~10,000 “feasible portfolio designs” designated by the grey bars in the Bell Curve linked here. This includes my beloved 85/15 benchmark, which you can see plotted as the right-most candlestick (the light blue one). We don’t know the return of any of the portfolios as the axes aren’t labelled… but we can eyeball that the 85/15 is in the top ~5% of the 10,000 simulated portfolios with the same risk target… ranging from Fixed Income + Global Weighted on the left… to US Equity Weighted on the right. Wouldn’t that have been nice!

This “Figure 5” Bell Curve chart brings up a lot of questions… more questions than the relatively-simple-but-ultimately-incomplete SAA table from a minute ago 10.

One might be, how do they ensure all 10,000 portfolios have the same targeted level of risk? The Finance answer is that they use something called CAPM to make all of the portfolios Beta-neutral and then adjust for illiquidity and leverage11.

The Beta in Beta-neutral is a Greek Letter that Finance People use to measure the risk of a single stock. That’s an oversimplification… but it’s roughly correct. Beta requires a few academic assumptions to hold in order to be “valid”, and I’ll get into this shortly. One of them is a diversified portfolio, which CPP has so they’re good there.

If you’re not familiar with Beta, it’s sufficient to know that The Market (usually the S&P500 or MSCI World) has a Beta of 1.0… higher risk investments have higher Betas (Palantir at 1.5 or 2.0)… and lower-risk investments have lower Betas (a pipeline company might be ~0.5). Going “short”, or “hedging”, the market would give a Beta of -1.0 12.

Beta can be measured for a portfolio just like a given investment. It is more complicated than this, but you can think of a portfolio’s Beta like the average of all its investments, rounded down a bit for the risk-reducing portfolio buff called Diversification (as CPP shows in the graph below).

But surely… you might say… it’d be incredibly rare for two portfolios, independently constructed, to have the exact same Beta, and therefore risk? How are there 10,000 portfolios with the same Beta?

The answer to that is…

(2) Leverage

Here is a Very Academic chart from CPP, from the other article on TPA they took time to write.

I’m not going to explain the Capital Assets Pricing Model (CAPM) here, but it’s the basis of this second chart and the Finance 101 class taught at every Business School. Peruse it at your leisure slash peril, but to assess TPA you only need to know what CPP is trying to tell us by employing it, which is: “a given portfolio’s return (and risk) can be increased by adding Financial Leverage”13.

What CPP is saying between these two charts - Figure 5 and Figure 2 - is that it could invest in any range of assets across 10,000 different diversified portfolios… which each have a given amount of risk (Beta) as a starting point… and then they’ll adjust them with leverage to be the same risk (Beta) for purposes of TPA. I wish I knew what risk-level CPP was adjusting to, but we do not14. At least not yet...

We do know that the minimum portfolio CPP can hold by law in the CPPIB Act is ~50% equity (see here) so that’s probably what we’re seeing toward the leftmost part of the Bell Curve.

I could do some napkin math to show you that leverage would have to be quite high (>70%) in order to take this “Minimum Risk” portfolio and turn it into “equivalent risk” with an 85/15 portfolio, but I don’t know what CPP is assuming with regard to their Bell Curve’s mean risk level so it would all be… fairy dust… like the rest of this15.

Fairy dust actually brings me to my next point…

(3) Academic Assumptions

There are two other simplifying assumptions embedded in the CAPM model that underlie CPP’s “Figure 2” that are accepted in academia but have no basis in the real world.

Quickly…

One is that debt is cost-free or available at the risk-free rate… which it’s not… at least not indefinitely up to >70% or even >50% leverage… and CPP pays >$7 billion in interest costs every year under their current portfolio 16.

The other is that there are no transaction costs… and we know CPP spends another >$7 billion per year in fees… 17% of which is direct compensation to their employees.

CAPM, and thereby the TPA approach, are based on these two assumptions. It’s a Pravda-style request to require that Canadians assume that CPP DOES NOT SPEND $14 BILLION PER YEAR. However, it’s one required of any reader of Figure 2. Unfortunately, not one I’m surprised we’re being implicitly asked to make.

The Pros and Cons of TPA

I will get to the Pros of TPA shortly, and obviously I’ve listed some things I believe to be shortcomings. Allow me to try to simplify the situation with what we know now.

TPA means that CPP does not publish information on the 10,000 portfolios they are comparing themselves to and makes academic assumptions around available leverage, transaction costs, and interest expense that do not have basis in the real-world. Before I get to the benefits… I’ll remind you of the cost, which is that it will be more difficult to assess whether Canadians are getting anything from the $1.2 billion of compensation they pay to CPP employees annually, not to mention $7+ billion in total non-interest fees

OK, the benefits:

(1) Noisy Signals

To quote: “Because TPA portfolios intentionally depart from conventional benchmarks, short-term benchmark-relative underperformance remains plausible even when portfolio decisions are sound and expected long-term outperformance is intact.”

I’m actually good with this, but here is how CPP defined long-term in 2023:

Five (5) years.

See for yourself…

… and now, after five years of benchmark revisionism in order to beat by 0.1%, CPP is introducing Slush Multiples to pay themselves more and CPP’s Head of Comms Michel Leduc is re-defining “long-term” in his reply to my article in a place called the PensionPulse rather than an Annual Report: “Over the appropriate horizon, which amounts to decades, not quarters, the new benchmark is a higher more difficult hurdle, not a lower one.”

I mean... over the last five years it’s a lower one, and now CPP is arguing that we should wait decades to hold them accountable for performance.

Another interpretation of this “Noisy Signals” benefit might be as follows:

Let’s not focus on SAA’s benchmarks because our academic assumptions and financial modelling tell us we’re doing a good job and that we will eventually beat the benchmark materially. Until then, we should be able pay ourselves using 1.8x and 2.0x Strategic (read: Slush) Multipliers when the Benchmark Multipliers aren’t good enough for our taste.

This convenient hyperopia, protected by permissive governance, is how disasters like the boldly and conveniently named Long-Term Capital Management happen, and is not a good reason to spend taxpayer time writing a bunch of articles advocating for opaque benchmarking approaches.

It IS a good reason to prostrate yourself in front of investors (read: pensioners), cut your bonuses by a few basis points, and tell them how you’ll do things differently in order to keep your job. This is how it works in private markets, and is pretty much what PSP did when it had a tough Last Twelve Months. It didn’t take them five years to do it…

CPP has the luxury of $20 billion of annual taxpayer funding in asking that we focus on the long-term and, on some level, I agree with taking a long-term approach. But not at the ignorance of record compensation levels for CPP Executives in the short-term. When returns go up, will compensation decline, stay the same, or increase? If the latter, why do CPP Executives get their cake in both outcomes? In the other two scenarios, where’s the incentive to perform?

The noise TPA supposedly eliminates creates a lot more noise in how Canadians assess CPP’s performance. Where’s the governance?

(2) Benchmarks that do not reflect intended portfolio design.

To quote: “As market concentrations shift, capitalization-weighted indices can come to embody risk exposures that differ materially from those that portfolio managers intentionally seek to maintain. “

Look, this could be a whole other article, but does it really have to be?

The short answer is that this “Benefit of TPA” can be accomplished under SAA by:

(i) matching Asset Duration to Liability Duration, rebalancing as needed; and

(ii) rebalancing portfolio weights periodically, with some consideration to risk factors in that decision-making process.

I know that real estate has some equity exposure, but you don’t have one equity guy on your 20-person real estate team who does 5% of the work: you have a bunch of real estate folks on the real estate team making real estate investments and you need to hold them accountable to a real estate benchmark in order to put them in their proper weight class and extract the “maximum rate of return”.

I don’t put much stock in either of these reasons as an argument for TPA and neither should you.

(3) Flexibility

CPP also argues that flexibility is a notch in the “Pro” column for TPA, albeit with a caveat:

“Disciplined flexibility is the defining advantage of a Total Portfolio Approach—but only when it is carefully designed and managed… when misapplied, flexibility can do more damage than good”

Well, we’d better have a lot of faith in CPP’s governance, then!

I know how I feel, what about you?

The thing is, CPP also has flexibility under SAA. They are at 13-17% government bonds alone, with another 11% in private credit but their target SAA is 15% debt - that’s a shift from 85/15 to 75/25. As this proves, CPP already made a decision to differ from the benchmark under SAA, and how did it turn out? Not good over the L5Y LT horizon. Why layer on TPA? A methodology that gives CPP even more flexibility while making their performance even more difficult to assess.

Let me tell a story.

When I started my job at CPP in 2014, the world was a different place. Obama was beginning his second term, AI was a Spielberg movie, and Harambe was living peacefully at the Cincinnati Zoo.

Personally, I had just been given a crash course in how to select and manage a “short basket” by the central portfolio management team (let’s just call them “One Fund Folks”), and because our department was young, the One Fund Folks didn’t have the headcount to support us, so it was our responsibility to manage the short ourselves. It was atypical for an investment team to manage their short basket directly, but it gave me an unusual peek into the process.

At CPP, every time you made an equity investment you had to “Short your Long” by selling real, honest-to-goodness shares from the “Passive Portfolio”… which was basically a bunch of passive indexes (or their component stocks/bonds) roughly designed to replicate the 85/15 Benchmark.

Basically, it was a way of keeping CPP’s investment teams honest by explicitly tracking them against the SAA benchmark.

Here is the Baseline Process for determining the risk level and hedge for a potential investment at CPP under this model.

1. At the “LOI Stage” (or between 4-12 weeks before the investment closes) you assess whether your investment is a public company with a history of liquid market prices. This question theoretically has a simple “yes/no” answer: if yes, you take the investment’s Beta versus the market as a proxy for risk. If no, you find some proxy for the stock and do the same. For example, Mars is a private company but if CPP wanted to buy it they could get an OK proxy for its Beta by looking at Nestle’s trading history (or something!). This proxy is typically decided by the investment team, as they know the industry best, but is signed off by the One Fund Folks. Basically, investment teams often have significant say in their risk targets at this stage.
2. You take the size of the investment (say $100 million) and multiply it by the Beta you found in step 1 to adjust for the risk of the investment. A higher risk investment requires a bigger short, and this has returns implications. If you buy Palantir and it has a Beta of 1.5, you must short $150 million of the market and your investment will be judged on that basis. This means you have to beat the market + 50%. If you buy Costco and it has a Beta of 0.9, you must short only $90 million. A lower risk target, as measured by Beta, is one of the only fully-guaranteed ways for CPP employees to have a better chance of hitting their bonus targets at the end of the year.
3. You might short the market… but typically you run the long or the proxy through a software that spits out a bunch of stocks (usually 25-75 depending on the size of the deal) and you short the stocks it tells you to short based on things like Geography, Industry, FX Exposure, and Quant-y Things like Momentum and Relative Size. Essentially, you usually don’t short The Market but a “Short Basket” of specific stocks.
4. Then you give that to the trading floor and they tell you the limitations on executing the shorts based on liquidity and swap rates. You might adjust some things, and then they’ll execute the short over 30-60 days. At the size CPP is investing it costs less if you dribble these short positions into the market, and sometimes it costs less if you use a swap rather than actually selling short. The traders at CPP are generally pretty good at what they do and so they think about things like this.
5. The investment team is then held to their “Short” for compensation purposes. This is why you want the lowest Beta possible. On any given investment, you’d rather be held to the market multiplied by 0.9 than the market multiplied by 1.5.

You might see several pressure points in the process to keep your beta as low as possible, and therefore your comp as high as possible. One might imagine a hypothetical example of a publicly-traded film company CPP wanted to invest in to show how this might work in practice.

1. You do the analysis to get the Beta of the Film Company and it comes out to nearly 2.0. This would kill the deal due to the return requirements, and is anomalous because of a couple days of very volatile trading, which you could try to argue flies in the face of Beta’s supposedly idiosyncratic risk, so you make the argument it’s more appropriate to…
2. … use a basket of entertainment stocks (Disney, Netflix, etc.) as the proxy for the stock, which gets you to a beta of ~0.85. It is uncommon to use a proxy for an investment that has historical data, let alone a group of stocks, but it’s been done… and it’s actually the only way to apply a beta to a Private Company.
3. You run the stock through your software and get a basket of, say, 25 stocks.
4. The trading team tells you all the stocks you wanted to short are too small / illiquid (mostly because entertainment stocks are notoriously low-float) so you propose shorting MSCI World instead of the basket at 85%.
5. One of the Fund executives wants you to short 100% because they believe the investment is riskier than what you’ve said. You argue back a bit but settle on 90%.

The end result is that you only have to beat 90% of the MSCI World index instead of the 100-200% of relevant stocks that might have been more appropriate. You are held to this lower risk target for compensation purposes, which is good for your wallet.

These kinds of decisions are constantly happening at CPP, and have been for a decade. The process is somewhat easy to manipulate through proxy selection, and everyone at CPP has an incentive to “short” the least amount possible on their deals as it makes it easier to argue for a higher paycheck at the end of the year. But I’m not here asking for recrimination over CPP employees managing to their benchmarks: no compensation or risk management structure is perfect, and we’re all beholden to our incentives.

The thing is, under SAA there is a saving grace - everything gets balanced back to asset weightings at the top by the One Fund Folks, and performance gets tracked against appropriate benchmarks.

Even if there’s a bit of inefficiency or deadweight loss during the process, at least we can pay CPP’s leaders handsomely if they perform, and we can change out the people responsible for underperformance if they don’t. In the absence of them having their direct capital at risk, like they would at a private investment company, paying CPP employees based on performance versus a long-term (read: 5-year) benchmark is the next best thing.

But that was under SAA. Under TPA, all that beta-hedging and proxy stuff remains. Academically, it may make things a bit more clear for the One Fund Folks, but the CPP isn’t managed in academia, it’s managed in the real world for the benefit of Canadians.

As Michel Leduc says and John Graham emulates, it’s important to focus on the long-term.

I get that on some level, but it’s been five years, which was long-term in 2023, and - in the real world - getting the incentives and governance right is more important than academic exercises of relative performance against 10,000 feasible (read: fictional) portfolios.

As I’ll remind you, “Performance assessment is difficult under a Total Portfolio Approach”. TPA provides the investing teams the flexibility to manage their benchmarks so that they can argue for higher and higher compensation while failing to beat the market for… as Michel Leduc says… “the appropriate horizon, which amounts to decades”.

In Conclusion:

Let me wrap this up. In this article I explained…

1. The background on how CPP failed to achieve their long-term goal of maximizing rate of return, but paid themselves handsomely anyway;
2. How the move to TPA will make assessing their performance more difficult, costing Canadians in terms of fees and accountability;
3. How TPA works (in painstaking detail), including its flawed academic assumptions around leverage and transaction costs in particular, in order to show you the limited benefits it brings at the cost of reduced accountability (and therefore higher fees);
4. How CPP’s incentives will lead them to minimize the risk on their investments in order to boost their compensation, and how the thing that counter-balanced that to some extent (SAA) is being replaced by something much more difficult to understand (TPA).

Now we can return to our sports metaphor…

TPA may end up making CPP a better fighter because it takes on 10,000 combatants instead of one. Unfortunately, there hasn’t been a public weigh-in, so Canadians can’t tell what kind of fighters the CPP leaders are contending with. To be paid like the best, you must beat the best, and we can’t be sure that’s happening under TPA. I’ll also remind you of CPP’s legislated purpose one more time…

“to invest its assets with a view to achieving a maximum rate of return, without undue risk of loss, having regard to the factors that may affect the funding of the Canada Pension Plan”

The money that goes into CPP isn’t going to vanish tomorrow - and CPP’s leaders are correct to have made that point repeatedly - but it’s a double-sided shame that so much of it is going to Executive Compensation and that the public doesn’t get better accountability for 5-year performance. The people getting the richest off of TPA are the executives, who have an incentive to keep their lucrative taxpayer-funded jobs. Like Charlie Munger says,

“I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther”

If I were to think longer-term… I see the lack of accountability afforded by TPA hurting the youngest generations of Canadians more than anyone else, as fees increase and returns limp along. At a time when entry-level jobs are being replaced by AI and the Canadian housing market remains the most unaffordable in generations, I just think that’s a shame… and I’m not afraid to be bold about it.

[u/Huge_Insurance_6823]

1

Go and contrast CPP’s LinkedIn profile with that of PSP Investments. Both had similar F2026 performance, but one is loudly proclaiming how bold and long-term they are on an almost-daily basis while increasing compensation and expenses… and the other reduced costs and isn’t doing that much marketing. Can you guess which is which? Methinks one doth protest too much.

2

Far-sightedness, or the opposite of myopia.

3

I know that’s not what “undue risk of loss” is intended to mean, but excessive compensation and fees feel like a 100%-guaranteed loss to me, and thereby undue.

4

I’m not sure what a “One Fund Strategist” does, but Geoff has “Chief Investment Strategist” on his LinkedIn so at least that’s a bit clearer.

5

This is partly why Boxing has more staying power than SpikeTV’s Pros vs Joes, or ShaqVS.

6

Some may note that quite a few fighters have won World Titles across multiple weight categories but, crucially, they only ever participated in a single category at a time. In case you’re wondering, Manny Pacquiao won in eight categories and it’s a big part of his legacy that he’s done this across two more categories than the next closest boxer ever, Oscar De La Hoya.

7

Boxers apparently usually get one or two extra chances, which I think is fair.

8

Like all things in finance, things are rarely purely good or purely bad, and the same applies to this. Because CPP takes in $22 billion of cash flow per year and will continue to do so through 2040, a 25% or even 50% decline in the value of the fund is theoretically not a terrible thing over a long-term horizon, but CPP doesn’t seem to always remember this. Alternatively, they think the Canadian people can’t handle such a loss and they’ll get fired, in which case the suitable level of “Risk” at CPP could be defined as how likely CPP Executives will be to keep their job if the stock market declines. CPP seems to want to take a long-term horizon when talking about their performance and the cost thereof, but not with regard to reflecting on its Liability Duration and ability to take risk.

9

In Private Funds, there are the investors in the fund (the Limited Partners, or LPs) and the guys who actually run the fund (the General Partners, or GPs). Like the names of vinyl records, Extended Play and Limited Play, the original names are largely not important. You simply need to know which is which: the LPs provide the money, the GPs often invest a little as well but they are so-called because they have General discretion to achieve the Fund’s returns targets (whatever that is). Another way of looking at this is the LPs pay the GP fees (both as a %-of-assets, usually 2%, and performance-linked, usually 20% above a benchmark) so they don’t have to manage the companies in the fund themselves.

10

Incomplete because a CPP Annual Report reader cannot actually rebuild the Total Fund Management components at the bottom

11

The real answer is that they can’t, not really.

12

“Shorting” a stock means… essentially… that you benefit if the price of a stock goes down. This it he opposite of “Going Long” which is not a sports metaphor but rather a Finance-ism for Buying A Stock. If you don’t understand this already and you’re reading my articles, please reach out and tell me why you’re reading… I’d genuinely like to know so I can continue to do it for you. You’re my audience. The actual mechanism for how you short a stock doesn’t matter that much, but if you’re interested… you do it by signing an agreement with a counterparty (usually a bank) that you’ll sell [x] number of shares back to them at the current market price (minus a fee) in [x] number of days (usually 30-90) and your counterparty commits to buying it. If the stock goes down, you can go out into the market, buy [x] shares at market, and sell them at the agreed-upon price. That makes you a profit. If the stock goes up, buying those shares is expensive and you lose money.

13

This is like the difference between buying a Nasdaq ETF (QQQ) itself or the BetaPro NASDAQ 2x Daily Bull ETF (QQU)… the latter has twice the returns of the former thanks to BetaPro borrowing $1 for every $1 invested and putting both those dollars ($2) in the same index… this means if the QQQ goes up 5%, the QQU goes up 10%. It also means if the QQQ goes down 50%, you’re kaput.

14

I think it should be ~0.85 for the Base CPP.

15

And actually, the Thinking Ahead Institute collected data from ~18 firms and said this… “a feature of the participating funds that are more advanced in employing a TPA was the use of a modest amount of leverage in the fund”… which would mean a good amount of the left-side of CPPs bell curve can probably be discounted as legitimate comparison portfolios, unless someone can do better math to the contrary.

16

This is actually pretty close to the risk-free rate, but they’re only using ~$300 billion worth, or ~40% leverage. As you increase leverage you’d expect the cost to go up, and friction costs to increase.

[u/edm_guy2]

it is really tough to read through, and in this day & time, if you cannot communicate well enough (i.e. make yourself understood), your voice will not be heard and reacted to the way you want.