CPP forecasts highest real rate of return from emerging markets

Additional returns from active management will reduce overall investment expenses

The Canada Pension Plan (CPP), Canada’s largest public pension plan, forecasts that it will receive the highest real rate of return from investing in emerging markets up until 2025.

The CPP also forecasts that it will generate higher returns from active management which will reduce total investment expenses. “Total expected investment expenses of 1% are reduced by an additional rate of return due to active management of 0.8% for a net investment expenses assumption of 0.2% to reflect the expenses due to passive management,” states the Actuarial Reports on the Canada Pension Plan as at 31 December, 2015.

The February 8, 2017 Office of the Chief Actuary, Office of the Superintendent on Financial Institutions Canada report forecasts that the real rate of return before investment expenses that it will derive from emerging markets will be 5.7% in each of 2020 and 2025, compared to 3% in 2016.

On the other hand, it projects a real rate of return before investment expenses of 4.7% in each of 2020 and 2025 in the Canadian and foreign developed markets, compared to 2% in 2016 in these markets.

For 2020, the CPP projects real rates of return before investment expenses on marketable bonds of (0.5%), non-marketable bonds (0.1%), real assets 4.2%, and short term investments (0.4%).

It projects fixed income yields to rise in 2025 and forecasts real rates of return before investment expenses on marketable bonds of 2.7%, non-marketable bonds 3.2%, real assets 4.2%, and short term investments 1%.

In 2040 and beyond, the CPP plans to invest 8% of its total portfolio in Canadian equities, 41% in foreign developed markets, 6% in emerging markets, 19% in marketable bonds, 25% in real assets, and 1% in short-term securities.