DBRS Morningstar Confirms CPP Investments at AAA and CPPIB Capital Inc. at AAA and R-1 (high), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Canada Pension Plan Investment Board (CPP Investments or the Fund) at AAA. CPP Investments is the federal nonagent Crown corporation responsible for managing the assets of the Canada Pension Plan (CPP or the Plan). DBRS Morningstar also confirmed CPPIB Capital Inc.’s Canadian Short-Term Promissory Notes, U.S. Commercial Paper Notes, and Euro Commercial Paper Notes programs at R-1 (high) and CPPIB Capital Inc.’s Medium-Term Notes at AAA. All trends are Stable. DBRS Morningstar notes that the ratings on the short-term note programs and long-term notes are predicated on the unconditional guarantees provided by CPP Investments on issuances. Furthermore, the strong ratings primarily reflect CPP Investments’ exclusive legislated mandate to manage CPP assets (including the legislative protection entitling CPP Investments to retain at all times assets that have a fair market value not less than its liabilities, including the liabilities under the guarantees in respect of debt issued by CPPIB Capital Inc., its robust liquidity position, its low recourse debt burden, and the strong fundamentals of the Plan.

In December 2016, the Canada Pension Plan Act, the Canada Pension Plan Investment Board Act, and the Income Tax Act were amended to increase the amount of retirement pensions and benefits that will be paid from contributions made after 2018. Starting in January 2019, CPP Investments received and invested its first transfer of funds for the additional CPP. Although all assets are held by the Fund, contributions, benefits, and assets for the additional CPP will be accounted for separately from the base CPP. Investment returns and benefits from the contributions made at the rates established before 2018 are managed through the base CPP account, while investment returns and benefits stemming from the increased contributions are managed through the additional CPP account.

The base CPP account and the additional CPP account delivered strong net returns in F2022 of 6.9% and 2.8%, respectively. On an aggregated basis, the total Fund earned a net return of 6.8%, outperforming the aggregated Reference Portfolio’s return of 4.7% by 2.1%. The Fund’s return was largely driven by strong performance in private and public equities, amid ultra-low interest rates and strong global equity markets for most of the fiscal year. The aggregated Reference Portfolio's returns were mainly driven by its higher asset allocation to global equities. The Fund generated net income of $34.4 billion, which, combined with the $7.7 billion in net contributions received, increased the Fund’s net assets to $539.3 billion, corresponding to approximately $527.0 billion in net assets for the base CPP and $12.0 billion in net assets for the additional CPP.

Recourse debt, consisting of commercial paper (CP) outstanding and long-term debt, ended F2022 at $44.2 billion, or 7.6% of adjusted net assets, up from 6.8% as at F2021. There was no CP outstanding as at F2022. In June 2022, the Fund increased the authorized limit on unsecured debt to an aggregate principal amount of $60 billion outstanding while maintaining the $15 billion limit on outstanding unsecured debt with a remaining term of less than one year. DBRS Morningstar expects that recourse leverage may continue to increase over the near term; however, overall recourse debt is expected to remain low, providing considerable room for cyclical fluctuations in asset values.
DBRS Morningstar notes that the Fund meets the DBRS Morningstar criteria for CP liquidity support outlined in the Appendix section in the “Rating Canadian Public Pension Funds & Related Exclusive Asset Managers” methodology. The Fund’s liquidity position remains sound, with sufficient same-day available funds equal to at least five business days of upcoming liabilities and discounted assets equal to the remaining maximum authorized CP program limit. It is also consistent with DBRS Morningstar’s policy on backup liquidity support for pension plans, and it provides considerable short-term financial flexibility.

In addition, the board approved Strategy 2025 in F2019, which focuses on adopting a global investment approach, including increasing the Fund’s allocation to emerging markets, using more technology and data in its investment decisions, and furthering talent and culture at CPP Investments. Because CPP Investments continues to place more emphasis on risk management, it established a new role of chief financial and risk officer in F2018, formally constituted a Risk Committee of the board in F2019, and continued to refine its integrated risk framework in F2020 and F2021.

In accordance with the CPPIB Act, CPP Investments undergoes a Special Examination of its systems and practices by an independent examiner every six years. Deloitte LLP completed the most recent examination in February 2022 in which a clean opinion was provided, concluding there were no significant deficiencies in the systems and practices examined.

In February 2022, CPP Investments announced its investment approach to reaching net zero of greenhouse gas emissions across all scopes by 2050. CPP Investments believes that directing the portfolio to net zero is in the best interest of contributors and beneficiaries of the CPP and is in line with its mandate of maximizing returns without undue risk of loss. In October 2021, CPP Investments appointed Deborah Orida as the inaugural chief sustainability officer (CSO), who is responsible for its approach to environmental, social, and governance (ESG) matters. The CSO works closely with the CEO and CIO to ensure that CPP Investments delivers on its commitment to reach net zero by 2050.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Canadian Public Pension Funds & Related Exclusive Asset Managers (April 26, 2022), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577