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Should our CPP savings go up in smokes?

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Discussion of push by Canadian Medical Association (CMA) to get the Canada Pension Plan (CPP) investments out of the tobacco business. I do not have a strong position on the subject matter. What concerns me is the motivation behind the chair’s position on retaining full investment flexibility to ‘protect’ the mandate of CPP. Decisions made without consideration of factors beyond the straight forward objectives often lead us into trouble.

For example, in the name of profit maximisation, a company may pollute a river since after all it is built for profit not environment stewardship. Likewise, in the name of maximum return and flexibility an investment plan like CPP can act without regard to social morals, impacts of investment choices and the large role towards a positive society and economy that a $75 Billion+ investment fund can play.

*****Full Story*****from the Toronto Star

Should our CPP savings go up in smokes?

JENNIFER WELLS

It would appear that John MacNaughton is trying most diligently this season not to be seen as the man utterly out of step with what’s in, and what’s out.

MacNaughton is the president of the Canada Pension Plan Investment Board, and as the near-autumn leaves preeningly commence their transformation to fall colours, he has embarked upon a coast-to-coast road show keeping Canadians informed of the performance of the CPP, also known as your money.

Having made four western pit-stops, MacNaughton is headed next to Toronto (Oct. 7 — mark it on your calendar) and thence to St. John’s and other Atlantic destinations. This is the public’s chance to query the board’s policies re: investing what is currently a $73 billion pot.

Granted, the CPP tour doesn’t have quite the wattage of the film festival or other social scenes. The last time board reps hit the road, two years ago, just six people attended the meeting in Saskatoon, and that was in the pleasing month of June. Barely more than 100 made the pilgrimage to the Toronto gathering.

Perhaps attendance numbers will pop this year, buoyed by a fashionable controversy. To wit: the decision taken last month by the Canadian Medical Association to “implement a detailed advocacy plan” to push the government to push the CPP out of the tobacco business. The association wants to see an amendment to the Canada Pension Plan Investment Board Act, one that would prohibit investments in the tobacco industry.

Some may see this as a no-brainer. Cigarettes bad. Ergo, the husbanded pension monies of Canadians should not be used to support big tobacco.

MacNaughton advises, in a letter posted on the investment board’s Web site, that he is “categorically opposed” to such a proposition and urges Canadians to take a broader prospective.

“Defined benefit pension plans, like the CPP, have a single purpose,” he writes. “Their reason for being is to pay the pensions promised to their retirees. Pension funds are not vehicles for advocacy groups to advance their objectives, however worthy.”

Lest anyone misconstrue, MacNaughton takes pains to make it clear that on a personal level, his heart is with the soldiers in the fight against the tobacco companies and, as he phrases it, “the illnesses their products cause.” He notes that he has been both a financial supporter of the Non-Smokers’ Rights Association for almost three decades (including serving for a time as an honorary director), is himself a cancer survivor and served as vice chair of the Princess Margaret Hospital Foundation for five years as it raised monies to fund cancer research. “Emotionally, I am with the doctors 100 per cent in their desire to marginalize tobacco companies.”

The job of the investment board, however, is to “maximize investment returns without undue investment risk.”

To cede to the wishes of the medical association could, implies MacNaughton, affect the long-term sustainability of the CPP. “Let’s not get on a slippery slope that puts at risk the retirement income security of the millions of Canadians who are counting on the Canada Pension Plan.”

Since the creation of the investment board in 1997, CPP plan members have become shareowners, fractional investors in bonds and equities, the list of which can readily be viewed on the board’s Web site (http://www.cppib.ca). As we all well know, the years since have been marked by a blossoming of social/ethical investing, which in MacNaughton’s interpretation is a swamp that must be avoided.

Or should it?

Is it good enough for the investment board to proclaim that “screening” companies on the basis of any criteria beyond investment criteria — making exceptions only for companies engaged in unlawful activity or engaging in business with countries with which Canada does not have “normal” relations — is an exercise in which it will not engage? Or should the legislation that sets the board’s mandate be amended?

There’s an interesting bit of history to look to. Four years ago, a bill requiring the California Public Employees’ Retirement System and the state’s teachers’ retirement system to divest their tobacco investments passed the California State Senate but did not ultimately clear the state assembly. The employees’ pension fund, colloquially known as Calpers, is a massive $163.5 billion (U.S.) juggernaut that, like the CPP, pays benefits based on actuarial projections of death and mortality. Like the CPP, Calpers must look prudently to a long-term investment horizon.

Calpers bills itself as a catalyst for so-called sound corporate governance, and in fact has been a leader in asserting that shareowners, and not just management and corporate boards, play a big role in the governance of corporations. But its fiduciary responsibility, again like the CPP, is to maximize returns.

Advocates of the California bill, much like the position of the Canadian Medical Association and its supporters today, argued that public pension funds should not be investing in tobacco companies at the same time as the state was investing hundreds of millions of dollars annually to treat people with smoking-related illnesses. The bill died in September, 2000.

A month later Calpers announced that it was getting out of tobacco anyway, citing the legal assault on big tobacco — action that, said the fund, “could substantially reduce our shareholder value in tobacco.” Today, says a Calpers representative, the fund has a “tobacco-free portfolio.”

As does the state’s teacher fund.

Calpers finessed the situation in just such a way as to avoid the “slippery slope” John MacNaughton fears. Could MacNaughton have finessed the CPP situation differently?

As it stands, his open letter seems churlish, remarking that “[s]everal political and opinion leaders promptly lent their support [to the CMA], publicly chiding the CPP Investment Board for its tobacco investments.”

Perhaps if MacNaughton were to hear the louder voices of regular folk on Oct. 7 he might be pressed to seek out a more conciliatory response.

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Jennifer Wells’ column appears Saturday in the Life section and Sunday in the A section. E-mail her at jwells@thestar.ca.

Additional articles by Jennifer Wells

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