[BRIEF NOTE] A brief look at the Caisse

[rfmcdonald]

Bertrand Marotte and Rhéal Séguin's article "How did it all go so wrong at the Caisse?", in today's Globe and Mail, takes a look at how Québec's pension fund got so badly off-track this past year--down nearly $C 40 billion, almost a quarter of its previous value--and what this might mean.

The Caisse de dépôt et placement du Québec will face intensified scrutiny in special government hearings into the investing strategies and risk management practices that led to its stunning $39.8-billion loss.

The Caisse, Canada's biggest public pension fund manager, racked up the worst performance in its 43-year history, posting a return of minus 25 per cent that left the once high-flying fund lagging its rivals.

The median return of large Canadian pension funds for 2008 is minus 18.4 per cent.

The Caisse was badly hit by exposure to asset-backed commercial paper, taking $4-billion in writedowns in 2008 related to its $12.8-billion portfolio, and was also hammered by its extensive currency hedging activities, used to cover its global investments in real estate, infrastructure and private equity.

But the losses confirm the worst fears of many Caisse watchers that the institution's risk management practices may not have been up to scratch, and led to big bets on complex derivatives and untested financial instruments that magnified its losses relative to those at other funds.

Mr. Perreault denied that, saying the sudden and dramatic drop in the value of the Canadian dollar by 20 per cent last year had a major negative impact on the Caisse's foreign exchange risk hedging.

Mr. Perreault said the pension fund took no undue risks and is in stellar company with fellow big-time losers on collapsing global markets like Warren Buffett.

"Warren Buffett lost 30 per cent last year and there are others that lost incredible amounts," Mr. Perreault said at a news conference to discuss the record loss.

The Quebec government also said it would make sweeping changes to the leadership, including appointing new board members and a new chairman to replace Pierre Brunet. A new president and chief executive officer will also be named, Finance Minister Monique Jérôme-Forget said.

The Caisse has been under fire for months now as it struggles with the fallout from its riskier investment strategies as well as turmoil in its senior ranks. Its much anticipated big loss for 2008 and management style were hot issues in last year's provincial election campaign, and its role as a key player in the Quebec economy continues to be the subject of fierce debate.

The Caisse de dépôt et de placement du Québec has played a central role in the Québec economy when it was created in 1965, as an organization responsible for the investment of the couple dozen institutional pension funds of Québec. Since its creation, the Caisse has stood as a major symbol of the post-1960 Quiet revolution of Qubec tha saw--among other things--the growth of a prosperous Francophone business class with access to investment funds, many of which have been provided by the Caisse according to a long-standing policy of favouring investments within Québec, even if they aren't the most economically productive investments. This traditional mandate changed after 39 years.

The Liberals have been criticized by opposition parties for changing the pension fund's mandate in 2004, putting the quest for "optimal" returns ahead of the Caisse's traditional role as an economic development tool. The changes, critics say, led the Caisse to take oversized risks with Quebeckers' savings in order to increase its annual return. Now, many of the 25 pension and insurance funds whose assets are managed by the Caisse could be forced to hike premiums or cut benefits to stay afloat.

Mr. Charest scoffed at accusations that his government bears responsibility for the fiasco, insisting that all pension funds lost money in 2008 and that the Caisse's long-term performance compares favourably with other pensions funds.