La caisse publishes its 2014 annual report

La Caisse de dépôt et placement du Québec today released its 2014 Annual Report. In addition to a detailed analysis of the financial results announced on February 25, the 2014 Annual Report provides a complete review of its activities.

Below are the highlights:

FOUR-YEAR PERFORMANCE

• 9.6% annualized return and increase in net assets by $74.2 billion as a result of net investment results of $67.2 billion and net deposits of $7.0 billion.
• Each of the four asset classes contribute significantly to la Caisse’s overall four-year return, which outperforms its benchmark portfolio.
• The returns of the eight main clients range from 8.9% to 10.2%.

2014 PERFORMANCE

• Overall return of 12.0% and rise in net assets by $25.7 billion as a result of $23.8 billion of net investment results and $1.9 billion of net deposits.
• The returns of the eight main clients range from 11.0% to 12.5%.

CONTRIBUTION TO QUÉBEC’S ECONOMIC DEVELOPMENT

• Strategy based on three main thrusts:
  • Seek out and act on the best business and investment opportunities by fostering the development of companies of all sizes in all regions;
  • Serve as a bridge between Québec companies and global markets by contributing to expansion projects; and
  • Stimulate entrepreneurship and strengthen the vitality of businesses, particularly through deployment of the Innover. Agir. initiative.
• Strong growth in la Caisse’s new investments and commitments in Québec, which total $11.1 billion over four years, including $2.5 billion in 2014.
• A $6.2-billion increase in la Caisse’s assets in Québec in 2014, bringing the total to $60 billion, with $35 billion invested in the private sector (p. 61).

RISK MANAGEMENT

• Absolute risk of the overall portfolio kept at a moderate level, namely 23.9% of net assets, versus 24.3% as at December 31, 2013. This decrease is due primarily to the Global Quality Equity portfolio and better diversification of the Infrastructure portfolio (p. 50).
• Active, rigorous management of credit, concentration, counterparty and liquidity risks:
  • $52 billion in liquidity as at December 31, 2014, which enables la Caisse to respect potential commitments, even in the event of a major market correction;
• Sustained management of la Caisse’s liabilities, which totalled 17% of gross assets as at December 31, 2014, a level practically unchanged since the 2013 level established in accordance with IFRS.

COMPENSATION

Review of the features of the compensation program that came into effect in 2010:

Main objectives

• Pay for performance by taking into account returns generated for clients and a sustained performance over several years.
• Offer competitive compensation to attract, motivate and retain employees whose expertise enables la Caisse to reach its strategic objectives.
• Align the interests of employees and clients over the long term.

Implementation and application

• Rigorous benchmarking of reference markets by a recognized firm:
  • According to an assessment done by Towers Watson in 2014, total compensation of la Caisse’s employees is in the 33^rd percentile in relation to reference markets for a 9.6% annualized return over four years;
• At the request of the Board of Directors, validatation of the fair application of the compensation program by Hugessen Consulting, an independent firm recognized for its expertise in the compensation of pension fund personnel (p. 104).
• Review of each employee’s performance based on a rigorous process to determine the incentive compensation to which the employee is entitled (p. 100).

Mandatory co-investment threshold

• To better align employees’ interests with the sustained long-term success of la Caisse, a significant portion of the total incentive compensation of some groups of employees is deferred over a three-year period.
• To remain at the forefront of the industry’s best practices, the minimum thresholds that must be paid into a co-investment account were increased significantly in 2013 for employees with a direct influence on La Caisse’s organizational and financial performance:
  • At least 55% of the total incentive compensation of members of senior management (up from 40%) – or more than half of their incentive compensation – thereby strengthening the alignment of officers’ interests with those of clients’ and making this measure even
    more stringent than current industry practices;
  • 35% of the total incentive compensation of Senior Vice-Presidents, Vice-Presidents and intermediate and senior investment employees (up from 25% before 2013); and
  • 25% for other high-level managers and professionals.
• The deferred amounts to be paid in 2017 in respect of 2014 will be increased or decreased according to la Caisse’s average absolute overall return during this period.

Incentive compensation

• The purpose of the incentive compensation program is to compensate a sustained performance over a four-year period.
• Taking into account incentive compensation, the total compensation of la Caisse’s employees in 2014 was below the median of the reference markets (with the 100th percentile representing the highest compensation), for an annualized return of 9.6% over a four-year period, corresponding to $2.2 billion of value added versus the benchmark portfolio (p. 101).
• The total incentive compensation paid in 2015 for the period ended December 31, 2014, was $39.9 million (including senior management).
  
• This year, as part of the incentive compensation program, employees (including senior management) deferred $20.6 million until 2017.
• The incentive compensation co-invested under the incentive compensation program introduced in 2010 was paid in 2014, pursuant to the conditions of the program and the tax rules in effect. The amounts co-invested in 2011 by the five most highly compensated executives who report directly to the President and Chief Executive Officer are provided in Note 1 on page 122 of the 2011 Annual Report.

Compensation of the President and Chief Executive Officer

Base salary and direct compensation

• At his request, Mr. Sabia has received no salary increase since he was appointed in 2009. His base salary remained unchanged in 2014 as it will in 2015.
• The direct compensation paid to Mr. Sabia for 2014, including base salary, incentive compensation and perquisites, remained unchanged from 2013 (Table 44, p. 109).

Incentive compensation and co-investment

• In accordance with policies that emphasize achievement of la Caisse’s business objectives and its performance, this year the Board of Directors is of the opinion that “Mr. Sabia performed exceptionally well in the past four years, exceeding his objectives by a wide margin” (p. 106).
• Mr. Sabia waived any form of incentive compensation for 2009 and 2010; accordingly, he did not participate in the co-investment program during those years. In 2014, he received his first deferred incentive compensation amount, which was based on the amounts co-invested in
  2011 and la Caisse’s solid performance over five years.
• Of his 2014 incentive compensation, Mr. Sabia was paid $600,000 and elected to defer $1.36 million to the co-investment account. This amount will be increased or decreased according to la Caisse’s average absolute return over the three-year period ending in 2017.
• In spite of this superior performance, direct compensation paid to the President and Chief Executive Officer, including base salary, incentive compensation and perquisites, was 33% lower than the potential direct compensation paid for superior performance by the reference
  market, which is made up of his peers at eight large Canadian pension funds. There is a difference of almost $1.1 million between the direct compensation paid to the President and Chief Executive Officer of la Caisse and the reference market (Table 47, p. 112).

Pension plan and severance pay

• When Mr. Sabia was appointed, he waived membership in any pension plan for the duration of his mandate. He also waived any severance pay.

EXPENSES

• In 2014, the ratio of expenses to average net assets was 16 cents per $100, placing la Caisse among the leaders in its management category.
• Expenses cover operating expenses, including compensation and external management fees.

RESPONSIBLE INVESTMENT

• La Caisse’s Policy on Responsible Investment has three main thrusts:
  • Integration of environmental, social and governance (ESG) criteria into its analysis of investments and associated risks (p. 79);
  • Shareholder engagement (p. 80 to 82); and
  • Exclusion of securities from its portfolio (p. 82).
• In 2014, various actions were taken under this policy. For example:
  • La Caisse exercised its right to vote on 47,859 proposals in connection with 4,679 shareholder meetings (p. 78); and
  • It took part in various initiatives in 2014 and organized a conference on academic research concerning responsible investment in Québec, as part of the international conference held in Montréal by the Principles for Responsible Investment.

The electronic versions of the 2014 Annual Report and the 2014 Annual Report Additional Information are available at the following addresses:

www.cdpq.com/sites/default/files/medias/en/nouvelles-medias/documents/ra2014_rapport_annuel_en.pdf
www.cdpq.com/sites/default/files/medias/en/nouvelles-medias/documents/ra2014_renseignements_add_en.pdf

ABOUT LA CAISSE DE DÉPÔT ET PLACEMENT DU QUÉBEC

La Caisse de dépôt et placement du Québec is a long-term institutional investor that manages funds primarily for public and parapublic pension and insurance plans. As at December 31, 2014, it held $226 billion in net assets. As one of Canada’s leading institutional fund managers, la Caisse invests globally in major financial markets, private equity, infrastructure and real estate. For more information: www.cdpq.com.