Source: The Canadian Press

At the time of the commercial paper crisis in 2007, risk management at the Caisse de dépôt et placement du Québec was “ineffective” and lagged behind “market practices, an internal report by accounting firm PricewaterhouseCoopers says.

The May 2008 document obtained by The Canadian Press said the investment vehicles became so complex “that the fund’s risk management group couldn’t (keep up with) them.”

According to PricewaterhouseCoopers, the implementation of a sound risk management culture was “inhibited” by the autonomy of investment teams and the focus on achieving results by individual portfolios.

In addition, the group spent a “disproportionate amount of time” trying to solve problems related to poor data quality and therefore had limited time to measure and analyse risk.

Several members of the risk management group were also overqualified for this work, which led to a high turnover of staff.

It could take up to seven weeks between the measurement of a risk and communication of the information to the persons concerned.

Worse yet, the measure of “market risk” was based on assumptions “inconsistent with industry practices.” Moreover, the scope of stress tests, to detect the extreme risks, was not as comprehensive as in other large pension funds.

Parti Quebecois MP Jean-Martin Aussant regretted that the report’s recommendations were not implemented before the financial crisis of September 2008, which shaked the Caisse.

“They have received the report before mid-year and the adjustments were not made at all at year-end,” he said during a telephone interview.

“The year 2008 was catastrophic with $40 billion in losses for the fund. I totally agree that there are $30 billion that were proportional to market losses, but the fund still lost $10 billion more than all its peers. This report therefore does not appear to have been applied with eagerness.”

The recommendations of PricewaterhouseCoopers were originally to be implemented over three years, but when Michael Sabia became president and chief executive of the Caisse in the spring of 2009, the period was shortened to 18 months, spokesman Maxime Chagnon said.

With the help of consulting firm McKinsey — whose work had cost some $10 million — the Caisse was able to implement its new policy on risk management in nine months, Chagnon said.

“In all, 30,000 hours of work have been devoted to this issue,” he said in an interview.

Chagnon said there are now four vice-presidents in charge of risk management in sectors of fixed income, equity markets, private equity and real estate.

The Caisse must still find a permanent replacement for Susan Kudzman, who officially left her job in May as senior vice president and head of risk following a long sick leave. She had been in place since 2005.

The PricewaterhouseCoopers report has been submitted to a parliamentary committee of the Quebec national assembly, which had made the request in May.

Canada’s largest pension fund lost more than $5 billion because of its massive investment in asset-backed commercial paper.