Shining A Light On Canada’s Top Ten?

Matt Scuffham of Reuters reports, Canada’s top 10 pension funds tripled in size since 2003:
Canada’s biggest 10 public pension funds now manage assets worth more than $1.1-trillion, having tripled in size since 2003, according to a study published by the Boston Consulting Group on Thursday.

The funds have expanded rapidly in recent years, pursuing a strategy of directly investing in assets globally with an emphasis on real estate and infrastructure projects such as bridges, tunnels and roads. Some pension experts say this approach has helped them mitigate the impact of volatility in global equity markets and challenging economic conditions.

About one-third of the top 10 funds’ investments are in alternative asset classes such as infrastructure, private equity and real estate, according to the study, which was commissioned by the top 10 funds.

“The top 10 have shown impressive growth in investment capabilities and scale to manage the realities of a post-financial crisis world,” said Craig Hapelt, partner and managing director at BCG.

“Their investments also have a broader positive impact on Canada’s prosperity,” he added.

By directly investing, the Canadian funds are able to manage assets themselves, a move the funds say results in lower costs. They have also built up sufficient scale over the past two decades to acquire capital-intensive assets such as infrastructure.

At the end of 2014, the top 10 funds now manage assets worth the equivalent of over 45 per cent of Canada’s gross domestic product (GDP), the research showed.

However, the funds face increasing economic headwinds including falling energy prices. Separate research by RBC in November revealed they had suffered a second consecutive quarterly fall in the value of their assets for the first time since the 2007-09 financial crisis.

The 10 largest funds include the Canadian Pension Plan Investment Board (CPPIB), the Caisse de dépôt et placement du Québec (Caisse) and the Ontario Teachers’ Pension Plan Board, the three biggest Canadian funds which are also in the top 20 public pension funds globally. Seven of the funds are among the top 30 infrastructure investors in the world.

Recent investments by Canadian pension funds include the $2.8-billion acquisition of the operator of the Chicago Skyway toll road by CPPIB, Ontario Teachers and the Ontario Municipal Employees Retirement System and the $7.5-billion purchase of an Australian electricity network by a consortium including the Caisse.
The Ontario Teachers' Pension Plan posted a press release on its website, Among the most successful in the world, the total value of Canada’s ten largest public pension funds has tripled since 2003:
According to  a new study conducted by The Boston Consulting Group (BCG), Canada's ten largest public pension funds (Top Ten) continue to drive impressive investment returns and remain key players on the global stage during a period of challenging economic conditions both domestically and in major markets globally. The funds now manage over $1.1 trillion in assets, which is the equivalent of over 45 per cent of Canada's GDP. An infographic highlighting key results and investments is available here.

"The Top Ten have shown impressive growth in investment capabilities and scale to manage the realities of a post-financial crisis world," said Craig Hapelt, a Toronto-based partner at BCG. "Not only do the funds represent an important aspect of Canada's retirement income landscape, but their investments also have a broader positive impact on Canada's prosperity."

The study indicates that three pension investment funds[1] are listed among the top 20 public pension funds globally. Additionally, the Top Ten remain prominent global players in the alternative asset management industry, with seven funds[2] named among the top 30 global infrastructure investors and five[3] listed as part of the top 30 global real estate investors.

Top Ten funds important to Canada's prosperity

The Top Ten are a significant component of Canada's retirement income system, helping to provide financial security in retirement to over 18 million Canadians. Their total assets under management tripled between 2003 and the end of 2014 and 80 per cent of this increase in value was driven by investment returns.

As investors behind several Canadian landmark assets and flagship companies, the Top Ten have invested approximately $600 billion across various asset classes in Canada and directly employ almost 11,000 professionals. In addition to monetary contributions, the Top Ten are responsible for creating talent clusters in multiple Canadian cities – attracting Canadian talent currently working abroad or providing home-based talent with opportunities to gain global experience.

Investment strategy promotes portfolio diversification to maximize long-term returns

While each fund's strategy is designed to meet its unique mandate, the Top Ten similarly focus on creating well-diversified portfolios that align with the funds' relatively long-term payout profiles. Enabled by their scale, approximately one third (32 per cent) of the Top Ten's investments are in alternative asset classes such as infrastructure, private equity, and real estate in Canada and abroad. This figure contrasts to a less than 11 per cent allocation in alternative asset classes by most other Canadian pension plans.

Some of these investments include Canada's TMX Group, Ontario's Yorkdale Mall, and BC's TimberWest Forest Corporation and Brentwood Town Centre. Globally, the Top Ten have invested in such assets as ING Life Korea; Globalvia, a portfolio of infrastructure assets in Europe and Latam; Port of Brisbane, one of Australia's fastest growing container ports; Open Grid Europe, a gas transmission network operator responsible for approximately 70 per cent of Germany's total national shipping volume; and, Camelot Group, the UK's national lottery operator.

About Measuring Impact of Canadian Pension Funds Report

This is the second time that BCG has been commissioned to conduct this survey on behalf of the Top Ten. The study focused on the ten largest public sector pension funds (ranked here by size of net pension assets under management): The Canada Pension Plan Investment Board ($265 billion), The Caisse de dépôt et placement du Québec ($192 billion), The Ontario Teachers' Pension Plan Board ($154 billion), PSP Investments ($112 billion),The British Columbia Investment Management Corporation ($104 billion), The Ontario Municipal Employees Retirement System ($73 billion), The Healthcare of Ontario Pension Plan ($61 billion), The Alberta Investment Management Corp. ($50 billion), The Ontario Pension Board ($22 billion) and The OPSEU Pension Trust ($18 billion).

About The Boston Consulting Group

The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 82 offices in 46 countries. For more information, please visit
You can download Boston Consulting Group's second study on Canada's top ten pensions here. I covered the first study going over the benefits of the top ten pensions in June 2013.

This study is a continuation of the first one and it demonstrates how impressive Canada's biggest pensions are not just domestically but internationally, investing across public and private markets all around the world.

To be sure, the BCG study is a bit of public relations piece commissioned by Canada's Top Ten so let me carefully scrutinize it by going over some important points which are worth bearing in mind:
  • The growth of Canada's Top Ten since 2003 (after the tech bubble crashed) has been explosive and while a lot of this growth was fueled by strong gains in global stocks and corporate bonds, the bulk of the value added over public benchmarks came from private market investments like real estate, infrastructure and private equity (except for HOOPP which does invest in private markets but has delivered stellar returns primarily by investing like a multi-strategy hedge fund across public markets doing everything internally).
  • The key point in the press release Ontario Teachers' put out was this: 80 per cent of this increase in value was driven by investment returns. This seems quite high to me (thought it was more like 70 percent) but the point is that it's investment gains, not contributions which explain the explosive growth of Canada's Top Ten. This and many other benefits of DB plans are critically important to remember when we look at bolstering our retirement system by building on the success of our large DB plans. 
  • What else? Canada's Top Ten have roughly 30% of their assets in alternative asset classes like infrastructure, real estate and private equity in Canada and abroad. This figure contrasts to a less than 11% allocation in alternative asset classes by most other Canadian pension plans which explains why Canada's Top Ten are outperforming their domestic and international peers. It's not only the large allocation to alternative asset classes which explains this outperformance, it's the approach they use. Canada's Top Ten invest directly in real estate, infrastructure and private equity, saving a ton on fees
  • The main reason behind the success of Canada's Top Ten is their governance model which ensures no government interference and introduces a compensation scheme that pays senior pension fund managers at Canada's Top Ten extremely well so they can attract talent to bring public and private assets in-house. 
  • However, as I recently stated, the media loves overtouting the Canadian pension model and in doing so it often presents biased views of what the Top Ten are doing, especially in terms of direct private equity deals. Still, there's no denying the success of Canada's Top Ten which is why many public and private pensions are trying to emulate their approach.  
  • The main drawback of this BCG study is that it doesn't delve deeply into the diverse approaches Canada's Top Ten use to add value over their benchmarks. For example, I recently covered PSP Investment's global expansion discussing how the fund is going into leveraged finance. The report also doesn't discuss the benchmarks Canada's Top Ten use to gauge their performance in public and private markets, nor does it discuss how a few in the Top Ten are highly levered relative to their peers which could explain part of their long-term outperformance (it's not the only factor but it's a big factor). 
  • In other words, this BCG is more of a public relations study; it isn't a rigorous, comprehensive performance audit on Canada's Top Ten. To be fair, BCG and McKinsey are large consultants which are typically used by Canada's Top Ten for big studies but they're there to deliver a product which is shaped by the senior managers at these shops. The consultants' focus is on repeat business which is why they present findings in a favorable manner. They're not hired to rock the boat (that's my job!). 
  •  Although I welcome this new BCG study, I wish the Government of Canada would commission a new study on the governance at Canada's Top Ten which closely examines the various approaches they use to deliver their results, the benchmarks they use to gauge their performance in public and private markets and whether their benchmarks appropriately reflect all the risks they're taking to deliver these results and whether these risks justify the very generous compensation being doled out to their senior managers.
  • What else? We need to improve the communication at Canada's Top Ten and perhaps even legislate that board meetings will be made public on a dedicated YouTube channel just like CalPERS, CalSTRS and other large U.S. public pensions do. More transparency is needed on investments, benchmarks and how they're tied to compensation. 
I know, I'm dreaming but when we want to shine a light on Canada's Top Ten, we're better off looking at the good, the bad and the ugly, not just the good.

Having said this, I'm a huge supporter of Canada's Top Ten and would like to build on their success to improve our retirement system and propel Canada to the top spot in the global ranking of top pensions. There are plenty of pension fund heroes in Canada who quietly do extraordinary work, delivering solid long-term results and even though I'm on their ass constantly to improve their governance and hire a more diversified workforce, if we're ever going to introduce real change to Canada's Pension Plan, we have to build on the success of our large DB pensions.

There's another reason why I'm a big believer in our large DB pensions. The next ten years will be nothing like the last ten years. We need to prepare for lower returns, especially here in Canada where negative interest rates could be right around the corner. In this environment, you're better off having your pension money invested in Canada's Top Ten than in some crappy mutual fund which rakes you on fees and is vulnerable to the whims and fancies of public markets.

Below, Ron Mock, president and CEO of the Ontario Teachers' Pension Plan, discusses Teachers' investments in Asia and the shift to renewable energy investments on Bloomberg television. Great discussion, well worth listening to.

Also, Caisse CEO Michael Sabia discusses the Bombardier investment and 'evolution' in governance on Bloomberg television. I covered the Caisse's big stake in Bombardier a few weeks ago but didn't see this interview until today and it fits nicely here.