Does Canada Have All The Answers?

On Thursday, The Brookings Institution will host an event in Washington, Fixing the U.S. retirement system – does Canada have the answers?:
In recent years, Canada has significantly expanded and improved its retirement income and pension system. The Canada Pension Plan (CPP), which provides Canadians with income security in the case of retirement or disability, has been expanded, and its defined benefit plans for government employees has managed to avoid many of the funding problems plaguing comparable U.S. plans. The country is also making advances in expanding coverage to moderate-and-lower income Canadians. But there’s still work to be done, particularly in improving efforts to target policies to low-to-moderate income workers.

How was Canada able to achieve this expansion, and is there anything in the Canadian experience that Americans can use to advance retirement system reforms in the United States? On November 2, the Retirement Security Project at Brookings will host an event with senior Canadian officials and American experts to discuss the Canadian system and its relevance to American policy debates. The event will be live webcast.
You can register for this event or webcast if you cannot attend here.

First, let me thank Hugh O'Reilly, President and CEO of OPTrust, for bringing this up to my attention on LinkedIn. Hugh will be attending this event and so will Jim Keohane, President and CEO of the Healthcare of Ontario Pension Plan (HOOPP).

I didn't receive my invitation for this event but registered to the webcast here.

Unfortunately, I don't see the US moving to the Canadian pension model anytime soon but if it did partially or fully privatize Social Security to adopt a similar CPP-CPPIB approach, it needs to ensure a few things first:
  • Get the mission statement right: What is the purpose of this new retirement system and how will the mission statement govern all activities at this new fund?
  • Get the governance right: Make sure the board overseeing this new pension plan is experienced, informed on all aspects (not just investments but HR, IT, etc.) and most importantly, independent. This board can then hire a CEO who will hire his or her senior team to carry out the day-to-day operations of this new pension. Most importantly, there can be no government interference whatsoever, and they need to get the compensation right to hire qualified staff able to bring assets internally and manage money at a fraction of the cost of outsourcing to external managers.
  • Get the risk-sharing right: If you look at the best pension plans in Canada, they have all adopted a shared-risk model which means higher contributions, partial or full removal of inflation-adjustments when the plan experiences a deficit or both. Investment returns alone will not be able to restore a plan's fully-funded status no matter how good the investment managers are. 
Now, there are a lot of other things that US plans need to get right, like lower their discount rate to estimate future liabilities which is still unreasonably high for many plans.

The biggest impediment for US plans to adopt the Canadian model is governance. I just don't see US public pensions doling out Canadian-style compensation packages to their public pension fund managers. It's never going to happen and there are powerful vested interests (unions, funds, etc) who want to maintain the status quo even if the long-term results are mediocre at best, especially compared to Canada's large, well-governed DB plans.

And by long-term results, I don't just mean performance, I mean funded status which Hugh O'Reilly and Jim Keohane emphasized in a joint op-ed they wrote last year. Long-term results matter but what ultimately matters most is a plan's funded status.

Now, it should be noted that Canada's large pensions have certain degrees of freedoms that their US counterparts don't have. They are piling on the leverage nowadays to take advantage of their pristine balance sheets which are a direct result of good governance, excellent risk management and to be truthful, a long bull market and investment policies that allow them to leverage their portfolio to improve overall risk-adjusted returns.

I also don't want to leave the impression that Canada's large pensions are perfect on the governance front and they can't learn anything from their US counterparts. This is pure nonsense.

Back in 2007, I did a study for the Treasury Board and can tell you in detail where Canada's large pensions can learn from the CalSTRS and CalPERS of this world. Things like better and more transparent benchmarks for private markets and better communication like public board meetings which are then on YouTube for everyone to see.

Canadians love boasting of how great they are in many activities, like education, healthcare, pensions, and hockey. My motto is simple: we can always be better.

So, does Canada have all the answers? Of course not but it has a lot of great insights and the establishment of a national pension hub will offer even more worthwhile insights on improving our pension system.

Can the US improve its retirement system based on Canada's experience? You bet and so can the UK which has one of the worst systems in the developed world.

I tell you, the UK needs to forget Mark Carney and hire Mark Machin to run a new national pension system akin to CPP and CPPIB. Every country needs to adopt the Canadian model but before doing this, they need to get the governance right.

Below, Mark Machin, CEO of the Canada Pension Plan Investment Board, discusses how they are navigating the global economy. You can watch this interview here. Listen carefully to Mark, we are lucky to have him manage the CPPIB.

And Healthcare of Ontario Pension Plan CEO Jim Keohane talks about why Canadian stocks, including energy, have a good long-term investment case. Keohane also tells BNN why HOOPP's loan to Home Capital was a "win-win" for both parties. You can watch this interview here.

Jim is humble, HOOPP made a killing on the Home Capital line of credit deal and it will likely outperform all its large peers this year for the simple reason that it fully hedges its currency exposure while others don't hedge (see here for a more detailed discussion). Next year will be a different story as I expect the loonie to get crushed.

Lastly, take the time to watch a great discussion on lessons from the Canadian pension fund model which took place last year featuring OTPP's CEO Ron Mock and the Caisse's CEO, Michael Sabia.

Canada doesn't have all the answers but it sure has top-notch pension fund managers who can offer great insights to US and other pension funds around the world.