Can Pension Funds Support Growth and Build a More Inclusive Economy?
Private equity firms have increasingly come under fire for actions that are making life more difficult and unaffordable, such as driving up the prices of single-family homes, closing hospitals that aren’t profitable enough, and laying off workers at companies they have purchased. New efforts by public pension funds are hoping to counter these bad practices and instead promote investments that benefit communities and workers.
Public pension funds have the ability to drive investment in our economy to promote shared prosperity while seeking competitive risk-adjusted returns. These funds represent over $6 trillion in capital, and are the collective retirement savings of millions of teachers, firefighters, nurses, sanitation workers, and other public employees who have earned these benefits through years of service. These funds are invested across the economy, in private equity, in real estate, and in public markets. The largest asset managers in the world rely on pension fund dollars to help fill their portfolios.
Recognizing this power, public pension funds are increasingly instituting policies to ensure that their money works for the people who contributed it, not against them. In line with the funds’ fiduciary duty to seek diversified, consistent, risk-adjusted returns for their participants, funds are thinking deeply about what prompts growth and prosperity. Some states are using their pension funds to invest in affordable housing or infrastructure, leveraging their capital to build the future workers hope to see. But one of the most powerful innovations is a new movement of public pension funds adopting workforce principles and requiring asset managers abide by them across their portfolio. Such principles—consistent with the fiduciary duty that fund managers have—promote investments that simultaneously maximize returns and worker well-being.
Private financial markets have grown rapidly over the past two decades and play an increasingly prominent role in the U.S. economy—and in the portfolios of institutional investors, including workers’ pension funds. Today, the private equity industry manages $11 trillion in assets, and companies owned by private equity employ about one out of every thirteen U.S. workers, or 11.7 million workers nationwide. Over half of the capital that private equity firms manage comes from public pension funds and other institutional investors. These large funds, such as the California and New York City public employee retirement system funds, invest the earnings of hard-working people who spent their careers in public service. The size of these pension funds is only expected to increase in the future. By requiring asset managers to adopt workforce principles across their portfolio to ensure that their workers are treated fairly and their rights are protected as a condition of receiving investments, pension funds are not only determining how their workers’ retirement savings are invested, but also ensuring that those investments create good jobs for other workers.
Why does this matter?
Private equity firms are focused on the short-term profits from any given deal. Public pension funds also seek competitive, risk-adjusted returns—but in addition to that, as universal owners, they are also incentivized to seek sustainable, long-term economic growth as aligned with their fiduciary duty.
The history of the private equity model has shown that while it can provide a good rate of return to investors, it also can have significant negative externalities for workers, communities, and the economy. When public companies are taken private, this can result in significant job losses and negatively impact whole communities. For example, when Toys R Us was bought by two private equity companies and eventually forced into bankruptcy in 2018, over 30,000 employees were laid off. The private equity firm Cerberus loaded up Steward Health Care with debt, running it into bankruptcy in 2024 and closing many of its hospitals. While this left many without access to care, the private equity company made over $800 million in profit. Some deals strip companies for parts, selling the land out from underneath a company’s buildings and leasing it back at exorbitant rates, as with Red Lobster.
Purchase of a company by a private equity firm can also lead to lower employment, lower wages, and lower productivity. Overall, this can lead to greater inequality, which will subsequently impact other parts of the portfolio through reduced economic growth, and—if the acquisition were funded with public pension fund dollars—may not benefit the very people funding the investments.
The push to make things better.
In order to promote not only better jobs for workers but also a better economic future for the country as a whole, public pension funds are increasingly requiring better treatment of workers across their investment portfolio. As long-term, fully diversified investors with commitments decades out, public pension funds recognize that a high-road approach toward workers can be an important tool to facilitate long-term positive returns (aligned with their fiduciary duty) that depend on overall GDP growth.
This is where the new principles being adopted by public pension funds for their private equity investments come in. These principles include industry standard wages, freedom of association, and other measures that support the workforce. The University Pension Plan of Ontario has identified inequality as a systemic risk, as they believe inequality can lead to instability and lower overall investment returns. Labor leaders, such as Sean McGarvey, Randi Weingarten, Gwen Mills, and Rebecca Pringle, have made a clear case that supporting good jobs encourages healthy returns and is therefore an advantageous strategy for investors. This perspective is supported by a large body of research.
First, research from MIT demonstrates that good jobs lead to better productivity and more competitive companies. Higher compensation can reduce turnover and increase productivity across industries, including airports, manufacturing, warehouses, and retail. Turnover can cost an employer between 5 percent and 95 percent of an employee’s annual salary, depending on the industry. Greater productivity is essential for economic growth, a key tool for pursuing higher returns.
Second, strong safety standards are crucial to not only worker health but also investment return. Injuries and unsafe practices can be expensive and lead to reputational risk. Research from California shows that putting worker safety first reduces employee injuries and costs, while buttressing the bottom line.
Third, pension funds often push for union neutrality since unionization can lead to better trained workers with lower turnover and higher productivity. Capital and infrastructure projects that use union labor have higher productivity and cost less, in part because of the higher skill level of the workforce.
Finally, adherence to high-road labor practices can lead to better performance in public markets as well. Just Capital, a research organization, has found that the companies they rank as having positive worker practices outperformed the market overall. This is confirmed by evidence that investments in compensation lead to long-term higher market returns. Implementing strong workforce principles can therefore advance productivity and profitability for both private and public companies.
For fully diversified, long-term investors such as public pension funds who touch all parts of the economy, higher productivity and lower inequality is a strong strategy to promote growth and protect future returns. Treating workers with dignity can help to achieve these goals.
Looking ahead.
Worker power and worker rights are not at odds with competitive risk-adjusted returns. They are self-reinforcing. As unions and pension trustees continue to advocate for workers in investment decisions, they are building a more sustainable economic foundation that benefits everyone. The choice is clear: pension funds can either perpetuate a business model that ultimately undermines their own portfolios, or they can champion an approach that recognizes workers as valuable assets whose wellbeing directly correlates with sustainable, broad-based economic growth. The latter path not only honors the legacy of the working people whose careers built these pension funds, but also helps ensure those funds remain robust for future generations of retirees.
This comment caught my attention for many reasons.
First, as public pension funds become larger and manage more assets across public and private markets, what role do they play, if any, in growing the economy and supporting workers?
Last month, I discussed how OMERS' economic contribution to Ontario grew to $15.3 billion, delivering stability and social value for members and communities:
A growing economic impact
The new report shows that OMERS activities contributed to:
$15.3 billion in provincial GDP (an 11% increase from 2023 and a 28% increase from 2020).
135,200 jobs across Ontario, including almost 40,000 jobs in rural communities.
Nearly $4.2 billion in combined federal and provincial tax revenue.
In total, more than 832,000 Ontarians - the equivalent of 1 in 11 households - benefited from OMERS activities in 2025.
Impact across all regions of Ontario
OMERS contribution to economic activity is felt across every region:
Greater Toronto Area: 71,500 jobs; $7.9B GDP contribution
Southwestern Ontario: 25,800 jobs; $2.7B GDP
Eastern Ontario: 16,800 jobs; $1.7B GDP
Central Ontario: 14,900 jobs; $2.4B GDP
Northern Ontario: 6,200 jobs; $0.6B GDP
And that's just OMERS. Imagine if we did a detailed study on the economic impact of all of the Maple 8 funds and how they contribute to the Canadian economy (if I remember correctly, it was done a few years ago).
Now, on to my second point, what is the economic impact large global pension funds, sovereign wealth funds and other large institutional investors have on the global economy?
It's huge, they provide stable, long-term capital and help public and private companies grow.
When these companies grow, they hire more people and the multiplier effect of all this activity on the global economy isn't trivial.
Third, what role can global pension funds and institutional investors play in public policy?
Here is the tricky part. In the US where public pensions report to state treasurers who have their own political agenda, there is more political interference in the decision-making process.
In Canada, our large public pension funds operate at arm's length from the government, they have independent boards who focus on the best interests of members.
There is no political interference but governments still maintain power (by nominating board members) and in extraordinary circumstances, can step in if they deem it necessary (think of the purge at AIMCo).
Having said this, all of Canada's large public pension funds take responsible investing very seriously and report to their members on activities related to it.
But responsible investing isn't the primary objective; rather it's a complement to investment activities to garner better risk-adjusted returns over the long run.
There are a lot of things I agree with the comment above and some things, I do not agree with.
They paint a mostly negative view of private equity, choosing Cerberus as an example, but that old way of managing assets is dead or on its way out.
If you look at what Pete Stavros at KKR is doing, they're literally forging a new path to capitalism, sharing profits with workers if they deliver and help add value to companies they acquire.
No doubt, private equity funds have a shorter investment horizon than pension funds but the smart ones extend if they can add value to their companies and reap bigger rewards.
Do pension funds have influence on private equity funds?
Yes, they do, but I wouldn't over-emphasize it.
KKR didn't implement its new model because public pension funds forced it to. They realized it makes great economic sense, aligning the interests of workers with their interest in adding value to companies they acquire.
But pension funds can make sure that private equity funds align with their interests as well.
For example, University Pension Plan of Ontario (UPP) states diversity is a systemic risk and they make sure all the public and private companies they invest with know their views.
So, at some level, global pension funds and other large institutional allocators have an influence, especially with smaller private equity funds.
Lastly, a big topic these days is the impact of AI on work. I tend to agree with a Harvard study that says AI doesn't reduce work, it intensifies it.
But pension funds investing with top venture capital funds are more privy to information on how AI will shape our economy, good and bad.
Do they have a role in supporting work, or will they invest in funds that destroy work?
Probably a mix of both if I am truthful.
The key thing I want to make clear here is that as pension funds get bigger and command ever more assets, policymakers will lean on them to help support the economy and if their objectives coincide, they will answer the call.
Those are just some of my reflections on pensions and public policy and how they can contribute to economic growth and and build an economy that supports workers.
Below, in this episode of Blue Skies, Erin O'Toole is joined by Jim Leech, former CEO of the Ontario Teachers' Pension Plan and a well-respected voice on business issues, to discuss the current debate about whether governments should mandate public pension plans like the CPP to invest more in Canada.
They also explore the development of the 'Canadian Model' for pension governance and why it has gained international acclaim. They also engage in a wider discussion of issues related to Canadian economic competitiveness and financial security for pensioners.
This discussion took place a year ago but it's well worth listening to it because Erin and Jim cover a lot.
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