Honoring a Canadian Pension Pioneer

The Canadian Business Hall of Fame recently welcomed four noteworthy companions and among them, Claude Lamoureux, the inaugural CEO of the Ontario Teachers' Pension Plan:
In recognition and celebration of their lifetime achievements, four exceptional business leaders will be inducted as Companions of the Order of the Business Hall of Fame by Chancellor David Denison during the 41st annual Gala Dinner and Induction Ceremony, taking place tonight at the Metro Toronto Convention Centre.

Each year, outstanding business leaders from across the country gather to celebrate and honour Canada's most distinguished leaders across all areas of business for their impact and enduring contributions to the economy and Canadian society.

The Inductees being recognized this year include:
  • Claude Lamoureux O.C., FCIA, Retired President & Chief Executive Officer, Ontario Teachers' Pension Plan
  • Chief Clarence Louie O.C., First Nations leader, Chief of the Osoyoos Indian Band
  • Stephen J.R. Smith, Chairman & CEO, First National Financial Corporation
  • Annette Verschuren O.C., Chair & CEO, NRStor Inc.
"The individuals being recognized have led remarkably accomplished careers, meeting the highest standards of leadership, ethics and dedication," said Mr. David Denison, Chancellor of the Order of the Business Hall of Fame. "We are pleased to welcome them to the Business Hall of Fame and to celebrate their contributions not only to Canadian business, but the country as a whole."

Since its inception in 1979, the Order of the Business Hall of Fame has been the highest honour of its kind in Canadian business. Each year, business leaders are nominated by their peers and chosen by an independent selection committee representing Canada's foremost business and academic institutions. The process is managed in its entirety by Lee Hecht Harrison Knightsbridge, the National Partner of the Canadian Business Hall of Fame.
You can see the inductees in the picture below:

Standing next to Claude Lamoureux on the far left is David Denison, the inaugural CEO of the Canada Pension Plan Investment Board and chancellor of the Order of the Canadian Business Hall of Fame.

Another noteworthy inductee is Stephen Smith, Chairman & CEO, First National Financial Corporation. He's standing on the right next to Scott Hillier, president and CEO of JA Canada. You'll recall Mr. Smith is one of the founders of Peloton Capital Management along with Steve Faraone and Mike Murray who were previously Managing Directors at Ontario Teachers’ Private Capital.

Anyway, today is St-Jean Baptiste Day in Quebec and it's a beautiful day so I wasn't planning on posting a comment but saw this story and thought it's fitting to cover a native Quebecer who has received the Order of Canada and l'ordre du Québec.

In April 2008, Adil Sayeed who long ago worked for the Ontario government as liaison to OTPP, wrote a nice article on Claude Lamoureux:
For veteran Ontario teachers, today marks their first annual pension plan meeting without Claude Lamoureux presiding as chief executive officer.

Lamoureux was appointed Ontario Teachers' Pension Plan (OTPP) president when the David Peterson government restructured the Teachers' Superannuation Fund in 1990. For 18 years until he retired last December, Lamoureux built and nurtured OTPP's award-winning investment and client service teams.

No large Canadian pension fund beat the OTPP's 11.4 per cent average annual return compounded from 1990 through 2007. Lamoureux started with a $19 billion portfolio invested entirely in Province of Ontario bonds. He leaves behind a $108.5 billion investment fund diversified around the world.

This spectacular growth was entirely due to investment gains. As a mature pension plan with almost as many pensioners as working contributors, OTPP paid out more in benefits than members and government contributed from 1990 to 2007.

OTPP achieved handsome long-run returns while running low short-run risks. Its worst year was 2001 – a 2.3 per cent loss. Other large pension funds reported larger losses during the bear market years of 2001 and 2002.

OTPP's investment prowess is well documented. The issue I want to highlight is why Ontario was lucky enough to recruit and retain Claude Lamoureux.

Lamoureux was born and educated in Quebec. When he started with OTPP in 1990, the Caisse de dépôt et placement was Canada's largest investment fund managing assets for the Quebec Pension Plan and provincial public employee pension funds.

During Lamoureux's 18-year tenure at OTPP, the Caisse had four presidents who combined to record a 9 per cent annualized return – 2.4 percentage points below the OTPP rate. And, Caisse returns were more volatile along the way, punctuated by a 9.6 per cent loss in 2002.

How is it that Quebec never hired native son Lamoureux to run its mightiest financial institution? The answer can be traced back to the Caisse's birth in 1965. Jacques Parizeau, then a top Quebec civil servant, saddled Caisse managers with a dual mandate: "to achieve optimal financial returns (and) to contribute through its activities to the vitality of the economy."

The Caisse was an arm of the Quebec government. High flyers moved freely between government jobs and the Caisse. During the 1980 and 1995 referendum campaigns, the Caisse quietly prepared to intervene in financial markets had Quebec voters given their province a mandate to negotiate independence.

During the nationalist era, no Quebec government could consider hiring plain-speaking Lamoureux to run the Caisse. Nor would Lamoureux have accepted a Caisse job when political considerations dictated investment decisions.

As a result, Lamoureux worked for Metropolitan Life before moving to OTPP. Over the years, he recruited a bevy of bright Quebecers to OTPP. Quebec's loss has been Ontario's gain.

Quebecers are reconsidering nationalism's costs. Current Caisse President Henri-Paul Rousseau is a respected professional. In 2004, he persuaded Premier Jean Charest to downgrade the economic development aspect of the Caisse's mandate.

Both Quebecers and Ontarians should remember what might have been. Suppose the Caisse's mandate had been modified earlier and Quebec had hired Lamoureux as Caisse president in 1990. The difference between OTPP's 11.4 per cent annual return and the Caisse's 9 per cent record since 1990 sounds small. But over 18 years small performance gaps add up.

The Caisse's net assets at the end of 2007 would have been well over $50 billion higher had the Caisse matched OTPP returns since 1990. The Quebec Pension Plan would still be facing long-run uncertainty, but projections of future contribution hikes and/or benefit cuts would be less dire.

Suppose Ontario had followed the Quebec model in 1990 and mandated OTPP to develop the provincial economy. Lamoureux would have remained in the private sector. OTPP would have been run by a succession of smooth-talking flatterers of the provincial government of the day. Had OTPP earned the Caisse's returns since 1990, the teachers' fund would be $40 billion smaller today.

Ontario teachers might not have seen their eligibility threshold for retirement fall by 2 1/2 years as happened in 1998. Nor would the Ontario government have profited from canceling their obligation to pay off OTPP's pre-1990 funding shortfall.

OTPP now faces a $12.7 billion funding shortfall. But, this problem is due to changes in forecasting the future, not past investment results. Teachers' life expectancy rose faster than previously predicted and projected investment gains based on long-term interest rates trended down over this decade.

Lamoureux will receive many tributes at the Ontario Teachers' Pension Plan annual meeting. Good luck finding a gold watch fancy enough to reward Ontario's $40 billion man.
There's no doubt Claude Lamoureux left his mark on Ontario Teachers' Pension Plan and is the pioneer of the Canadian Pension Model but there is a history behind this venerable organization that Jim Leech who succeeded Claude shared with me two years ago:
At one point, during the Peterson government, discussions took place between Ontario's teachers who wanted a broad asset mix to get better benefits and the government which saw these pensions as a liability on its books.

Three proposals came about:
  1. A traditional pension where the government funds it and the teachers' union has no say.
  2. A union plan which is entirely funded and managed by the union.
  3. A jointly sponsored plan where the union and government share the risk of plan equal
It was agreed that a jointly sponsored plan was the best option and initially, they said the board would be made up of four government bureaucrats, four teachers, and one chair.

Now, at the time, the Petersen government was being displaced by the Rae government and there were some very heated discussions that took place where the union and government threatened to walk away. But Bob Rae's government had the foresight to continue these discussions.

Then came the all-important question just how did Ontario Teachers' Pension Plan adopt their arm's length governance model? Jim told me that "urban myth" was the union wanted the former Bank of Canada Governor Gerald Bouey to be the Chair because his daughter was an Assistant Deputy Minister in Rae's government and they respected her.

Bouey accepted the role of inaugural Chair on one condition: Ontario Teachers' Pension Plan had to adopt a business model for its board of directors. The Board would delegate authority to the CEO who would in turn delegate authority to senior management. He demanded there would be no government interference whatsoever.

Moreover, it was Bouey who demanded the Board be made up of very qualified people, not government hacks or union members, but people who understand investments and how to run an organization.
All this to say, Claude Lamoureux, Jim Leech, Ron Mock, Bob Bertram, Leo de Bever, Neil Petroff, Mark Wiseman and other Canadian pension titans who worked at OTPP owe a great debt of gratitude to Gerald Bouey for demanding the organization be run like a business with no government interference whatsoever.

This is the governance foundation of the Canadian Pension Model. From that point, Claude Lamoureux went out to hire Bob Bertram, Jim Leech, Leo de Bever and later on Ron Mock who is now the acting CEO of Teachers'.

An actuary by training, Claude Lamoureux understood pensions are all about matching assets with liabilities, but he had the foresight to hire extremely smart and experienced investment professionals who were running their operations like a business and he wasn't afraid to take risks in private equity, real estate, infrastructure and hedge funds, all of which are now mainstream investments but back then were considered "too risky" for pensions.

I only met Claude once back in 2009, when then Liberal backbencher Tom Mulcair invited me to Parliament Hill to speak at the Standing Committee on Finance on matters relating to pensions.

Claude also spoke to this committee and was irritated with some of my comments on Canadian pensions gaming their private market benchmarks and doling out big bonuses on a terrible year. He let me know after the committee was over that I "didn't know what I was talking about" but I didn't take his comments to heart (I have a knack for getting under people's skin and obviously touched a very sensitive topic which hits compensation, so I understood where he was coming from).

Truth be told, my views on private market benchmarks have evolved over the years and I realize there will always be issues with these benchmarks as there is no perfect benchmark (this is why I like CPPIB's approach to evaluating the risks of each investment across public and private markets).

Anyway, Claude Lamoureux deserves his place in the Canadian Business Hall of Fame, not only for pioneering the Canadian Pension Model at the Ontario Teachers' Pension Plan but also for his many other contributions, including teaming up with Stephen Jarislowsky in 2002 to form the Canadian Coalition for Good Governance.

I leave you with something Andrew Claerhout, OTPP's former head of Infrastructure and Natural Resources, recently shared with me when he was talking about how some organizations hire the wrong people for important positions. He referred to something Claude Lamoureux once told him: "A employees hire A employees and thrive on watching them succeed. B employees hire C employees because they're insecure which is why they typically don't go far in an organization."

I like that quote and there's no doubt Claude Lamoureux hired a bunch of A employees during his tenure which led to Ontario Teachers' long-term success.

I have reached out to Mr. Lamoureux to get his thoughts on how the Canadian pension model has evolved since he left the industry. I also invite him for lunch the next time he's in Montreal.

Below, JA Canada honors Claude Lamoureux, 2019 inductee to the Canadian Business Hall of Fame. Félicitations, M. Lamoureux, c'est un honneur bien mériter!

Also, Canadian Business Hall of Fame inductee, Claude Lamoureux, retired president and chief executive officer of Ontario Teachers’ Pension Plan, speaks with BNN Bloomberg's Greg Bonnell on the tech bubble, contrarian investing and planning for long-term investment.

Lastly, BNN Bloomberg's Amanda Lang spoke with Claude Lamoureux last November about Canadian pension investing and what the country needs to do to remain competitive. Very interesting discussion which is still very relevant.