Should We Create Another Caisse?

Miville Tremblay, senior fellow at the C. D. Howe Institute, wrote an op-ed for La Presse advocating for a second Caisse de dépôt (translated from French):

Quebecers have reason to be proud of their Caisse de dépôt et placement, which efficiently manages the assets of their pension plan and those of the pension funds of almost all public sector employees. Unfortunately, municipal and university employees are not so fortunate.

I know a lot of city and university pension plan managers and I know they are dedicated and competent people. However, because their funds are smaller, they do not have access to the same resources, the same investment opportunities and must bear higher costs, which penalize their members as well as their employers and, ultimately, taxpayers.

The Caisse de dépôt and Teachers’, the pension plan for Ontario's teachers, pioneered the Canadian model of pension fund management, a success envied around the world. Montreal is home to a second institution of its kind, PSP Investments, which manages the fund for federal civil servants. It is time to create a third one for employees of Quebec municipalities and universities.

The Canadian model boils down to a few characteristics: large size, which generates economies of scale; a high proportion of funds managed in-house, rather than entrusted to private firms, which reduces costs; a significant proportion of investments in so-called real assets, such as real estate and infrastructure; an elaborate risk management system; competitive compensation with the private sector to attract the best managers; and rigorous governance ensuring the long-term interests of beneficiaries and independence of decisions from political pressures.

A quantitative study has just demonstrated the undeniable superiority of this formula by comparing the costs and performance of Canadian funds with American and European ones.

The authors are Sebastien Betermier, professor at McGill, Alexander Beath, Chris Flynn and Quentin Spehner, analysts at CEM Benchmarking, a Toronto-based firm that compiles an international database on pension funds.*

The large Canadian funds (US $ 10 billion and more) manage just over half of their assets internally, while their peers elsewhere in the world, it is just under a quarter. The very large Canadian funds ($50 billion and more) manage 80% of their assets themselves, against 34% for their foreign counterparts.

The savings thus made allow Canadian pensions to allocate significantly more resources to their teams, analysts, information technology and risk management. They can afford the best specialists.

The authors find that this translates into somewhat lower costs first. Large Canadian funds average 57 cents per $ 100 in assets, compared to 62 cents for foreigners.

A Superior Performance

Pension funds take varying levels of risk. We must therefore compare their returns per unit of risk with the Sharpe ratio. With an average of 0.93, the large Canadian funds dominate the rankings and beat the American public funds, which post a disastrous 0.48. Large US corporations do little better at 0.55.

But the revelation of this research is the superior performance of Canadian funds when taking into account the nature of their financial liabilities to retirees, who in the public sector often enjoy some protection against inflation.

This success is largely due to the three times the weight of their investments in real estate and infrastructure, which although expensive to manage, in the long run are more protective against the ravages of inflation.

For example, we can bet that the performance of the Caisse in the REM will follow the cost of living with normal price increases. The large Canadian pensions have experienced teams who develop large-scale real estate projects, whose rents tend to keep pace with inflation.

Even the largest municipal and university funds, with assets ranging between $ 1 billion and $ 5 billion, do not have this capacity. They have to settle for a watered-down version of the Canadian model, which still does better than petty cash elsewhere in the world.

But if we entrusted the management of the funds of some 200 municipal plans and those of Quebec universities to a new common fund, this one, with assets exceeding $50 billion, could play in the big leagues. The pension plans and committees would remain separate, with investment policies adjusted to their needs.

To date, Quebec has entrusted everything to the Caisse de dépôt et placement. Instead, Ontario has relied on several large institutions, even if they are smaller than the colossi of Caisse de dépôt and CPP Investments, which administers the funds of the Canada Pension Plan.

Granting an additional $50 billion to the Caisse de dépôt, which already has $340 billion, would give it no additional advantage. It would also be prudent not to put all of our eggs in one basket. Creating a new flagship institution would be preferable for Quebec and the employees of cities and universities. The idea deserves careful consideration.

Alright, it's Wednesday, another crazy day in markets but let me put my pension hat on to tackle Miville Tremblay's opinion piece.

First, full disclosure, the first time I worked at the Caisse on contract for a year was back in 1999 (later full-time in 2002). I worked in a small intelligence team headed by Ginette Hains and we gathered the best research from brokers and independent shops and presented their ideas to the Caisse's senior VPs every quarter and our write-ups more often. 

Fun job, got to read a lot of market research and coming from BCA Research prior to that, I learned a lot about the stock and bond markets. Back then, the focus was a lot more on stocks and Nortel (the Caisse got its head handed to it on Nortel as did others but that had nothing to do with our team).

We also organized to bring guest speakers to speak at offsite strategy sessions for the senior VPs. I discovered Jim Bianco's research back then and brought him in to speak at one of those strategy sessions and he blew the socks off the senior VPs and the then president and vice-president of the Caisse (Jean-Paul Scraire and Michel Nadeau). 

Like I said, those were fun times but I was still a novice learning the ropes (was far less jaded).

Anyway, Miville was part of my team, he worked for a few years at the Caisse, got a CFA at a late age which is impressive, and then he went on to work for the Bank of Canada at its Montreal office where he covered Canadian pensions (nice gig, especially for a French Quebecer like Miville).

He obviously knows Canadian pensions very well which is why C.D. Howe asked him to join as a senior fellow.

But as much as I respect his credentials and experience, I totally disagree with him on what he's advocating and will explain why:

  • First, Caisse de dépôt et placement du Quebec (CDPQ) is now a global powerhouse, at the same level or very close to CPP Investments. This is not the CDPQ of 1999-2000 when Scraire, Nadeau and his boys ruled the day and played fast and loose on governance and oversight or even 2008 when Henri-Paul Rousseau ruled the day was completely unaware of the excessive risks being taken in the ABCP portfolio (or was aware and turned a blind eye). Importantly, CDPQ was transformed during the Michael Sabia era, the initial focus was to clean up house, set tight governance and oversight and while Sabia was far from perfect, he did leave solid foundations for his successor, Charles Emond.
  • Why is this history important? Because I trust CDPQ's governance and oversight over that of any or all Quebec municipal or university plans. I'm not saying there aren't good people working at these plans, but there is a lot more potential for fraud and lack of oversight there and a lot less transparency (obviously, there are many good plans but lots of shady ones too).
  • Second, and equally important, why do we need to create a new pension plan when we already have one of the best large public pensions and it is run very efficiently? Just from a cost advantage, Quebec's taxpayers are better off having this $50 billion managed at the Caisse, but when you add long-term performance, it's there where the real cost advantage comes into play. Importantly, CDPQ has major investments in public and private markets all over the world, invests in and co-invests with the best private equity funds and hedge funds, does a lot of of sophisticated strategies internally, and this gives it a comparative advantage over smaller plans. It wouldn't be impossible for a new pension to compete but it would be very hard. Just look at my recent comment on CDPQ and DP World expanding their port platform. Which $50 billion pension is going to compete with that? Good luck!
  • In short, CDPQ and CPP Investments have structural and developed advantages that are simply too hard to replicate at smaller funds. Yes, it's true, HOOPP and OTPP managed very well at $50 billion but they attracted the right people to do sophisticated things internally, not sure we want to waste time and taxpayers' money after the pandemic to start a new Quebec pension fund. The ramp-up takes time and you need a lot to think about. Just look at my recent conversation with Barbara Zvan who is heading up UPP, it will take her a year before operations commence and they have been thinking about this new pension plan for years (and she can attract top talent there because it's based in Toronto, the epicenter of top pensions). If anything, maybe UPP should also manage the assets of all Quebec and rest of Canada university pensions, that would also make sense to me.
  • If we are to create a new public pension in Quebec and Canada, it's my recommendation to create a second CPP Investments of sorts which focuses solely on amalgamating and managing badly managed corporate DB pensions in this country, backed by the full faith and credit of the Canadian government but with a shared risk model (jointly sponsored plan).
  • But another CDPQ? Non merci, Miville, that doesn't interest me and reading your comment, I think you make more of a case for having the assets managed by CDPQ.

Now, I shared Miville's article on Twitter and Ludovic Dumas, VP Direct Investments at Claridge, shared his thoughts:

He basically thinks the idea merits some exploration to avoid too much concentration at the Caise and introduce more competition into the ecosystem.

Again, I'm not convinced and that argument doesn't address my governance and oversight concerns, or the other arguments I've laid out above. 

We don't need new pensions to compete with the Caisse, that's neither necessary nor in our best interests. And again, it's not that easy competing with the Caisse or CPP Investments in 2020, many other smaller pensions investing largely in public markets in a zero-bound world will underperform over the next 20 years (see me last comment on why CPP Investments is reviewing its bond portfolio). 

Now, it's not all peachy and there are things we need to keep in mind if the Caisse gets this $50 billion in assets to manage:

  • CDPQ has a dual mandate to maximize returns without taking undue risks and to promote Quebec's economy. Sometimes that dual mandate is good (Lightspeed, Nuvei) and sometimes it's bad (SNC-Lavalin and Bombardier). When the Caisse is managing your pension assets, you have to accept there will be some hiccups along the way because this dual mandate can expose it to making some risky investments locally (but they manage all risks very diligently).
  • Getting rid of a lot of smaller Quebec pension plans means a lot of high and medium paying jobs will be wiped, including consultants, and that represents a loss of income taxes for the Quebec government. In some cases, it makes sense, in others, it might not because the pensions are being properly managed. There is a lot to think about here and it's not that obvious.

Having said all this, I'm convinced we are heading into a very tough, turbulent period for all investors and many smaller pensions will really struggle to survive and won't be able to fulfill their mandate.

I hope I presented the arguments for and against a second Caisse very clearly but feel free to email me your opinions at

A few more newsworthy items on CDPQ and on this first one, also read this article on Wes Hall, a man on a mission:

Like I said, it's really hard to compete against CDPQ and other large Candian pensions.

Below, Nuvei Corporation (TSX: NVEI) recently started trading its shares on the Toronto Stock Exchange. 

The payment processing company raised $700 million in the biggest initial public offering of a technology company in the history of the TSX. 

Nuvei provides payment solutions to merchants, technology, and distribution partners, serving companies in North America, Europe, Asia Pacific and Latin America. Nuvei counts over 780 employees and services more than 50,000 customers around the world. The company supports a vast number of local and alternative payment methods in nearly 150 currencies and is backed by Novacap and Caisse de dépôt et placement du Québec (CDPQ). There were 211 technology companies listed on both TSX and TSX Venture Exchange as of August 31, 2020, with a combined market capitalization of $289 billion (CAD). 

Watch the clip where Loui Anastasopoulos, President, Capital Formation, Toronto Stock Exchange and TSX Venture Exchange joined Philip Fayer, Chairman and CEO, Nuvei Corporation and his team to open the market to celebrate the company’s listing on Toronto Stock Exchange.