Mark Wiseman on How the World Can Learn From Canada's Pension Model

Mark Wiseman, AIMCo's Chair wrote a comment for BNN Bloomberg on how the world can learn from Canada's pension model:

Chief among the many challenges brought on by COVID-19 is the acceleration of the global pension crisis. Low interest rates and decreased economic activity are ballooning pension liabilities and challenging return assumptions, ultimately stressing pension plans all over the world.

To illustrate this, look no further than America’s largest public pension plan. CalPERS, the pension plan responsible for providing retirement benefits for millions of Californians, is less than 72 per cent funded according to current estimates.¹ The pension situation in much of Europe and Asia is, at best, in a similar position.

Canadians are not insulated from this concerning trend. According to research from the Healthcare of Ontario Pension Plan, almost three quarters of Canadians agree that there is an emerging retirement income crisis.² Canadians are concerned about how the global pandemic will affect their ability to retire comfortably. Thankfully, Canadian pensions are well managed and safe. But, in times of crisis, the risk that governments make unwise decisions increases substantially.

Canada has world-class pension plans, and to ensure the continued security of Canadian’s pensions, it is vitally important that these plans continue to operate with the independence and strong corporate governance structures that have been in place at these institutions for decades.

Following the 2008 financial crisis, Ireland raided its national pension plan for up to 17.5-billion euros, as part of a deal with the European Union to bail out its banks.³ This was not long after Argentina nationalized nearly $30 billion in private pensions, as a result of the financial meltdown in that country. A study conducted by the Argentinean Ombudsman's Office in 2019 found that approximately 70 per cent of pensioners in Argentina were unable to afford basic needs,⁴ demonstrating the dire situations citizens are left in when governments do not respect the independence of pension plans.

Importantly, independence from governments alone is not enough to ensure the success of pension plans. These plans also require rigorous corporate governance structures that are akin to a publicly-traded company. In fact, poor corporate governance is the primary cause of CalPERS’ recent struggles.

First, CalPERS’s board is highly politicized. Its former chief investment officer abruptly resigned in August after compliance staff noticed that he had personal stakes in some of the investment firms that CalPERS invested in. However, many observers see this forced exit as being driven by the board’s politics. To make matters worse, the board has been painstakingly slow in finding a permanent replacement, in no small measure because many qualified candidates do not want to work under a politicized board.

Even more problematic is the fund’s inability to invest in private equity, an asset class that has become a vital part of achieving target returns for pension funds. Data show that CalPERS’s private equity allocations and returns are consistently lower than industry benchmarks, largely because its board members have gotten in the way of management in making key investment decisions.⁵ The board should oversee strategy and risk management, but it should not be involved in the day-to-day investment decisions of the plan.

The Ontario Teachers’ Pension Plan (OTPP) is what a pension plan with both independence and rigorous corporate governance structures looks like.

Thanks to the brilliant foresight of former Chief Executive Officer Claude Lamoureux, OTPP is held accountable to the government, but not controlled by them. The plan sponsors - the Ontario Teachers’ Federation and the Ontario Ministry of Education - are equally responsible for ensuring the plan has good corporate governance and enough money to meet its long-term pension obligations. Board members are required to act independently of both the plan sponsors and management, and to make decisions in the best interests of all plan beneficiaries.

All these factors allow OTPP to consistently meet and exceed target returns. The same can be said for most public pension plans across Canada, including the Canada Pension Plan Investment Board (CPPIB) and the Caisse de dépôt et placement du Québec (CDPQ), which respectively manage the assets of the CPP and QPP, helping to ensure the retirement security of virtually every Canadian worker.

Canadian governments have, to date, understood that the money in these plans is not theirs to invest or spend, rather it belongs to Canadian beneficiaries and should be managed in a way that safely maximizes the risk adjusted returns for those beneficiaries.

There is no safer place in the world to have your pension than in Canada. The Canadian pension plan model has shown that with exemplary corporate governance and principled independence, pension plans can help ensure that a country’s citizens have a retirement egg to fall back on, even during these trying times.

Mark Wiseman is a veteran Canadian investment manager who currently serves as chair of Alberta Investment Management Corporation (AIMCo). He previously acted as global head of active equities at BlackRock Inc.; before that, he was chief executive officer of the Canadian Pension Plan Investment Board (CPPIB). 

1 https://www.pionline.com/pension-funds/calpers-tops-400-billion-total-assets#:~:text=CalPERS'%20total%20assets%20have%20hit,30%2C%202018%2C%20actuarial%20valuation.
2 https://hoopp.com/docs/default-source/about-hoopp-library/advocacy/abacus_executive_summary_2020.pdf
3 https://www.theguardian.com/business/2010/nov/28/ireland-bailout-contribution-pensions
4 https://www.telesurenglish.net/news/Argentina-70-of-Pensioners-Cant-Cover-Their-Basic-Needs--20190417-0040.html
5 https://www.nytimes.com/2020/10/19/business/calpers-pension-private-equity.html

This is an excellent comment from Mark Wiseman, one that I fully agree with since I've been writing about these issues for a very long time.

I think we take a lot of things for granted here in Canada and it's about time we wake up.

First, as Mark alludes to, when the going gets tough, other nations had no problem raiding their national pensions.

Can it happen in Canada? In theory, no and even in practice, it wouldn't be easy since there are a lot of hurdles to clear but anything can happen when governments need money, including raiding public pensions. 

A friend of mine who agrees with me that Canada's large public pensions are the best in the world always tells me straight out: "I'm stressing out saving and investing because I doubt they will be as strong or even there when it comes time to collect."

I reassure him that his fears are unfounded but he tells me: "Look at the Trudeau government spending money like drunken sailors, at one point, we as a nation have to pay for all these programs."

Good point, and we will be paying for decades to come, but that has nothing to do with our public pensions which will hopefully always operate at arms-length from any government interference. 

But as Mark Wiseman notes above, independence from government doesn't ensure success, especially if you don't get the corporate governance part of the equation right. 

What happened to CalPERS' former CIO, Ben Meng, was a travesty, a political witch hunt that was so wrong and so many levels.

Now, CalPERS has to hire a new CIO, probably their sixth over the last ten years (maybe not but there's been a lot of turnover at the CIO level) and everyone I speak to doesn't want to touch that job with a ten foot pole.

Why not? It's CalPERS, the largest US public pension fund, they should be honored and competing for that job, but as Mark rightly notes, there's way too much politics at CalPERS, effectively hamstringing any qualified CIO that takes the role.

In fact, if I was taking on that role, I'd tell CalPERS' board straight out, on one condition only, CalPERS would need to rewrite the governance on its board from scratch to make sure there's no political interference whatsoever. 

But CalPERS is CalPERS which means you will always have political interference until they hit the proverbial pension brick wall and the situation is so grave that they will need to change the governance for the better. 

This has nothing to do with the competence of people on its board, it has everything to do with the structure and their uncanny ability to politicize investment decisions.

That's a huge faux pas, one that Mark Wiseman alludes to above. 

Anyways, take the time to read my previous comment on why the world's best pensions are Canadian. 

You should also read Ben Meng's comment on saving America's public pensions as well as the update I posted at the end of that comment.

Also, take the time to read an excellent paper Clive Lipshitz co-authored with Ingo Walter on what lessons US pensions can learn from Canadian pensions and the paper from Sebastien Betermier and Quentin Spehner. 

 

Interestingly, earlier today, Clive Lipshitz sent me Keith Ambachtsheer's latest paper, "The Canadian Pension Model: Past, Present and Future" which is forthcoming in the April issue of the Journal of Portfolio Management. You can link up to it here but need to pay to view it.

 

Here is the abstract:

This article documents the invention and rise of the Canadian pension model, starting with its intellectual foundations in the 1970s and 1980s and the creation in 1990 of the model’s prototype: the Ontario Teachers’ Pension Plan (OTPP). It follows OTPP’s evolution into a new, innovative type of pension organization, which other Canadian pension plans started to adopt. This evolution was the subject of a 2012 feature article in The Economist, which further raised the profile of what is increasingly called the Canadian pension model. This notoriety raises the logical question today of whether the adoption of the model is being matched by actual superior financial performance. This article presents evidence that is indeed the case. As to the future, wider adoption of the model would help generate the retirement income needed to sustain aging societies around the world.  

Maybe someone can contact Keith Ambachtsheer and tell him it's nice to publish academic articles in JPM (that most people don't read) but it's much more important to write a clear and concise guest comment on Pension Pulse which everyone reads.

Anyway, I know all about the good, the bad and ugly on the Canadian pension model and even though it's far from perfect, it's leagues above what is being used in other countries.

 

What worries me a lot nowadays is political and activist encroachment, typically left-wing environmental activists who think they know better than Canada's pension fund managers as to where they should be investing. 

Then there are public sector unions whose members are the chief beneficiaries of Canada's large, well governed public pensions doing a disservice to their members publicly attacking their public pensions for putting profits over people or questioning their investments in 'climate failure'.

I have no problem with members questioning their public pension managers but get your facts straight and please do it privately, you have no idea how lucky you are to have a defined benefit pension managed by well governed global businesses.

That's what Canada's large pensions are, well governed global businesses which are using their long investment horizon and other advantages to manage pension assets in the best interests of their members.

Do Canada's senior pension managers get paid big bucks? You bet, millions but they need to post the long-term returns to justify their compensation and it's spelled out in painstaking detail in their annual reports every year.

Alright, let me wrap it there, I'm sounding irritated and insufferable, which I tend to become whenever I discuss what ails pensions and why we shouldn't tamper with the Canadian pension model.

Below, Mark Wiseman, chair of AIMCo talks about "an emerging retirement income crisis" thanks to record low interest rates and decreased economic activity as a result of the pandemic. He talks about what can be done to ensure the strength and success of the Canadian pension model in this environment and how we can grow the economy. Click here to view it if it doesn't load below. 

 

This is an excellent interview, take the time to listen to Mark's insights.