CPP Investments' Out of Control Pay?

Amir Barnea, an associate professor of finance at HEC Montréal, recently wrote a comment for the Toronto Star stating the Canada Pension Plan has been a huge success but investment board executive pay is getting out of control: 

By almost any measure, the Canada Pension Plan Investment Board (CPPIB) has been a huge success.

Established just 25 years ago to invest on behalf of the roughly 20 million Canadians who participate in our country’s largest retirement program, its total fund size has grown enormously to its current value of $550 billion — making it one of the largest state-owned pension funds in the world.

But as assets under management have ballooned, so has the pay for the fund’s executive and board. The CEO now makes roughly 16 times as much as the prime minister — and board members have seen their pay rocket up from about $12,000 a year in 2001 to $80,000. And this is for a not-for-profit Crown corporation, with a mandate to serve the public.

Are those sky-high pay packets justified? It depends on who you ask. 

There’s no arguing that the CPPIB has so far delivered excellent financial results: its annual net return has been 11.6 per cent over the past decade, handily beating the market and most mutual funds.

But its unique governance structure (it operates and is governed at arm’s length from both the federal and provincial governments) has created a powerful board that has little oversight. This has allowed board members to award themselves generous remuneration packages — similar in magnitude to those in public, for-profit corporations — and to approve gigantic, multimillion, private market salaries for CPPIB’s top executives.

In 2020, Mark Machin (who resigned as CPPIB’s CEO in early 2021) took home $5,883,555. CPPIB’s top five paid executives jointly made about $20 million in total compensation in each of the past three years.

As a comparison, Tiff Macklem, Governor of the Bank of Canada — also a federal Crown corporation — makes about $500,000 a year. Prime Minister Justin Trudeau’s total compensation is about $370,000 — which amounts to only six per cent of the pay awarded to CPPIB’s chief.

Board members at CPPIB — who provide oversight for the national pension fund — are also compensated handsomely, and their pay just keeps going up.

Back in 2001, the annual retainer of a CPPIB board member was $12,000. In 2021, it ballooned to $80,000. Serving as a committee chair on the board awarded you an extra $3,000 in 2001. In 2021 — that’s an additional $25,000.

But the largest benefit goes to the board chair. When Gail Cook-Bennett served as the chair of CPPIB’s board in 2001, she had an annual retainer of $32,000. This past year, Heather Munroe-Blum, who has served as chairperson of the board since 2014, earned $273,369 in total compensation.

Meanwhile, at other high-profile Crown corporations, the CEO pay has increased only modestly. From 2014 to 2022, CEO compensation increased by less than five per cent (an annual increase of about 0.6 per cent) on average at Canada’s Crown corporations.

Over the past 20 years, the remuneration for directors of Canada’s Crown corporations hasn’t increased by a penny. “They were last fixed on Oct. 1, 2000, and have not been updated since that time,” said Pierre-Alain Bujold, a spokesperson for the Privy Council Office.

A director who sits, for example, on the board of Canada Post, receives between $8,800 and $10,300 in annual retainer, the same amount as in 2000. Over at CPPIB, average compensation per board member was $178,563 last year.

Similarly, Canada Post’s board chair receives $17,400 to $20,500 in annual compensation — a fraction of Munroe-Blum’s $273,000 pay as chair at CPPIB.

What allows this pay discrepancy is unlike other Crown corporations, CPPIB operates and is governed at an arm’s length from federal and provincial governments. This is in accordance with the CPPIB Act to safeguard against political interference.

Not a bad idea by itself.

But this structure also gives CPPIB’s board almost complete freedom to interpret (and implement) what it considers appropriate remuneration for senior management and board members.

CPPIB is a quasi-public corporation. Legally, it’s a federal Crown corporation serving a public purpose. But it’s also a professional investment company, managing more than half a trillion dollars in a competitive market.

So how should its executives and board members be compensated?

The approach of the CPPIB board, led by Munroe-Blum, is similar to a private company.Remuneration is based on “market salaries” in similar organizations.

The CPPIB Act allows that interpretation to some extent. It states that: “A director/chairperson is entitled to receive from the board … remuneration and benefits received by persons having similar responsibilities and engaged in similar activities.”

But again, what “similar responsibilities and activities,” are is open to interpretation. Munroe-Blum and her directors decided the benchmark would be mostly the 100 largest Canadian public corporations and larger Canadian asset managers.

Even CPPIB’s board realizes that “A full market-based level of compensation is not appropriate, given CPP Investments’ public purpose,” and it claims, “a 20 per cent discount was applied during the last review of compensation in fiscal 2020.”

But it seems like that “20 per cent discount” is with respect to directors at large, private, Canadian corporations and not compared to other Canadian pension funds.

For example, board members at CPPIB make on average three times more than board members at Quebec’s pension fund, the Caisse de dépôt et placement du Québec (CDPQ), a sister pension fund that manages $389 billions of assets. Named executives at CDPQ make less than half their peers at CPPIB.

Board pay at CPPIB is also at least 25 per cent higher than at other large Canadian pension funds such as Public Sector Pension Investment Board (PSPIB), and Ontario Teachers’ Pension Fund.

When reached for comment, Michel Leduc, the CPPIB head of public affairs and communications, said, “We respectfully disagree with your premise on what determines, or ought to determine, compensation at CPP Investments.”

“In fact, there are multiple considerations and principles that we apply, going well beyond any narrow set of comparators as you put forward.”

Leduc said assessing an organization by comparing it to nearby or different types of institutions is misleading.

But are Canada’s two largest pension funds — Toronto-based CPPIB, managing $550 billion of assets, and Quebec’s CDPQ with $389 billions in assets under management — really different enough to justify the large gap in pay?

Since Munroe-Blum became board chair in 2014, compensation for herself, fellow board members and top management, has increased to a level that is excessive for an organization serving the public good.

The minister of finance didn’t wish to comment on the CPPIB’s board level of pay. A spokesperson said, “The CPPIB is guided by an independent board of directors and operates at arm’s length from the federal government. As such CPPIB is best placed to comment on the remuneration of its board members.”

This comment is disappointing, the CPPIB board is accountable to the federal finance minister and the finance ministers of the participating provinces.

Sure, the board is given some minimal oversight. For example, as required by the CPPIB Act, every six years a special examination of the financial and management control and information systems and management practices maintained by CPP Investment Board takes place. And every two years public meetings in each participating province are taking place.

But the reality is that CPPIB has a board that is accountable mostly to itself; there are no shareholders to vote out directors or approve new board members.

Munroe-Blum is a professional and experienced board chair who served on boards such as Four Seasons Hotels, Yellow Pages, and Royal Bank of Canada. But the private-sector practices and free-market jargon she brings to CPPIB are inappropriate.

In defence of the high pay levels, Leduc argues that “CPP Investment Board’s purpose is to contribute to the financial sustainability of a national public fund expressed exclusively through commercial activities on a global scale across highly contested markets,” and that “relentlessly upholding the organization’s commercial imperative is how we helped restore the solvency of the CPP.”

Moreover, Leduc adds, “we must compete fiercely for market access, prized assets, local partnerships, talent and favourable policies, all against trillion-dollar financial giants based in North America, Latin America, Europe and Asia-Pacific, which also operate globally.

“As the world of institutional investing continues to evolve, there are no half-measures and CPP Investments seeks to punch well above its weight while always remaining true to a principles-based, objective process as clearly outlined in our annual report,” he said.

I’m not contesting CPPIB’s impressive financial performance. I’m arguing that it could have achieved the same results while paying executives and board members significantly less.

Look at Norway as an example. Norges Bank Investment Management (NBIM) manages on behalf of the northern country the oil fund, the largest state-owned pension fund in the world. It has $1.4 trillion (U.S.) in assets — more than three times the size of CPPIB. In fact, Norway’s pension fund is so big that it owns on average, 1.4 per cent of every listed company in the world.

Yet, its CEO, Nicolai Tangen, makes $920,000 (6.5 million kroner) a year, one-sixth the pay of CPPIB’s top executive.

CPPIB has created enormous wealth for Canadians, and this needs to be celebrated. But as the Caisse de dépôt et placement du Québec and Norway’s oil fund have proven, that same goal could be achieved without showering excessive compensation on board members and executives, wasting taxpayers money.

Arm’s length or not, Canada’s finance ministers are the only people who can end this pay party.

This article is part of the Toronto Star's recent "Risky Business" series criticizing Canada's large pensions:

• Canada’s big pensions say they’re investing responsibly — so why won’t they tell us what they’re investing in?
• Are Canada’s largest pensions putting your retirement at risk? A growing chorus of experts say they are
• How does your pension stack up? Look up the returns and expenses of Canada’s largest public-sector pension funds
• How do you lose $3 billion in a booming market? A massive Ontario pension comes clean on what happened 

Let me start by stating these aren't the only negative articles I've read on Canada's large pensions over the last 12 months but when the Toronto Star posts this stuff on its front page as part of a wider series criticizing our large public pensions, you can imagine what a public relations fiasco this is for them. 

All of a sudden, they have to defend their compensation and their investments to a wider audience which will likely not be sympathetic because they are ill-informed and don't have the proper context.

For example, the most liked comment from the article above on the Star's website was literally: "Pigs at the trough".

Now, I understand the visceral reactions and will try to present diverse perspectives below.

But let me be clear, I read the article above and read other articles from this Risky Business series and wasn't very impressed. They’re basically hit pieces meant to sell newspapers, not to properly inform the public.

Below, I'll quickly go over what I find wrong with the article above:

• The article decries bloated pay at CPP Investments comparing the CEO's compensation to that of the prime minister's and that of the Governor of the Bank of Canada, stating this is "a not-for-profit Crown corporation, with a mandate to serve the public." This is all wrong for a lot of reasons. It's like stating the CEO of Royal Bank, who received $15.5 million in direct compensation earlier this year (see details of the breakdown here), a 25% increase from the previous year, shouldn't make more than the PM or the Governor of the Bank of Canada.This is ridiculous. True, CPP Investments manages over $500 billion in assets from captive clients, but the people working there aren't government bureaucrats, they're finance professionals with top-notch credentials and extensive private sector experience. Importantly, to attract and retain highly qualified staff to internalize asset management across public and private markets, lowering costs considerably, you need to compensate people properly because you are competing with top private sector firms for specialized talent. This point is totally ignored in this article.
• Barnea states: "Board members have seen their pay rocket up from about $12,000 a year in 2001 to $80,000,."  but he provides no context whatsoever. In 2006, CPP Investments decided to adopt an active management strategy as a means of improving the overall returns of the Fund. At the time, the Fund was managing $98 billion in passive indexes mostly. They assessed whether the Fund could generate value-added results above a passive benchmark while not taking on excessive risk. Given CPP Investment's comparative advantages of a long investment horizon, the certainty of cash flows, and scale, management concluded that an active management strategy would be a responsible choice and in the best interests of the CPP Fund. By building broad internal expertise and strong relations with potential partners, and by applying a total portfolio approach, they felt confident they could achieve above-market returns over the long term. And they have, adding material value-add over their passive benchmark since introducing this active management strategy back in 2006, investing more internally across public and private markets all over the world. Today, CPP Investments manages $540 billion in assets across six teams that invest in approximately 30 distinct investment programs. These investment programs require specialized skill sets. Also, the Fund is global, it invests in 56 countries and has relationships with almost 300 global investment partners. Keep this context in mind when looking at the increase in compensation at the organization and understand that senior executives and board directors are now dealing with a lot more complexity than their predecessors. In other words, the nature of the job has changed dramatically over the years and is a lot more onerous now.
  
• Barnea also states: "The largest benefit goes to the board chair. "When Gail Cook-Bennett served as the chair of CPPIB’s board in 2001, she had an annual retainer of $32,000. This past year, Heather Munroe-Blum, who has served as chairperson of the board since 2014, earned $273,369 in total compensation." Again, read my comments in the previous point, CPP Investments has matured and grown significantly since 2001 and 2006 when they introduced an active management programs. You can't expect Dr. Munroe-Blum to receive the same amount as Gail Cook-Bennett received in 2001, that is ridiculous. Second, CPP Investments' Chair is not only  a distinguished academic leader and administrator and an outstanding scholar in the fields of psychiatric epidemiology and public policy, she also served on the boards of the Royal Bank of Canada, Four Seasons Hotels, Alcan, Yellow Media Inc., Hydro One (Ontario), and CGI Group. She has extensive board experience and impeccable credentials which is why she was appointed to CPP Investments' Board in December 2010 and appointed Chairperson in October 2014. Her current term expires in October 2023. She has done an outstanding job as far as I can tell in her functions as Chair and while we can quibble about whether she deserves $273,000 a year for this job (see comments below), I don't think people fully appreciate her role or the role of all directors at CPP Investments.  It's not an easy job, the role of directors at these large pensions is becoming a lot more onerous. This is why I don't see an issue raising their pay to reflect the changing nature of their work which has become a lot more demanding.
  
• Moreover, these directors are not politically appointed by the Prime Minister or any provincial premier. There is a rigorous process for selecting board members at CPP Investments and they in turn have extensive responsibilities they must fulfill. It's a lot of work and as the organization grows, the demands on these directors grow accordingly. I would suggest Canadians read about the governance of the Board at CPP Investments to understand why the organization is internationally recognized as a leading example of sound pension plan management, operating at arm’s length from federal and provincial governments and guided by an independent highly qualified, professional Board of Directors. Moreover, CPP Investments' Board is more similar to the Royal Bank of Canada's Board, you have highly accomplished people with extensive experience on both boards (but as a friend of mine remarked: "you have to be connected to make RBC's Board whereas CPP Investments' Board is made up of independent and qualified directors who actually worked in audit, HR, IT, investments, etc.").
  
• What else? This part of the article really irked me: "But its unique governance structure (it operates and is governed at arm’s length from both the federal and provincial governments) has created a powerful board that has little oversight. This has allowed board members to award themselves generous remuneration packages — similar in magnitude to those in public, for-profit corporations — and to approve gigantic, multimillion, private market salaries for CPPIB’s top executives." Little oversight? Do you really think Dr. Munroe-Blum and other directors operate with full impunity and are not beholden to any oversight? That is total nonsense! They work with the Office of the Chief Actuary of Canada (part of the Office of Superintendent of Financial Institutions) and the Auditor General of Canada conducts special examinations of CPP Investments, PSP Investments and other Crown corporations at least once every three years. You can read these reports on CPP Investments' website here.
• Lastly, Barnea states that Norway's massive wealth fund which manages $1.4 trillion in assets doesn't pay its senior executives as well as CPP Investments: "CEO, Nicolai Tangen, makes $920,000 (6.5 million kroner) a year, one-sixth the pay of CPPIB’s top executive." Here, he's comparing apples to bananas, something he does throughout his article. Norway and Japan's behemoth funds are largely beholden to what stocks and bonds are doing, they have huge embedded beta risks in their portfolio. That works well in roaring bull markets when stocks and bonds are soaring, not so well when both stocks and bonds are getting clobbered, like in Q1 of this year where Norway’s sovereign wealth fund’s investment portfolio lost 4.9% during the first quarter of 2022. Don't get me wrong, everyone loses when stocks and bonds go down, including CPP Investments, but some lose a lot less than others and it's directly related to the success of their active management strategies across public and private markets (the drawdowns at CPP Investments and other large Canadian pensions with similar strategies are less than those of pensions that have a lot of beta exposure but the upside is less too when markets are roaring).
  

These are my main beefs with this article which got huge exposure in Ontario and across the country.

There are other important considerations.

Michel Leduc, Senior Managing Director and Global Head of Communications and Public Affairs at CPP Investments shared this with me: 

"A major turning point for CPP Investments occurred when the governments amended our Act to permit “international” directors considering the Fund must be highly diversified globally. Board directors are under pressure to maintain a limited number of directorships because the workload is increasingly intense and complex. If they accept only three, and they are in demand, what are the odds they will accept anything that is massively out of the range. Should a national fund compromise on governance?"

Michel added more important context:

Another consideration - related to talent and the applicable breadth and scope of the CPP Fund - is public policy. 

The “stewards” of the national retirement fund - in their capacity as being ultimately accountable to the public for the CPP - look to various mechanisms as they fulfill their responsibilities. 

One is the Office of the Chief Actuary of Canada, which independently conducts a very extensive evaluation of the state of the CPP and whether it continues to be sustainable (using a 75-year prospective horizon) every three years. 

Another source is the production and public dissemination of our quarterly statements (perhaps the only retirement fund on the planet to issue 90-day updates), and an extensive annual report tabled with Parliament with considerable disclosures that their own experts (dozens of Finance & Treasury officials in each province and in Ottawa) diligently reviewing the details, while submitting  questions and comments through the year through regularly-recurring and ad hoc engagements. 

However, stewards also importantly rely heavily on leading experts to oversee management, with utmost rigour in as real time as you can get, selected from the world of global governance. As a matter of sound public policy, why would stewards not expect CPP Investments to benefit from the same level of competence in risk management, as one of required skills for example, as say HSBC or JP Morgan or RBC? What about top minds in global investing or geopolitical risk? Are the assets and processes supporting the CPP deserving of any less governance talent compared to other global institutions we run into everywhere? 

 

This comes back again to the wisdom of the Act: compensation based on similarity. And, to be clear, the approach, practice and reality are that compensation for CPPIB directors is actually NOT at the same level with their global peers. The compensation principles, made available to the public, make the discount clear, readily juxtaposed with higher levels paid among their peers. 

 

More than ever, with heightened geopolitical issues, human resource challenges as the global pandemic persists, intensifying competition, and so on - leading governance talent is finite. Removing the job out of its true context, while characterizing the effort as part-time, betrays a less complete understanding of the sheer volume, complexity and commitment it entails. Potential directors must limit the number of roles they take and the discount they took is a very quantifiable opportunity cost.

All great points and I thank Michel for sharing them with my readers.

Now, I promised to be fair and balanced in my comment with other perspectives. 

Earlier today, I had an extensive discussion with a director of a medium-sized financial company in Canada who raised different points:

• He said he doesn't know the Chair of CPP Investments but he felt her new compensation was on the high end. "Good for her, she is definitely paid extremely well relative to her peers at other Crown corporations, many of whom are politically appointed and underpaid, and her retainer is more in line with what we see at major banks and large publicly traded corporations where directors get paid very well and also receive stock options."
  
• He explained to me how compensation works for boards, senior executives and other roles. "Organizations typically hire some outside consulting firm to direct them on compensation and these consultants go around looking at median compensation at comparable firms. Guess what? It's in their best interest to do this, especially in good years like last year, because they can then justify hefty pay increases at their organization. Directors, however, get retainers, once their salary goes up, it never goes back down. There are no variable components to their pay like senior executives at these large pensions and their pay isn't tied to the Fund's long-term performance."
• He went on: "I don't know what the Chair at CPP Investments does exactly every week, but let's say she attended all nine regularly scheduled Board meetings last year, and let's say those are 2-day meetings that take up 16 hours each time, plus add another 10 hours to prepare for these meetings, that's 234 hours a year. I'll be generous and add another 270 hours for special Board and Committee meetings, and other ad hoc meetings, that's a total of roughly 500 hours a year. At $273,000 a year salary, it works out to be $546 an hour in total compensation. That's what I call being paid extremely well. Good for her but guess what? Other directors across Canada will use that figure to justify pay increases at their organization, some justifiably so."

According to him, the system is such that it encourages higher and higher compensation every year:

 "The consultants NEVER tell you to drop your compensation, they won't be winning repeat mandates unless they justify higher compensation every single year."

On senior executive compensation at our large pensions, he added: 

"The question isn't whether or not they are adding value, clearly they are over the long run. The question is if we put these coveted jobs out to tender in a rigorous process, would we get highly qualified people doing them for far less money? I think so but again, the system is geared to justifying higher and higher compensation every year, especially at upper levels, and Canadians struggling to make ends meet aren't going to be sympathetic to these people even if they beat some internal benchmark over the long run to justify their compensation."

He also questioned the pay structure at financial firms and at our large pensions: 

"If you look at NHL hockey teams, it's not the presidents and GMs making the big bucks, it's the star players (after the owners). The top alpha generators at the big banks and pensions should make the most but that's not the way it works at these organizations. Moreover, I question how many managing directors and senior managing directors at Canada's large pensions are really worth $1, $2, $3 million or more a year. Are they sourcing deals and working directly on them? Are they generating the bulk of the alpha? If not, there's a lot of dead weight at these funds, never mind what the directors and CEOs are making (including their pension benefits)."

Well, he certainly didn't mince his words and he's very informed and knows what he's talking about.

I don't agree with him on everything but he adds an interesting perspective and raises many good points, chief among them: is there a structural issue that always biases compensation higher and higher every year and if so, what are the limits and how do we conduct proper oversight on this?

Still, I caution my readers, it's easy to criticize higher compensation but higher compensation at our large pensions is directly tied to long-term performance and it's actually a good thing if compensation and performance fees went up, it means your pension plan had a very good year.

Moreover, the compensation for senior executives at CPP Investments isn't out of whack. 

The table below on executive compensation is from Fiscal 2021 annual report (covering period until March 30th, 2021):

As shown below, it is in line with that of other large pensions in Canada which recently released their results (all tables are from their latest 2021 annual reports):

OTPP

OMERS

CDPQ

CPP Investments and PSP Investments have not released their Fiscal 2022 results because their fiscal year ends in March and official results aren't out yet, but I have no doubt their compensation will be in line with that of their peers even if Q1 this year wasn't a good quarter for stocks and bonds (they typically outperform in bear markets so Q1 might have helped them).

Now, I realize regular hardworking teachers, nurses, public sector workers and other Canadian workers making modest incomes will see the compensation at these large public pensions and think it's totally egregious, but keep in mind these aren't public sector jobs, these are high finance jobs in the investment management industry.

There is constant pressure to perform and compensation is based on long-term performance first and foremost.

In essence, these organizations are paying highly qualified staff to manage assets internally, lowering costs as much as possible. 

Yes, unlike private funds, they don't need to raise funds, they have captive clients. This is why they are not being paid as as well as the folks at Apollo, Blackstone, Brookfield, Citadel, Goldman, etc, but make no mistake, they still get paid very well as long as they produce results over the long run. 

It's also worth reading the annual reports to get in-depth details on compensation.

Every large Canadian pension provides a deep analysis on compensation in their annual report.

Is there room for improvement? Yes, I'd like to see more pay transparency in the annual reports at all levels:

• For example, what is the median compensation for associates, analysts, senior analysts, directors, senior directors, managing directors, senior managing directors, people working in finance, IT, risk management, etc.?  Provide ranges so people understand the variation.
  
• Are women being paid as much as men throughout the organization? If not, why not?
• What are these organizations doing to attract talent in a post-pandemic world? Specifically, do they have programs in place to attract people with disabilities who are more comfortable working from home? If not, why not?
  

I added that last point because everyone wants to be paid well, everyone wants to feel valued for the work they produce but not everyone has the same opportunity set as others and this is something that needs to be rectified at all our large pensions and quite frankly, all our Crown corporations.

I'm a stickler for transparency and diversity & inclusion at all levels and when it comes to compensation, I'm with the young workers who want to see more transparency:

Some 42% of Gen Z workers, ages 18-25, and 40% of millennial employees, ages 26-41, have shared their salary information with a coworker or other professional contact, the survey found. The poll was conducted by YouGov Plc, Feb. 16-18 among 2,449 adults, and of those 1,416 were either employed or looking for work.

“Younger workers are really rewriting the script here,” said Bankrate.com analyst Sarah Foster.

“The workplace landscape is much different for these younger workers and all this is adding up to reshape the workplace environment.”

….

“Pay transparency is more about having the structures and frameworks in place that ultimately help to reduce bias, and reducing bias helps you to close pay gaps,” said Ruth Thomas, pay equity analyst at Payscale.

We need to introduce more transparency to reduce all sorts of biases, primarily gender bias but other biases too.

Let me end by stating I'm a senior investment analyst who has worked at our large pensions investing and analyzing hedge funds, private equity, infrastructure, timberland, commodities and more. 

I've also attended plenty of board meeting and know the drill.

Over the years, I have built a great platform to communicate what Canada's large pensions are doing and I've been lucky to talk to a lot of smart senior executives at these pensions who support my efforts.

When I read these articles in newspapers, they really irritate me which is why I avoid reading them as much as possible. There are good newspapers and good journalists but not everyone covers material properly, providing proper context and that's too bad.

When it comes to compensation at Canada's large pensions, we should have open, transparent discussions but we need to provide proper context and also address legitimate concerns (How much is too much? Are there limits to higher compensation at public pensions and who sets them?).

Let me wrap it up there.

Below, earlier this year, Bloomberg reported Goldman Sachs Group Inc. is set to pay a one-time reward in addition to annual bonuses for its 400-person partner class. Bloomberg's Sonali Basak and Bloomberg Intelligence's Alison Williams provided the details

My prediction? This time next year, the tune will change dramatically and many of these big bonuses which swept across the finance industry last year will be gone for a very long time!  

Update: Sebastien Betermier, associate professor of finance at McGill University and an expert on Canada's large pensions, sent me this after reading my comment:

I am in full agreement with you that the Toronto Star article is rather one-sided. I spent about 45 minutes on the phone with the journalist discussing about the multiple benefits of the Canadian model based on my research findings that you know well. These points were not covered in the article. The one quote attributed to me “The Canadian funds are cooking at home a lot with good ingredients and then they can afford to go to a high-end restaurant” was also negatively interpreted by the journalist as a `well-earned splurge’. This interpretation is inaccurate and gives the wrong impression that public funds are going to waste. I used this analogy to explain that, because Canadian pension funds save on costs by investing the majority of their funds internally, they are able to afford top-quality external managers. This is poor journalism.

I agree with Sebastien, it is poor journalism but there is no editorial oversight at these papers. They publish what they want and these commentators get paid nicely for writing hit pieces that sell newspapers. They aren’t interested in covering these topics using proper context and in-depth analysis.

Another governance expert contacted me after reading this comment and shared his thoughts on out of control pay at CPP Investments:

"This issue is more widespread than CPP Investments. Over the years, Canada's large pensions have done very well, touting their world-class governance model to justify higher compensation. But if operating at arm's length from the government means abusing the governance model to continuously inflate compensation, then that poses a serious risk to this sacred model. I can assure you that finance ministries across the country are paying close attention and if they feel abuse is going on, they will pull the plug on this governance model once and for all, and this will set these large public pensions back."

Interesting perspective, one I didn't really think of but he raises a good point. Perhaps the biggest threat to the independent governance model which has led to the success of Canada's large pensions isn't from outside critics attacking compensation, it's from within. 

This just underscores the need for more transparency on compensation and a clear framework where pay-for-performance is maintained but not abused to the point where it jeopardizes the independent governance model that has led to the success of our large public pensions.  

Having said this, I think we need to trust the stewards and senior managers at our large pensions.

One person sent me this: 

"Allowing people to be anonymous and have their views propagated seems a little tricky. It does ultimately encourage extreme positions with less nuance. Easy to make grand or harsh statements knowing it is entirely unattributed. It gives less responsibility to understand the underlying trade-offs to balance policy goals."

All fair points which is why I decided to give the final word to Jim Keohane, HOOPP's former CEO who is now a director at AIMCo and Trans-Canada Capital. Jim reached out, sharing his own personal views which are now on the record:

I wanted to comment on the issue of pay at the large Canadian Pension Plans. These are my own personal views.

The Canadian pension model has been successful largely because it is built on a strong foundation of good, independent governance which allows the funds to operate like a business and act in the best interest of the plan members. The ability to pay market wages to attract high quality investment management professionals is the key to being able to manage the funds using an internal management team.

Internal management is very much in the best interest of members because it affords the lowest cost of implementation and enables a much wider scope of investment opportunities and among other benefits, allows for much more effective risk management.

The alternative is to outsource the investment management function which is what we observe with many of the large US state pension plans. The principal reason why the US state plans use outsourcing is because their governance models are fraught with political interference which makes it almost impossible for them to pay market wages to internal portfolio managers. So instead, they write much larger cheques to outside managers to run the money.  The overall implementation cost, which is what a business should be focused on, is much, much higher.

It is also important to understand that market forces - the supply and demand for portfolio managers, is what sets the wages that the Canadian pension funds pay.  They don’t just decide to pay higher wages. They pay what they need to pay to attract the talent they need to produce the good results they have produced over the past couple of decades. There is a very high demand for investment professionals who have shown an ability to outperform markets. Investment organizations globally are willing to pay very high compensation to these individuals.

There is a strong governance processes and oversight around compensation at all of the large Canadian pension plans. Third party experts are used by all Canadian pension plan boards to ensure that the compensation methodologies and the quantum of pay is in line with market practice.

Canadian pension funds have produced some of the best returns globally over the past couple of decades. The ability to pay market compensation levels in order to attract and retain the talent needed to manage their funds internally has been a cornerstone of this success.  

Tampering with the very successful governance model of the Canadian pension plans would be a huge mistake.

I thank Jim Keohane for sharing his wise insights and agree with him, tampering with the governance model at Canada's large pensions would be a monumental mistake.

At the end of the day, while transparency and openness on compensation are good and necessary, we also need to trust the process and that the stewards and senior managers at our large pensions are operating in the best interests of beneficiaries and stakeholders.