More on the Federal Government's Pension Push to Invest More in Canada
Ottawa wants Canadian pension funds to invest a larger share of their assets in Canada and is promising measures to make it a more attractive option, as advocates for raising domestic investment have clashed with pension managers intent on guarding their independence.
The federal government pledged in its fall economic statement on Tuesday to “work collaboratively” with Canadian pension funds to create an environment that encourages them to put more of the trillions of dollars of assets they collectively manage to work domestically.
Ottawa gave few details about how it plans to do that. But its decision to add pension investment to its priorities comes after lobbying from investment industry professionals who argue pension funds have underinvested in Canadian public markets, sapping precious capital from the country.
That has put pension fund managers on guard. Some are warning against heavy-handed measures that could undermine their discretion to seek the best returns for pensioners wherever they can find them, and to manage risks from overconcentration in any particular market.
On Wednesday, an executive at the Canada Pension Plan Investment Board (CPPIB), which has 14 per cent of the $576-billion in assets in Canada, said the fund would welcome broad policy measures to make the country more competitive at attracting long-term capital.
“Countries are competing for that,” said Michel Leduc, CPPIB’s global head of public affairs and communications, in an interview. “You’ve got to fish where the fish are. You’ve got to make it attractive to them. ... [Canada is] already an attractive place to invest. How do we make it even more so?”
Others are more wary of Ottawa’s intentions. Alberta Investment Management Corp. (AIMCo) chief executive officer Evan Siddall said a key element of Canada’s pension fund model “is independence from political influence of any kind, or even the perception of it,” in an e-mailed statement.
AIMCo, which manages $146-billion for the province and has 43 per cent of its investments in Canada, is pursuing large-scale infrastructure investments around the world, he said. If Canada’s government opened up similar assets that it owns to private investment, it “would be a constructive demonstration of Ottawa’s desire to increase pension fund investments in Canada.”
In late September, Mr. Siddall used a speech to confront calls for more domestic investment from Canadian pension funds with a blunt warning: “The pension savings of Canadians is not our nation’s piggy bank,” he told an audience at the Canadian Club Toronto.
The government said Tuesday it will “explore” removing a rule that caps Canadian pension funds’ investments in most corporations at 30 per cent of voting shares, to make it easier for them to take large, controlling stakes. And it called for pension funds to more consistently report how their investments are spread across countries and asset types – details several of the largest plans already disclose.
Among the most vocal advocates for boosting Canadian pension-fund investment in domestic stock markets is Peter Letko, the veteran fund manager who co-founded Montreal-based Letko Brosseau & Associates. He has lobbied federal and provincial officials with presentations that show publicly traded Canadian stocks make up just 4 per cent of Canadian pension funds’ total assets, down from 23 per cent in 1990, according to the Pension Investment Association of Canada.
Some of those dollars have since moved abroad. But pension funds have also shifted more assets out of publicly traded stocks and bonds and into private assets such as real estate, infrastructure, private equity and private loans.
Ottawa’s announcement is “just the first step” toward increasing pension-fund investment in the country and “there is work to be done,” Mr. Letko said in an interview.
Pension funds have had “some general conversations” with Ottawa, Mr. Leduc said, but are awaiting details about how specific policies could be tweaked to make domestic more investment “commercially viable.”
“We’re not concerned about any heavy-handedness” from federal officials, he said.
On Tuesday morning, Healthcare of Ontario Pension Plan (HOOPP) chief investment officer Michael Wissell said in a statement that, “all else being equal, we prefer to invest in Canada when the risk and reward are appropriate.”
About $60-billion of HOOPP’s $104-billion in assets are already invested in Canada, Mr. Wissell said, but diversifying its portfolio across different countries “helps mitigate risk” and “enhance returns.”
Many pension-fund leaders are quietly worried that adding more exposure to Canada would increase concentration risks, as the future solvency of plans is already correlated to the country’s demographics, economic growth and immigration policies, among other factors.
“We want to be exposed to a whole bunch of markets,” CPPIB’s Mr. Leduc said.
Alright before I get into it again, read the message below from HOOPP's CIO Michael Wissell on why Canada is a great place to invest:
You may have noticed pensions have been in the news lately:
Finance ministers from across the country recently met to talk about one of Canada’s great success stories, the Canada Pension Plan. Auto workers at multiple car companies in Canada have negotiated better pensions into their contracts. And, former Bank of Canada Governor Stephen Poloz has published a paper on HOOPP’s website that says our country may be ripe for a “renaissance” of defined benefit pension plans as they become even more valuable in an uncertain world.
There has also been talk in the news about how much Canada’s largest pension plans – known as the Maple Eight (HOOPP is one of them) – invest in Canada, and whether we should invest more.
You may be curious about how, and where, HOOPP invests your pension dollars on your behalf.
The first thing that must be emphasized is that we invest and manage money solely for our members, Ontario’s healthcare workers. The focus is entirely on ensuring you have a secure and reliable monthly pension when you retire, for the rest of your life. This is both our mission and our legal responsibility. This differentiates us from investment management firms, who have a shorter-term focus on profits and annual returns.
As for our commitment to investing in Canada – it’s strong. Canada is not only our home, but also a safe and stable country that offers attractive investment opportunities. Investors must always weigh risk and reward when choosing potential investments. The greater the risk, the greater the required expected return. With a portfolio of more than $100 billion, the HOOPP investment team conducts these risk assessments and analyses on a large and global scale. All else being equal, we prefer to invest in Canada when the risk and reward are appropriate.
Over $60 billion of HOOPP’s assets are invested in Canada. This includes real estate, such as major industrial and logistics parks, office towers and housing. It also includes supporting Canadian innovation and entrepreneurship by investing in home-grown companies.
HOOPP is also one of the biggest investors in Canadian bonds; they comprise about half our Canadian portfolio, and generate safe and reliable returns. In addition, money raised through government bond sales helps pay for the public services and infrastructure we all rely on – hospitals, public transportation, schools and parks.
Like other major Canadian pension plans, HOOPP invests beyond our own borders. Diversification is one of the first rules of smart investing. You don’t want to put all your money into a single asset, or a single country. All investments have some level of risk, and diversification can help reduce risk. So, while we favour Canada, there are many other safe jurisdictions, including the U.S., Europe and parts of Asia, where we seek opportunities. This diversification helps mitigate risk, enhance returns and ensure we can continue to deliver on our pension promise for decades to come.
There is yet another way HOOPP contributes to the Canadian economy. More than one percent of all Canadians are members of HOOPP, and your hard-earned money is either contributing to the Fund or being paid in pensions. In fact, we paid $3.5 billion in pension benefits in 2022 to Ontario healthcare workers. These dollars help retirees in every corner of the province pay for the things they need, predominantly in their local economies. This is an element of pensions’ economic contribution that is sometimes overlooked.
Canada’s major pension plans, the Maple Eight, are considered among the best in the world. From time to time there may be opinions in the news about how and where these pension plans should be investing. We want to assure you that our commitment to Canada is and will remain strong. In HOOPP’s case, we have been independently investing a large part of our portfolio in Canada for more than 60 years and will continue to do so because it's good business. And our business is delivering pensions and providing retirement security for our members, now and in the future.
Ok, now I will get into it and be very blunt and brutally honest with my assessment.
First, on HOOPP and CIO Michael Wissell's message.
I have tremendous respect for HOOPP and it's easily one of the best pension plans in the world, managing assets and liabilities very carefully.
I don't know what prompted Michael to write this message but let me be very clear, HOOPP will have no choice but to look outside of Canada as its assets under management grow well past $100 billion over the next decade.
What does that mean? It means HOOPP at $200 billion will NOT have 60% of its assets in Canada.
No way José, not going to happen for a lot of reasons.
In fact, HOOPP is already taking active steps to diversify away from Canada in a number of asset classes, infrastructure being their priority.
In ten years, HOOPP's asset allocation and geographic and sector diversification will look more like OTPP's and other large peers in the Maple 8.
That doesn't mean they will abandon Canada and its markets, it means they need to be prudent and diversify that portfolio across geographies, asset classes and sectors as they grow.
Yes, there are great opportunities in Canada across the capital structure and HOOPP will still invest in them but let's be clear, the globalization of HOOPP is inevitable and it's necessary.
Also, notice HOOPP manages assets and liabilities, so it has a huge fixed income allocation and is a major player in the Canadian bond market.
What else? Unlike others, they fully hedge currency risk but I'm not a big believer in this as my natural inclination is to be long US dollars over the long run, like most large Canadian pension funds.
Where HOOPP adds important value to the Canadian economy, however, isn't through their Canadian investments, it's through their focus on delivering secure pension benefits to their active and retired members.
Those secure pension benefits translate into income their members can rely on which they then spend in the Canadian economy.
****
Back to the original article above, I agree with CPP Investment's Michel Leduc and especially with AIMCo's CEO Evan Siddall.
On Tuesday, I wrote my thoughts in a comment on Freeland eyeing the power of Canadian pensions.
Evan wrote me: "You can quote me as calling her statement more theatrical than substantive."
I didn't want to post it because of the Alberta Pension Plan fiasco but Evan is a big boy and he's spot on, the statement is more theatrical than substantive and we need to ensure Canada's pension funds operate at arm's length from the government.
What about Peter Letko who is lobbying the government hard to force Canadian pensions to invest more in Canada?
Well, tomorrow morning I'm having a web conference call with him and his partner Daniel Brosseau to discuss their views.
I will be fair but firm and here are some of the hard questions I will ask them:
- The Canadian governance model has been a huge success. Why change this in any way?
- Critics say you're talking up your (equity) book right before you get ready to exit the industry, how do you respond?
- Your studies show Canadian equities offer better long-term risk-adjusted returns but did you fit that data and choose a biased sample period?
- Do you not agree the US market is the most liquid and diversified market in the world?
- Why focus on equities and not private assets like infrastructure?
In fact, those questions give away my biases and thoughts.
I only invest (more like swing trade) in US stocks because it is the best, most liquid market in the world and 8 years out of 10, the US dollar outperforms the loonie.
[Note: I joke with my friends that Canada's equity markets is covered by Royal Bank, Manulife, Bell, Telus, Enbridge and Canadian Natural Resources. That's pretty much it and add Shopify for some excitement.]
As far as infrastructure, this is where I see a real need for our pension funds to invest more in Canada as long as the federal government creates winning conditions.
Winning conditions means de-risking projects and privatizing more assets to allow our pension funds to own and operate them properly.
Lastly, and a friend of mine reminding me of this earlier, pension assets belong to Canadian pension members, not Peter Letko, Trudeau, Freeland and not even Michael Wissell, Jeff Wendling, Evan Siddall, John Graham, Michel Leduc, Jo Taylor, Gordon Fyfe, Charles Emond, Deb Orida, Blake Hutcheson, Bert Clark, Barb Zvan or whoever.
This means these pension plans and funds should be doing what is in the best interests of their active and retired members. Full stop.
This is why I'm uncomfortable with this government effort to encourage our pension funds to invest more in Canada.
Anyway, more on this tomorrow and Monday after I speak to Peter Letko but he's not going to change my mind and I doubt I will change his.
Below, Robert Asselin, senior vice-president of policy with the Business Council of Canada, speaks with CPAC's Michael Serapio in the media lock-up for the federal government's fall economic statement.
Great comments, listen carefully at the end when he talks about Canada's debt-to-GDP which takes into account the massive pension fund assets of our country.
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