Don't Meddle with Canada’s Pension-Plan Model

Earlier this week, seven former pension heavyweights came together to write an op-ed for the Globe and Mail pleading governments here not to meddle with Canada’s pension-plan model:

What is the purpose of a pension plan?

That’s a strange question to ask in this country, where we have spent nearly three decades building a Canadian pension model that is respected and coveted around the world.

Yet, more than 90 Canadian business executives recently signed an open letter calling for governments to make re-evaluating that pension model “a national priority,” with a focus on introducing unclear mandates not related to financial returns.

So, we must start at the beginning. Put simply, the purpose of a pension plan is to help secure the financial future for Canadian workers by delivering promised pension benefits at a reasonable cost.

Those benefits come from two sources. First, hard-working Canadians and their employers spend decades contributing to pension plans with the promise of financial security in retirement. The second, and far larger piece, comes as pension plans help keep that promise by generating required investment returns. Approximately 80 per cent of the pension payments made to retirees flow from investment returns.

And that’s where the simplicity ends. Investing for generations is a challenge that requires navigating uncertain markets and operational complexity. Any added constraints imposed, including such new suggested requirements, only exacerbate these challenges. Portfolios become less efficient, risks increase, investment returns are threatened, and future pensions are put at risk.

Right now, Canada leads the world in pension investing. Despite being only the 38th-largest country by population, Canada has the third-largest share of pension wealth. Among the reasons for that success is the pursuit of investment returns and an absence of political interference.

Our pension plans’ governance models also afford them clear mandates and board directors who uphold leading governance practices. This commercial focus is a compelling advantage. And, consequently, we have very well-funded pension plans.

We can see how extraordinary this result is by looking at other jurisdictions. South of the border, many pension plans and state pension systems are underfunded. In fact, cities have declared bankruptcy because their pension plans were in crisis, thus depriving their workers of their retirement savings.

Moreover, the most direct U.S. equivalent of the Canada Pension Plan, social security, is on a path to financial difficulty within a decade. Meanwhile, the CPP and other Canadian plans are well-funded.

It’s easy to forget that Canada once faced similar struggles. In the 1990s, growing concerns about the solvency of our plans gave way to a series of reforms and the “Canadian model” of pension investing was born.

This solution did not come at the expense of Canadian economic growth and development. On the contrary, by reducing pension expenses and long-term costs of providing retirement security, we contributed to Canadian competitiveness.

All our well-known Maple funds invest heavily in Canada – at least 10 per cent of their portfolios are invested here, with several closer to 30 per cent or even more. They are already entwined in support for the Canadian economy, not only as owners of publicly traded stocks, but also of real estate, infrastructure and private businesses. They fund corporate and government debt across the country.

More compelling opportunities at home would be welcome, should the business climate, policy certainty, taxes and other investment factors strike the right balance of risk and return.

Yet, the Maple funds don’t put all their eggs in one basket. Seeking diversified assets globally helps protect members from the demographic and economic factors that affect the financial sustainability of their plans. Changes to Canadian population age, employment, immigration and earnings growth all contribute risks that can be mitigated by investing in different economies.

Focusing too much on Canada, to the exclusion of other compelling investment opportunities, would be a step backward. It would jeopardize the sustainability of our pension plans and cost plan members in uncaptured growth and lost access to unique industries or currency advantages available elsewhere. For example, the average annual return for the S&P 500 over the past ten years has been about 14 per cent, while the TSX 60 has returned about 7 per cent, in Canadian dollar terms.

The Canadian pension model already requires investment income earned abroad to flow back to Canada in the form of benefits to plan members. This is the same approach that many individuals seek to replicate with their own RRSPs or TFSAs, with similar benefits. Forcing pension plans to invest more member contributions in Canada is essentially the same as forcing Canadians to invest their personal savings here.

Instead of looking to Canadians’ savings, governments have other tools at their disposal to seek diverse public-policy goals.

Unintended harm is much more likely when policy instruments designed for separate and distinct objectives (e.g., the safety and soundness of pension plans vs. general regional economic development or corporate subsidies) are confounded and implemented without accountability to government for outcomes – good or bad.

Our globally envied, made-in-Canada retirement security system was built by millions of Canadians. It works.

There is no reason to sacrifice this in pursuit of unsubstantiated benefits that would come at a cost to pension-plan members. Canadian pension plans are already serving their purpose


Robert Bertram is a former chief investment officer of Ontario Teachers’ Pension Plan.

David Denison is a former chief executive of Canada Pension Plan Investment Board.

Jim Keohane is a former CEO of Healthcare of Ontario Pension Plan.

Claude Lamoureux, Jim Leech and Ron Mock are former CEOs of Ontario Teachers’ Pension Plan.

Mark Wiseman is a former CEO of Canada Pension Plan Investment Board.

This is a short and insightful op-ed from experienced pension managers which hits all the right notes and the message is very simple: don't tamper with a successful model which has been proven to work over the long term and will ensure future generations can rely on their pension benefits when they retire.

I cannot overemphasize this point in the comment above:

Unintended harm is much more likely when policy instruments designed for separate and distinct objectives (e.g., the safety and soundness of pension plans vs. general regional economic development or corporate subsidies) are confounded and implemented without accountability to government for outcomes – good or bad.

The older I get, the more cynical I become and appreciate Milton Friedman's message on why governments shouldn't meddle with the economy, most of the time they bungle it up!

Last week, I wrote my own thoughts on why the federal government should leave Canada's pensions alone and focus its attention elsewhere.

I was very explicit and blunt, the federal government should only focus on creating winning conditions to attract foreign and domestic investments. 

And in my opinion, the most important thing it can do is start privatizing infrastructure assets like airports, toll roads, ports and other assets.

Canada's infrastructure is decaying, we desperately need private investments and that will create jobs and help our large pensions pay benefits over the long run.

I'm actually surprised the CEOs of the Maple Eight and other large Canadian pensions aren't getting together demanding this policy shift from the federal and provincial governments.

The situation is dire. Earlier this week, my former colleague Stefane Marion, Chief Economist and Strategist at the National Bank, wrote an excellent comment on why Canada's only way out is to attract more private investment.

We have a huge productivity problem in this country and we are not addressing it. Worse still, government policies on immigration, housing and taxation are exacerbating this problem.

The end result? Nobody wants to invest in Canada and without that much needed investment, we risk falling further behind the United States in terms of productivity and this will permanently jeopardize our standard of living.

Canada's mighty pensions can help at the margin, especially if the federal government privatizes assets, but we need a hell of a lot more if we are to rectify this ongoing problem.

The truth is the United States is so far ahead of Canada, Australia, Europe, and even Asia when it comes to productivity gains that it's no wonder the Nasdaq attracts huge global capital flows.

Let me just end it on this note.

A friend of mine in Greece reminded me what a disaster it was when SYRIZA forced Greek pensions to invest more of their assets in the domestic economy.

Is that the course of action Canada wants to follow? 

Let's stop talking nonsense. I have no qualms on transparency, accountability and forcing Canada's large pension funds to disclose more. In fact, I will write a comment on how we can significantly improve the governance at these pensions (yes, there's room for improvement, never mind what you think).

But I cannot sit idly by and watch the federal government make stupid decisions, threatening the Canadian pension model which is working exceptionally well even if it's far from perfect.

That's all from me, had a very busy week covering the results at OTPP, HOOPP and OPTrust and trading US biotech stocks that are volatile and kept me active all week (I should write a book on trading biotechs before I have a heart attack).

Lastly, take the time to read Barbara Shecter's excellent article on why the Liberals' 'dangerous' pursuit of Canada's pension billions keeps falling flat. It is a little long but has further insights on why governments shouldn't meddle with our large pensions.

Below, Canada’s largest pensions have gained a global reputation by investing billions in real assets such as infrastructure and real estate. This has attracted attention back home. Meet the Maple 8.

Update: Sebastien Betermier shared a Globe and Mail op-ed he wrote with Keith Ambachtshteer on why the business of pension funds is to serve beneficiaries – not boost the economy. I note the conclusion which echos my thoughts above:

The question we should ask ourselves is not whether Canadian pension funds invest enough in Canada, but instead how we can make Canadian assets more appealing to investors. Reducing the barriers to investing in Canada will unlock capital not only from our own pension funds but also from a much larger pool of international investors.

Take the time to read their full comment here.

Also, Jim Leech, former president and CEO of Ontario Teachers' Pension Plan, joins BNN Bloomberg to talk about why he thinks the open letter calling on Canadian pension funds to invest more at home is counterproductive. He also talks about the incentives needed to get our pension funds to funnel more dollars to Canadian projects.