Leave Canada's Pension Funds Alone, Focus Attention Elsewhere
Federal and provincial finance ministers are embracing efforts to spur Canada’s largest pension funds to invest more in the country, but are stopping short of endorsing rule changes advocated by a group of influential business leaders who are pushing for more domestic investment.
On Wednesday, more than 90 chief executive officers at some of the country’s largest companies signed an open letter that urges federal and provincial finance ministers to “amend the rules governing pension funds to encourage them to invest in Canada.”
The letter is the latest salvo in a campaign to push political leaders to use regulations and incentives to steer more of the trillions of dollars that pension funds invest on behalf of retirees into Canadian investments, particularly to public stock markets but also private investments in infrastructure, real estate and other assets.
But it has drawn sharp pushback from some pension executives who argue that any system that directs more investment to Canada would cloud the clear mandate that pension funds have to earn the best returns for their members and pay pensions on time.
Federal Finance Minister Chrystia Freeland and Ontario Finance Minister Peter Bethlenfalvy both said in separate statements that they are eager to see Canada’s major pension funds invest more in Canada, responding to the CEOs’ open letter. And on Thursday, Ms. Freeland met with CEOs from major pension funds in Toronto, as part of previously scheduled prebudget consultations.
“Canada’s pension funds are among the world’s most highly respected investors and provide a secure and dignified retirement for millions of Canadians,” said Katherine Cuplinskas, a spokesperson for Ms. Freeland, in an e-mail. “Our government is committed to working collaboratively with them to find even more opportunities to bring their investment acumen home to Canada.”
Her statement echoes the priorities Ottawa set out in the federal government’s fall economic statement, which promised a collaborative focus on domestic investment, “while helping to deliver secure pensions for Canadians.”
Ms. Cuplinskas also highlighted the Caisse de dépôt et placement du Québec in her statement, “with its strong track record of both delivering excellent returns and contributing to Quebec’s economic development,” as “a good example of how effective this approach can be.”
The Montreal-based Caisse manages $434-billion, of which $117-billion is in Canada and $88-billion in Quebec. It is the only one of Canada’s largest pension funds that has a dual mandate: to earn optimal returns on its investments but also to contribute to Quebec’s economic development.
That comparison could raise alarms among pension executives, however, some of whom privately suspect that double mission hampers the Caisse’s performance. The Canada Pension Plan Investment Board – with a singular mandate to earn a maximum rate of return without undue risk of loss – has averaged a 9.3-per-cent annual return over 10 years. That compares with a 7.4-per-cent return for the Caisse.
There are also fears among some pension fund leaders that new measures to tilt investment decisions to Canada’s advantage would chip away at the independence that has helped make Canada’s large pension funds stable and effective.
The CEO of Ontario Municipal Employees Retirement System, Blake Hutcheson, said the fund manager – which invests $129-billion on behalf of 600,000 Ontario public-service workers – is “dedicated to growing and fiercely defending their retirement savings,” in an e-mailed statement. “We must put members’ interests first and foremost, above those of any self-interested parties with competing agendas.”
Mr. Hutcheson said that roughly one quarter of OMERS assets – about $34-billion – are invested in Canada, including in infrastructure, clean energy, hotels, office buildings and shopping centres, often through direct private investments not available to public-market investors. And he said OMERS has told federal and provincial governments that it is willing to work together to find new investment opportunities – as long as they “meet our required risk and return profile.”
“That co-operative approach is in the best interest of our plan and this nation,” he said. “Any attempt to mandate investments in certain prescribed asset classes or components of our economy would limit our flexibility and make it extremely difficult to continue to deliver on our pension promise.”
Mr. Bethlenfalvy, Ontario’s Finance Minister, said “we agree that Canadian pension funds should invest more at home,” in an e-mailed statement.
“We also understand that pension funds need to make returns that support their pensioners and provide stability for the future,” he said. “That is why our government launched the Ontario Infrastructure Bank that will partner with pension funds and enable Ontario workers to put their pension to work right here at home.”
Ontario announced its provincial infrastructure bank, with $3-billion in initial funding, modelled after similar institutions launched by Ottawa and governments in Britain and California, seeking to use injections of government money to attract more private-sector investment.
Alberta’s pension fund managers “must make investment decisions that align with the mandate of their clients and comply with investment policies and goals,” said Savannah Johannsen, a spokesperson for provincial Finance Minister Nate Horner in an e-mail.
The open letter was signed by CEOs and senior executives in industries that include auto parts, oil and gas, airlines, telecommunications, banking and grocery retail. It continues a crusade spanning more than two years, led by Peter Letko and Daniel Brosseau, co-founders of Montreal-based investment manager Letko, Brosseau & Associates Inc.
One option put forward by Mr. Letko and Mr. Brosseau – but not necessarily endorsed by the signatories to the open letter – would be to require a pension fund making an investment outside Canada to set aside some money in a reserve. These pension plan reserves would be financially prudent, they said, as they would hedge against risks such as moves in currency markets, and by exempting domestic investments from the same requirement, the policy would make Canadian investments more attractive.
“It’s to introduce some element that they can enter into their calculus that would differentiate between a domestic and a foreign investment,” Mr. Brosseau said in an interview.
Let me thank Senator Clement Gignac for posting this article on LinkedIn earlier today and here is the comment I posted when I read it:
Politicians love pandering to the public and this issue is an easy one to manipulate. Why not invest more in Canada, eh?
Well, here’s some food for thought. Canada’s mighty pensions invest more in Canada than Norway’s Government Pension Fund with over $1.6 trillion in assets, almost exclusively invested abroad: https://www.nbim.no/en/
More importantly, Canada’s pensions have long-dated liabilities and have been pleading with our governments to privatize infrastructure assets to no avail. If governments want Canada’s mighty pensions to invest more domestically, they should create winning conditions to allow them to invest in domestic brownfield and greenfield infrastructure projects.
Bottom line: We need an open and transparent debate about where Canada’s large pensions invest and why and if we want them to invest more in domestic assets, which assets are where Canadians get most bang for their pension savings? In my opinion, it’s in infrastructure, not resource equities or other stocks.
Let me be even more blunt, the mandate of Canada's large pension funds is to make sure we have generational wealth built up to pay long-dated liabilities, and to do this properly, they need to seek the best risk-adjusted returns across all asset classes all over the world.
I read the signed open letter to finance ministers and wasn't terribly impressed.
It seems like a bunch of people have an agenda, an angle, and all of a sudden, everyone is a pension expert.
I spoke to Peter Letko and Daniel Brosseau of LetkoBrosseau Global Investment Management back in November to set the record straight on where they stand on Canadian pension funds investing more in Canada.
No doubt, they are pension experts, started off at CN Pension before opening their own shop and they told me the impetus behind their effort was to have a more open and transparent conversation of where our large pensions invest.
But when they start telling me about how Australia's pensions are mandated to invest a certain portion of their assets in domestic equities, I tune off.
Again, Norway's giant Government Pension Fund has 98% of its assets invested abroad, and it's doing exceptionally well over the long run.
What is behind this push to invest more in Canada?
I suspect people have an angle to play and they see our cash-rich pension funds as a solution to structural problems that can be traced back to Ottawa, namely, policies that have hindered foreign investment and protected industries from global competition.
It infuriates me when I read that Canada's large pension funds should invest more in Canada.
Why aren't global funds investing more in Canada?
I know why, it's the same reason why I only invest in US equities and will teach my child how to trade properly and only invest US equities.
The Canadian stock market is a joke, it truly is, big banks, big telecoms and big energy shares, big deal!
I know some of you will disagree with me, that's fine, there are exceptional companies in Canada but let's call a spade a spade, Canadian stocks are a fart in the wind compared to US stocks and our main industries are federally backed oligopolies.
Yeah, I know, I can invest in Bell, Enbridge, Bank of Nova Scotia, you name it and collect a nice dividend but it bores the living hell out of me.
Pas pour moi.
And why are we always talking about Canadian equities and our large pensions?
What have the federal and provincial governments done to create winning conditions to invest more in domestic infrastructure?
Diddly squat! The Canada Infrastructure Bank and the new Ontario Infrastructure Bank are a joke, no government is privatizing large infrastructure assets so our large pensions can bid on them, and here we are complaining that our resource sector is "starving for cash" and our pensions should invest more in Canada.
I'm fed up with this debate, a lot of chiefs who don't really know what they're talking about and let me be clear, the more governments get involved in the way our pensions manage their assets, the worse off our retirement system will be over the long run.
What about CDPQ and its dual mandate? What about it? They have been successful till now but if I were to put CEO Charles Emond and his predecessor Michael Sabia on a polygraph, I can assure you they'd tell me they'd wish they didn't have this dual mandate.
Investing in our own backyard has pros and cons.
Sure, you know the companies better but it opens the door to fraud, abuse and subsidizing losers over the long run.
I believe in capitalism.
When I am trading US biotech stocks (roughly 30 of them I watch closely) to make returns, nobody is there to hold my hand and tell me what to do, it's either I make money or die, period.
And that's my message for every Canadian industry looking for a handout from our large pension funds: shape up, become competitive or you will die sooner or later.
Canadians working hard, forced to contribute to the Canada Pension Plan and other pension plans that cover their members, expect their pension fund managers to invest that money wisely over the long run and diversify across geographies and industries.
The biggest mistake we can do is tamper with a successful governance model which has produced great long-term risk-adjusted returns.
My message to Ottawa and provinces, you can have discussions with our pension funds, you can and should demand full transparency, but keep your grubby hands off our pension assets, let experts manage these assets in the best interests of contributors and beneficiaries.
Do I have concerns about some investments? You bet, I wouldn't invest a dime in China directly, only indirectly through US stocks, because I fundamentally don't believe in investing in a communist or autocratic country.
Do we need a conversation about where our large pensions invest, how they value private markets and more? Sure, I'm a stickler for transparency and accountability and we need these conversations.
But let me be very clear, the best bang for our pension buck lies in domestic infrastructure and that's where finance ministers need to focus their attention, in creating winning conditions to allow our large pensions to invest more in domestic infrastructure, not stocks and bonds.
If you want to read another comment on this, read Jack Mintz's latest on why you can't solve investment woes on workers’ backs.
This country has huge problems and the biggest problem is that we have a bunch of incompetent people in Ottawa who don't know how to run it properly.
Anyway, I get really irritated reading these articles, everyone has an opinion but very few are transparent about the angle they're playing.
Let's do what's right for the country, let's make sure we strengthen, not weaken, our retirement system and let's introduce policies that make our industries more competitive and stronger, thus attracting more foreign and domestic investment.
Below, highlights from President Joe Biden's 2024 State of the Union address before Congress on Thursday. He sure came out swinging last night, it was nice to see him on fire again.
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