A Clash of Titans Over Canada's Pension Fund Strategy

Jordan Fleguel of BNN Bloomberg reports fight over where Canada's pension funds should invest is a 'clash of titans': 

One of the main proponents of increased domestic investment from Canadian pension funds says there are two competing theories on the issue that each come to a different conclusion about what’s best for Canada’s pensioners and its economy.

“It's a clash of titans, because we have two economic theories,” Daniel Brosseau, co-founder and partner at investment firm Letko Brosseau, told BNN Bloomberg in a Monday interview.

Brosseau and his firm helped bring national attention to the debate over where Canada’s pension funds should be investing by penning an open letter last month to Finance Minister Chrystia Freeland, urging policymakers to alter the rules for pensions to “encourage them to invest in Canada.”

The letter received pushback from some members of the business community who argued that government should not interfere with pensions’ investment decisions, but Brosseau believes that viewpoint doesn’t take the full macroeconomic picture into account.

“Portfolio management says that Canada is almost three per cent of world GDP, and three per cent of world markets, so a diversified portfolio should have just three per cent invested in Canada, and anything more is a bit overweight,” Brosseau said.

“But you have another theory, which is macroeconomic theory, that says a country should invest all it can in its own development, because that's the way it's going to increase its productivity, its incomes, its jobs, and its general wealth.”

Brosseau said the country’s national pension fund, the Canada Pension Plan (CPP), has around two per cent of its capital invested in Canadian private and public equities, with the majority invested in other markets.

He said this type of investment approach essentially cedes control of Canadian companies to investors from outside Canada, hampering the economy in the long run.

“Portfolio theory says to invest very little in Canada, and leave the control to foreigners, while macroeconomic theory says to invest all you can in Canada and keep control of your companies,” Brosseau said.

He added that despite his personal feelings on the issue, his main goal was to kick-start a conversation about it so that Canadians can be more informed about where their retirement savings are being allocated.

“It's a question that needs to be asked and needs to be discussed. If people decide that the best thing is that we let that money go and we don't encourage our own economy… if that's best for the country, so be it, we’ll live with it,” Brosseau said.

“But it cannot happen by accident, so this discussion that's going to occur is going to be quite important.”

And the discussion now has a moderator, as the federal Liberals announced in their budget last week that they’ve asked former Bank of Canada governor Stephen Poloz to examine ways to entice pensions to invest more at home.

Brosseau called the move “very positive,” and added that “(Poloz) has all the required skills and knowledge to be able to understand what the real issues are.”

Well, at least I agree with Daniel that naming Stephen Poloz to examine how Canada's large pension funds can boost domestic investment is an unambiguously good thing.

We need to have an open, transparent conversation on this issue and we need to get it right because a lot is hinging on getting it right, not just the future of our retirement system but also the future of our economy.

Now, a month ago, I openly discussed Daniel Brosseau and Peter Letko's views on why Canada's pensions need to be part of the solution

I do not want to rehash all the pros and cons but I disagreed with Daniel and Peter because in my opinion they got it all wrong and are too equity focused in their arguments.

To be truthful, I have smart friends of mine who agree with their views and think it's totally unacceptable that large Canadian pension funds do not invest more in TSX listed companies and Canadian private equity.

To be even more honest, one of my friends worked at CDPQ and told me a dual mandate isn't necessarily a bad thing but agrees with me that governments shouldn't tamper with governance at the Maple Eight as "that would be the beginning of the end."

He's also overweight US and Canadian energy companies and is selling now "because of the stupid increase in the capital gains tax, not because of the ESG frenzy which has led many Canadian pensions funds to be under-invested in traditional energy companies."

I've been thinking a lot about this issue because I realize there are many views but I keep coming back to years of bad policies at the federal level as the main culprit of Canada's structural productivity crisis and I fear that pensions are now being sought after to fix a structural problem they didn't create, nor can they realistically fix by investing more in Canada (they already invest a lot across all asset classes).

In my opinion, the increase in the capital gains tax last week was the final death knell in tax policy in this country, never mind the carbon tax. 

It's a massive wealth tax which will discourage, not encourage more investment in this country and its effects will be broad and impact future generations if the Liberals are re-elected.

Now, let me set aside my political views. What if tomorrow all of Canada's large pension funds got together and decided to invest 10% more in Canada across all asset classes, public and private?

Would that solve our productivity crisis? I really don't feel like it would make a dent but I am open to listening to all arguments from economists and investment professionals.

In my view, the best thing Canada can do is create policies to attract the best and brightest from all over the world, and to do that, we need major investment from the world's leading companies, not from our pension funds.

Bank of Canada's former Governor David Dodge has openly questioned the over-investment in Canada's housing sector stating we need more investment in machinery and equipment.

With all due respect to David Doge who I respect a lot, not sure that will cure Canada's productivity disease either.

We are sorely lacking the VC ecosystem in this country to address a serious productivity crisis and we may never obtain it.

"Well Leo, that's more reason for Canada's pension funds to invest more in Canada."

I'm not so sure about that, the main job of our large pension plans/ funds -- of all pensions, public and private -- is to meet the liabilities of their contributors and beneficiaries.

And to do this properly, we cannot impose restrictions on them, we need to understand their objectives and why they invest the way they do.

Having said this, I'm a stickler for the three Ts: transparency, transparency and TRANSPARENCY!

Let me be crystal clear here:

  • Transparency on where our large pension funds invest: I want to be able to go on their website and click on a link that is highly visible which states "where we invest" and see very detailed information providing geographic, sector and asset class breakdown by country. Full stop.
  • Benchmark transparency: All pension funds must make their benchmarks transparent and explain them in detail for all investment activities. Full stop.
  • Compensation transparency: All pension funds should disclose how compensation is determined and report not only compensation at the highest levels but at all levels. Full stop.
  • Independent performance audits: This is tricky because it's hard to find anyone independent these days but in my view, an independent performance audit that digs deep into all investment activities is needed and these reports must be made publicly available. Full stop.
  • Valuation policy transparency: Related point here is all of Canada's large pension funds should publicly disclose how they value their private market investments. This way skeptics like Peter Letko (and others) can't openly question the way these assets are being valued. Full stop.
  • HR policies transparency: Last but not least, we need more HR policies transparency at Canada's large pension funds. I want to know how many women, people with disabilities, LBGTQ+, aboriginals, visible minorities, older Canadians are applying to jobs and why they are or aren't being hired. For far too long, it's like an HR mafia controlling who gets hired at these organizations and Canadians deserve a lot more transparency on hiring/ firing activities. Full stop.

Now, I realize my transparency list isn't exhaustive and it's a pipe dream but I'm still laying it out there and by the way, I would demand the same transparency from our federal government and all Crown corporations. 

I worked at the BDC after I worked at CDPQ and the PSP, I also worked at the government organizations and seen the good, the bad and the ugly at each place.

Let me give you a quick example. The federal government has a central registry where all organizations have to upload expenses, all expenses from government contracts awarded to ArriveScam to all other expenses including the PM's trips.

Why can't all Canadians easily click on a website to obtain that information on a timely basis?

I know why because they want to keep that information private citing national security concerns (aka, "we don't want Joe and Jane Taxpayer knowing all the expenses in detail, they'd have our heads"). 

Anyway, getting back to this "clash of titans," I welcome more debates on this issue and will only ask Stephen Poloz makes these meetings/ forums transparent so all Canadians can judge the merits of the arguments and make up their own mind.

Do I plan on going to Ottawa to testify? Maybe if I'm invited but the last time I went to Parliament Hill to testify, it didn't go too well. I'm very blunt, have zero tolerance for BS, and left many politicians open mouthed and gasping for air (Tom Mulcair loved it, not sure the rest did).

I'm obviously not a good politician but humble enough to know I don't have the monopoly of wisdom on pensions and investments. I'd like to hear an open and honest debate where key players come together to discuss their views and I'll be glad to cover them here.

One last point, I do agree that it's silly to look at Canada's MSCI weighting to determine how much our pension funds invest in Canadian equities, that should be dropped as a point of reference, it's a terrible argument.

And I remain steadfast in my view that the best way Canada's large pension funds can invest more in Canada is by privatizing major infrastructure assets, so I was glad to see Budget 2024 is opening up that avenue (let's see where it goes).

Alright, let me wrap it up there, see the interviews below for more insights.

First, Daniel Brosseau, co-founder and partner of Letko Brosseau, joins BNN Bloomberg to talk about the ongoing discussion on where Canadian pension plans should be investing more dollars. 

Next, Mark Wiseman, former chair of AIMCo and former CEO OF CPP Investments, joins BNN Bloomberg to weigh in on the ongoing debate on where Canadian pension funds should be investing. He says he'd love to see more pension fund money in Canada, but there are several barriers to achieving that.

I like the part where he says it's not taxes, it's money hard working Canadians and their employers put into a fund to secure their retirement, we don't want to change the governance to make it a stealth tax.

Lastly, 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.