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Stephen Poloz to Examine How Canada's Pension Funds Can Boost Domestic Investment

Derek Decloet and Christine Dobby of Bloomberg report Canada taps ex-BOC governor to examine how pension funds invest:

Canada’s finance minister has asked former central bank governor Stephen Poloz to examine ways to entice its pension funds to invest more in the country.

Poloz will lead a “working group” that will look at what it will take to get Canadian pensions to put more of their capital into domestic opportunities — including housing development, venture capital and infrastructure such as airports, the government said in budget documents Tuesday.

Large public pension managers including the Canada Pension Plan Investment Board have few restrictions on where they can invest. Over time, they’ve made a huge swing into foreign markets, seeking better returns and greater diversification.

That shift has spurred debate within the country. Last month, more than 90 business leaders, including current and former CEOs, signed an open letter to Finance Minister Chrystia Freeland and her provincial counterparts, urging them to alter the rules for pension funds to “encourage them to invest in Canada.”

Poloz was governor of the Bank of Canada from June 2013 to June 2020, when his seven-year term expired.

Freeland’s budget also takes steps to advance the government’s open banking framework.

Open banking — also called “consumer-driven banking” — allows consumers and businesses to securely transfer their financial data to other service providers. In theory, that should increase competition in the financial services sector, but the government has been slow to bring in the necessary legislation - it says it’s coming soon.

Freeland’s budget appoints the Financial Consumer Agency of Canada to take charge of overseeing the open banking rules. The government is also setting aside $4.1 million for the finance department to finish the policy work on it.

Canada’s large incumbent banks have been preparing for open banking for years, but they’re not expecting an immediate threat to their business.

Aris Bogdaneris, who runs Bank of Nova Scotia’s Canadian banking division, recalled working as a senior executive at ING in the Netherlands when open banking was introduced in Europe.

“It didn’t really impact the banks at all, much to the regulators’ chagrin,” Bogdaneris said during Scotiabank’s investor day in December. “They wanted to have more competition and it didn’t really materialize.”

James Bradshaw of the Globe and Mail also reports Stephen Poloz will lead push to boost domestic investment by Canadian pension funds:

Ottawa is appointing former Bank of Canada Governor Stephen Poloz to lead a new federal working group that will look at ways to spur Canadian pension funds to invest more in the country, especially in areas such as digital infrastructure and airports.

The working group is being created to “explore how to catalyze greater domestic investment opportunities for Canadian pension funds,” according to the budget document released Tuesday, and Mr. Poloz will be supported by Finance Minister Chrystia Freeland, with participation from pension leaders.

The review will focus on priority areas that include digital infrastructure and investment in artificial intelligence, physical infrastructure, airport facilities, venture capital investments to back startup and early-stage companies, as well as building more new homes. There is a particular emphasis on airports – an asset that pension fund leaders have long said would interest them if governments opened them up to private investment.

And the group has been asked to consider whether Canada should lift a rule that restricts pension funds from holding more than 30 per cent of the voting shares in a company, which is considered archaic by some and already circumvented by some large funds.

The working group is Ottawa’s answer to a debate that flared up in recent months about whether Canada’s largest pension funds, which collectively manage more than $2-trillion of assets, are investing sufficiently in their home country. Senior business leaders, including CEOs from some of Canada’s largest companies, have pressed finance ministers including Ms. Freeland to change the rules governing pension funds to nudge them to put more of their members’ dollars into Canadian investments. But current and former pension fund leaders have strongly pushed back, arguing that pension funds must keep their freedom and independence to invest as they see fit to ensure they can pay sustainable pensions into the future.

Ms. Freeland and Ontario Finance Minister Peter Bethlenfalvy have both signalled a desire to boost pension funds’ domestic investments, and the budget measures announced Tuesday echo previous pledges made in the federal government’s fall economic statement.

But by framing the working group as “working with pension plans,” and focusing on unlocking investment opportunities that meet pension funds’ duties to invest in the best interests of their members, Ottawa appears to be taking a conciliatory approach.

“It appears to us, based on what we’re seeing in the budget, that they have it right,” said Michel Leduc, global head of public affairs and communications at Canada Pension Plan Investment Board. “If you want to bring all the right people to the table, you’ve got to demonstrate a level of openness, and I think that’s what they’re doing.”

In Mr. Poloz, the government has chosen a respected intermediary to lead the process. The economist and former central banker, who now works as a special advisor for law firm Osler, Hoskin & Harcourt LLP, commands respect from a broad swath of Canada’s business leaders. After a career spent in Ottawa’s senior ranks, he has a deep understanding of the broad forces that shape the country’s economic performance. And his experience leading the Bank of Canada – an institution that fiercely guards its independence – is likely to give some comfort to pension fund executives who are set on preserving their own autonomy.

The proposed scope of the working group does not mention more drastic options, which could have included rewriting legislation to add an explicit focus on economic development to pension funds’ mandates, or changing investment rules to treat investments in Canada differently from ones made abroad, as some have advocated. Those types of changes can be hard for Ottawa to make as they would require buy-in from provinces in most cases.

While nearly all of Canada’s largest pension funds have mandates to focus on getting the best investment returns for pensioners while managing risks, Quebec’s Caisse de dépôt et placement du Québec – which manages a $434-billion investment portfolio for 48 clients – has a dual mandate that includes contributing to Quebec’s economic development. In past statements, a spokesperson for Ms. Freeland has praised the Caisse’s track record of delivering returns and adding to Quebec’s economy, but the latest budget measures, including the creation of the working group led by Mr. Poloz, appear to steer away from that course.

“A key measure of success will be: Does it create new and better opportunities at scale? Does it lower various forms of risk relative to other markets? Because it’s all about risk-adjusted returns,” said CPPIB’s Mr. Leduc.

To attract new investment capital to airports, including from pension funds, the budget said the Minister of Transport plans to release a policy statement this summer that highlights “existing flexibilities” in the governance of the national airports system.

The government also plans to make the breakdown of how much Canada’s pension funds invest in Canada and abroad more transparent, announcing it will empower the country’s federal financial regulator, the Office of the Superintendent of Financial Institutions, to publicly disclose a standard set of information on large federally-regulated pension plans. It would show the proportion of assets invested in each country, broken down by types of assets – for example, stocks, bonds, real estate or infrastructure – in each jurisdiction.

That could help fill gaps where plans don’t already publish that much detail, and Ottawa is pledging to work with provinces and territories to create similar disclosure rules for the large plans they regulate, which would be crucial to create a consistent standard.

The budget document also sharpens the mandates for the Business Development Bank of Canada (BDC) and Export Development Canada (EDC), two Crown agencies where the government has previously promised to review operations. Ottawa is directing BDC to ramp up financing “for promising new and high-growth businesses,” and to redirect more of its venture capital investments to “emerging and higher-risk sectors to help attract more private capital.”

The government also said in the budget that EDC should tweak its risk management policies to take more risks, and create a special envelope of money to take bigger risks when supporting exporters in key areas for Canada, recognizing they are expanding into “highly competitive markets.”

Alright, this is excellent news because I worked with Steve Poloz in the late 90s at BCA Research when he was a Managing Editor there and I really like the guy on all levels, he's an excellent economist (obviously) and has tremendous experience as head of the EDC and as Governor of the Bank of Canada.

You might not know this but the CEOs of the Maple Eight meet with the Governor of the Bank of Canada twice a year to discuss financial matters. 

In other words, many CEOs of the Maple Eight already know Stephen Poloz and Tiff Macklem and think highly of both of them.

Stephen is also the author of The Next Age of Uncertainty and he has written a policy paper for HOOPP on Pensions in the Age of Uncertainty which I covered in my comment on why it's time to expand CPP again.

In short, Steve who is now Special Advisor at Osler, Hoskin & Harcourt is the perfect person to lead the discussion on how Canada's large pensions can invest more domestically.

Keep in mind, however, they already do invest a lot more than they should domestically (according to me) but I do see opportunities to invest more domestically, especially in infrastructure if the government is finally serious about privatizing assets like airports, ports, toll roads and more.

And yes, the focus should be on bolstering digital infrastructure where Canada lags far behind the US, Asia and Europe and really needs a plan to boost investment there fast.

Now, I've openly disagreed with Daniel Brosseau and Peter Letko who in my opinion have this obsessive and singular focus on boosting Canadian pension funds' investment in Canadian public listed equities (they have a bias against private market assets where they claim "appraisals are lax").

Having said this, they too should be part of the conversation and meet with Steve Poloz to discuss their views and try to convince him (they failed to convince me).

Hell, let's have one big pow-wow in Ottawa and I'll even join the fun and give them my unbiased and blunt views on what needs to get done fast and how we can improve the governance at Canada's large pension funds through more transparency about where they invest and more benchmark transparency.

You see, I too have very strong views about what needs to get done but nobody in quoting me in the Globe and Mail and that's fine, I prefer to write my views here.

So here they are in a nutshell:

  1. Privatize, privatize, privatize our large infrastructure assets to entice Canada's large pensions to take meaningful stakes in these assets and improve their operations over the long run.
  2. Do not meddle with the governance framework but make sure you set clear expectations that you expect all of Canada's large pension funds to be radically transparent on where they invest and to have that information updated every quarter on their website. There should be clear and transparent information providing a detailed breakdown on geographic, sector, strategy by asset class and this has to be standardized across all public and private pensions (OSFI can easily oversee this). There should also be a transparent valuation policy so we understand exactly how they value private assets.
  3. Related to point number two, it's high time we introduce independent performance audits at all our large pension funds because that's not the job of the Auditor General of Canada or the Office of the Chief Actuary of Canada or their respective board of directors for that matter. In order to do this properly, you need an independent outfit that can properly evaluate the risks being taken at each investment activity across public and private markets and whether the benchmarks properly reflect those risks. And to do this properly, we need benchmark transparency for all investment activities across all asset classes. That information and the special independent performance audits that I propose take place every three years can significantly boost the governance at Canada's large pension funds and the information should be publicly disclosed on their respective websites.

Of course, not all of Canada's large pension funds will welcome such independent performance audits and some will vigorously oppose such an audit but this is my expert opinion and yes, when it comes to pensions, I still know what I'm talking about (haven't lost my pension oomph yet!).

Anyway, I'm looking forward to seeing what comes out of this and think Stephen Poloz is the ideal person to have a proper discussion on how Canada's large pension funds can boost their domestic investments in an intelligent way which benefits beneficiaries, stakeholders and our country over the long run.

Of course, it's not lost on me the irony of Budget 2024 and how it's proposing an increase in the taxable portion of capital gains, up from the current 50 per cent to two thirds for annual capital gains over $250,000. 

How exactly does this boost domestic investment and close the productivity gap with the US?

What else caught my attention? The paltry increases in disability benefits:

Parliament last year passed the Canada Disability Benefit Act, which promised to send a direct benefit to low-income, working-age people with disabilities. 

Budget 2024 proposes funding of $6.1 billion over six years, beginning this fiscal year, and $1.4 billion per year ongoing, for a new Canada Disability Benefit.

Advocates had been hoping for something along the lines of $1,000 per month per person. They'll be disappointed.

According to the budget document, the maximum benefit will amount to $2,400 per year for low income individuals with disabilities between the ages of 18 and 64 — about $200 a month.

I remind Canadians that when the pandemic hit and inflation was low, all parties did the right thing and voted for CERB to help cushion the blow of losing employment income.

They set an amount of $2,000 a month back in 2020 when inflation was low and now they're dithering on rectifying disability payments which have been half that amount and not indexed to inflation for far too long.

It's shameful and it disgusts me the way our country mistreats disabled Canadians, many of whom are struggling to survive. If anyone thinks otherwise, I invite them to read this article and plenty of others to properly inform themselves because on disability issues, most Canadians are completely clueless.

I'm a conservative at heart, I do not believe in wasteful government spending and reckless deficits but I do believe we have a responsibility collectively to first take care of our most vulnerable citizens before we accept millions of immigrants and take care of them financially.

Anyway, those are my blunt and raw thoughts.

Below, take the time to listen to the views of former Bank of Canada Governor David Dodge who told CTV's Vassy Kapelos yesterday that the 2024 federal budget from Deputy Prime Minister and Finance Minister Chrystia Freeland is "likely to be the worst budget" in decades. 

God I love David Dodge, he certainly doesn't mince his words, and is another Canadian treasure.

He's spot on about Canada's productivity problem and what needs to get done.

And Tony Clement recently welcomed back Stephen Poloz former Governor of the Bank of Canada, for a Prescient & Pressing Finance and Economic discussion on his Boom and Bust show. 

Take the time to listen to Steve's insights on the age of uncertainty and what it means for policymakers implementing retirement and other policies and also see a previous comment of mine in why it's time to expand the CPP again where I share more of Steve's wise insights on retirement security.