Bob Baldwin and Erin O'Toole on Why We Shouldn't Mess With the Maple Eight
Last month’s budget unveiled a working group led by former Bank of Canada governor Stephen Poloz to collaborate with pension fund leaders to encourage funds to invest more of their assets in Canada.
This initiative is not consistent with the proper management of pension fund assets. It also lacks proper supporting evidence, is unlikely to be effective in achieving its objective except under one unacceptable condition and ignores the use of alternative tools to achieve its stated goals.
The legislation creating the Canada Pension Plan Investment Board includes a statement of “Objects and Powers” that summarizes the approach to investing consistent with fulfilling the fiduciary duty of the fund managers. The objects include: assisting the Canada Pension Plan in meeting its obligations to contributors and beneficiaries; managing any amounts transferred and its right, title or interest in any designated securities, in the best interests of the contributors and beneficiaries under that legislation; and finally, to invest its assets with a view to achieving a maximum rate of return, without undue risk of loss, having regard to the factors that may affect the funding of the CPP and its ability to meet its financial obligations on any given business day.
Almost identical wording was used to establish the objects and powers of PSP Investments.
Quite properly, the exclusive focus of these objects and powers is the best interests of the plan members. After all, it’s their money. Notably absent from the objects and powers is any suggestion that investments be made to support a government’s issue of the day.
I realize, of course, that the Finance Minister was urged to move in this direction in an unusual open letter from 100 senior business leaders. The proposal in the budget document can be viewed as a milder version of this letter. The budget talks about encouragement rather than compulsion, which is implied in the letter. But it still provides the wrong frame of reference for pension fund investors and is bound to create pressures for them to follow “encouragement” from the Poloz working group.
Notably absent from the letter and the brief discussion in the budget document is any evidence that Canadian pension funds are passing over good Canadian investment opportunities in favour of foreign investments. In the absence of such evidence, calling on Canadian pension funds to invest more in Canadian securities seems to suggest that they should accept concessional returns. It is hard to see how this is in the interests of the plan members.
The budget and the open letter share the goal of an increase in real capital investment, not simply about the purchase of securities. In fact, the letter persistently confuses the two. One might have hoped for some evidence that real capital investment projects are going unfulfilled because there are no takers for Canadian securities that would finance them – even if they offer globally competitive returns.
No evidence is provided in the letter or in the budget document on this matter. Without this evidence, asking pension funds to invest more in Canadian assets may have the same effect as pushing on a string: Canadian securities prices will go up, but nothing changes in terms of real capital investment.
Note, too, the effectiveness problem is only overcome if pension plans are forced into concessional investing. Being forced into concessional investing is an unacceptable outcome.
Even if it was possible to overcome the fiduciary responsibility problem – which is doubtful – why lean on pension funds to promote the government’s objectives when Ottawa has so many other tools it can use: tax and regulatory law; the Canada Growth Fund; the Infrastructure Bank; the Business Development Bank of Canada; and so on.
If the government wanted to do something of value to pension fund investors and society in general, it would move ahead on the development of the taxonomy of climate transition investments as recommended by the Sustainable Finance Action Council. There is no conflict with fiduciary duty in this area. Nor is there any fiduciary duty problem with the other tools just mentioned.
Although it is unlikely to happen, we should scrap the working group to encourage pension funds to invest more in Canada or, at the very least, have a commitment that any recommendations from this working group will be consistent with the objects and powers of the CPPIB and PSP Investments. It is important to repudiate the view expressed in the letter that says: “Government has the right, responsibility and obligation to regulate how this [pension] savings regime operates.” This view is totally at odds with the objects and powers of the CPPIB and PSP Investments.
*Bob Baldwin is co-chair of the C.D. Howe Institute’s Pension Policy Council and an Ottawa-based consultant who has worked on pension issues for more than 30 years.
Bob Baldwin used to sit on the Board of PSP Investments when I was there. He's a very nice and sharp guy with tons of experience and his op-ed highlights the central issue of what's wrong with encouraging Canadian pension funds to invest more domestically, namely, it runs against the legislation of CPP and PSP in fulfilling their fiduciary duties of achieving a maximum rate of return, without undue risk of loss, having
regard to the factors that may affect the funding of the CPP or plans PSP is responsible for.
Bob is also very clear:
Quite properly, the exclusive focus of these objects and powers is the best interests of the plan members. After all, it’s their money. Notably absent from the objects and powers is any suggestion that investments be made to support a government’s issue of the day.
Nowhere does it state in best interests of the Canadian economy or in best interests of government to achieve its economic policy.
Bob goes on:
Notably absent from the letter and the brief discussion in the budget document is any evidence that Canadian pension funds are passing over good Canadian investment opportunities in favour of foreign investments. In the absence of such evidence, calling on Canadian pension funds to invest more in Canadian securities seems to suggest that they should accept concessional returns. It is hard to see how this is in the interests of the plan members.
Well, it's implied and the research Letko Brosseau put out does provide evidence they feel makes a compelling case for Canadian pension funds to invest more in Canadian equities.
Hell, this weekend on my personal chat group made up of close-knit friends, we highlighted two great performing Canadian stocks, Dollarama and Stantec:
No doubt about it, these are well-run Canadian companies and their stock has rewarded shareholders extremely well over the last five years.
Wouldn't be surprised if LetkoBrosseau owns them both (they told me they own Stantec).
But the Canadian market is small potatoes compared to the US market and the data can be fudged many ways to show "outperformance of Canadian stocks.
Since 2009, however, the S&P 500 and especially the Nasdaq have trounced all other global indices including the S&P TSX.
In fact, some of my friends openly wonder why we even have Canadian pension fund managers and not put all the pension money into the SPY (S&P ETF) and Berkshire Hathaway shares (BRK). There are a lot reasons why but that is a discussion for another day (main reason is volatility and ensuring a stable contribution rate).
Bob also states:
Even if it was possible to overcome the fiduciary responsibility problem – which is doubtful – why lean on pension funds to promote the government’s objectives when Ottawa has so many other tools it can use: tax and regulatory law; the Canada Growth Fund; the Infrastructure Bank; the Business Development Bank of Canada; and so on.
If the government wanted to do something of value to pension fund investors and society in general, it would move ahead on the development of the taxonomy of climate transition investments as recommended by the Sustainable Finance Action Council. There is no conflict with fiduciary duty in this area. Nor is there any fiduciary duty problem with the other tools just mentioned.
Not sure why he threw in the taxonomy of climate transition investments as recommended by the Sustainable Finance Action -- probably to appease Barb Zvan who's frustrated with the slow pace of adoption -- but he's right that there are plenty of other organizations the federal government can lean on to promote their goals (BDC, EDC, Canada Growth Fund, etc).
Lastly, I disagree vehemently with Bob Baldwin when he states:
Although it is unlikely to happen, we should scrap the working group to encourage pension funds to invest more in Canada or, at the very least, have a commitment that any recommendations from this working group will be consistent with the objects and powers of the CPPIB and PSP Investments.
The working group shouldn't be scrapped, it must go ahead and if it was up to me, all the documents and sessions would be publicly available.
Bob is too focused on PSP and CPP Investments and doesn't see the bigger picture of how all of Canada's pensions invest and why we need an open and transparent debate on these issues.
Most importantly, we really need to get this right for our country's long-term economic needs and for the future of our retirement system.
The two goals of a strong economy and strong retirement system aren't mutually exclusive and as far as current legislation that governs PSP and CPP Investments, it can be changed if 2/3 of the finance ministers agree to change it (in case of CPP Investments; federal government can change PSP Investments' legislation).
But before we tinker with legislation, let's hash it out and listen to all arguments for and against having our pension funds invest more domestically.
My opinion hasn't changed, I prefer if we leave Canada's pension funds alone to invest where they see fit and I'm convinced this is what is in the best interest of Canadians and the economy over the long run.
Still, we need to properly discuss all views and I want to see them discussed openly and a final report summarizing the key findings should be made available (it will).
Lastly, Bob Baldwin isn't the only one with opinions on this matter.
Former PC leader Erin O'Toole also wrote an op-ed for the National Post on why we need to let Canadian pension funds decide for themselves where to invest:
Canadian public pension funds are respected around the world and consistently lead the global tables for returns. These funds already invest significantly in Canada, so why are so many Canadians beginning to demand that they invest even more?
The appointment of former Bank of Canada governor Stephen Poloz to lead a working group on this issue will give more Canadians a chance to both learn about what makes our pension system world class and confront the real elephant in the room. The problem facing Canada is not that Canadian pension funds are not investing enough in our country. The problem is Canada, and forcing investment decisions on our pension funds won’t fix it.
In 1999, just as the newly formed Canada Pension Plan Investment Board (CPPIB) began receiving funds to invest for Canadians, politicians were already trying to influence its investment decisions. In response to the NDP questioning the ethical implications of the CPP holding investments related to tobacco, Finance Minister Paul Martin said “[I]t is very important that there not be political interference in the administration of the funds by the government.”
Paul Martin’s advice is even more important today. The geopolitical and investment risks the world is facing are unprecedented, so maintaining the independence of the professional management teams of Canada’s public pensions is essential to generating the returns needed for the pensioners of today and tomorrow. Pension funds should never be beholden to a government, a political ideology or a sector of the Canadian economy, no matter how important that sector may be. But the Trudeau government keeps pushing to influence them and now many other voices are joining the chorus.
This is a departure from the approach by the Liberals of Chrétien-Martin era, who deserve credit for safeguarding the Canada Pension Plan (CPP) when there were fears about its long-term viability. The government increased contribution rates to address shortfalls, modernized governance practices and created an independent and professional CPPIB to help maximize returns for future generations. But it was pension managers at the Ontario Teachers’ Pension Plan and other Canadian pension funds who inspired these CPP reforms with their independent, in-house teams and innovative investment strategies. The Canadian approach became so successful that it became known as the Maple Model.
The most important principle of the Maple Model has always been independence. The political independence of the CPPIB was so central to the Chrétien government’s reforms that they deliberately made it very difficult for future governments to change the system. Any changes to the CPPIB would require two-thirds approval of the provinces representing at least two-thirds of Canada’s population, which is why the Poloz working group is just exploratory. But other Canadian pension funds are not afforded the same protection from influence.
Politicians will put their own ideological spin on everything, and pensions are not immune from this. I had a front row seat when Prime Minister Justin Trudeau attempted to pressure Canadian pension funds into making investments that would complement his campaign for a United Nations Security Council seat. In 2018, he funded the creation of a Global Investment Hub that was focused on encouraging Canadian public pension funds to invest in UN international development projects despite the high risks involved. For decades, the NDP have tried to force their ideology on pension investments. And even some Conservatives have pushed to restrict where the CPPIB can invest according to political events.
While nothing much has come of these attempts to influence pension fund managers, they demonstrate that politicians can and will view the large pools of capital in the pension plans through their own ideological agenda. Governments change and so will agendas, threatening not only the independence of pensions but their long-term focus, as well. Whether a specific investment would be in the public interest or not, forcing such decisions onto the Maple Model would be a slippery slope that could put the future retirements of Canadians at risk.
Capital investment in this country is lacking, but not because the Maple pension funds are unpatriotic. We need to give them more and better opportunities to invest at home. We need to approve projects faster. We need to reward risk taking. And we need to be realistic about the timeline of the energy transition. There are lots of things that need fixing in Canada that the Poloz working group should recommend, but forcing investment decisions on our pension funds is not one of them.
Over the weekend, AIMCo CEO Evan Siddall posted a link on LinkedIn to Erin O'Toole's Substack comment which is even more comprehensive, Help us Obi-Wan Poloz, you're our only hope.
I encourage you all to read it here and just like his op-ed, it's bang on, hits all the key points.
Is Stephen Poloz our only hope for pension salvation in this country?
No, he can't do it alone, we need a proper discussion on these issues and all views must be assessed on their merits.
And even though I'm a diehard Conservative, I miss Paul Martin and Jean Chretien as they were a lot more competent in governing our country properly than the current generation of Liberals who live in La-La Land.
I don't want to open that can of worms but I'm truly disgusted by the way the Liberals and NDP have bungled up important files and set our country back.
Below, Barb Zvan, Jim Leech and Keith Ambachtsheer, join Steve Paikin on The Agenda to discuss why don't Canadian pension funds invest more at home.
Take the time to listen to this discussion here as I cannot embed it below (tell Paikin to put it on YouTube, Geez, we are 2024!!). It's well worth it even if I don't agree with Keith comparing CDPQ's long-term returns to CPP Investments (he knows better, comparing apples to oranges).
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