Alberta Has Gotten Itself in a Real Pension Pickle
The wholesale dismissal last week of AIMCo’s highly respected board and senior management team is difficult to understand. The Alberta government has a lot of explaining to do.
The Crown corporation suffered a serious investment-related loss in 2020 that prompted major actions by the province to strengthen AIMCo’s board and senior management. Those changes are now in place. However, it will take time to assess the full impact of the 2021-2023 governance and management changes on the pension fund manager’s organizational performance.
Meanwhile, we already know the actual AIMCo investment performance for the 2021-2023 period. It reported a three-year annualized net return of 5.8 per cent, against a benchmark return of 3.6 per cent if its investment policies had been passively implemented. This suggests that AIMCo’s new board and management team were off to a strong start.
On the cost side, AIMCo’s 2023 investment management plus operating costs were reported at 0.66 per cent of assets under management. The comparable numbers for Investment Management Corporation of Ontario (IMCO) and British Columbia Investment Management Corporation (BCI) were 0.81 per cent and 0.54 per cent respectively. This puts into question Alberta’s cited rationale for sacking the board and senior management.
In this context, what exactly was the reason? Was there something in AIMCo’s benchmarking processes that triggered the government’s sudden loss of confidence in the board and senior management team? Was fraud or major conflicts of interest detected? Were AIMCo’s pension fund clients consulted, as would normally be required under investment management agreements? What makes the government think it can improve on the high quality of the board and executive team members it just fired?
That last question is especially problematic in an industry where trust, integrity, autonomy and in-house investment expertise have shown themselves to be important drivers of value creation. Ironically, it was the rise of the globally admired Canadian pension model over the course of the past 30 years that drove these points home. Who wants to be associated today with a public pension overseen by a government that apparently does not respect these principles and appears comfortable making decisions that disrupt organizational integrity and, to date, defy common sense explanation?
With such an overhaul of the board and management, the cost for Albertans – in terms of ability to attract topflight people, co-investors and investment opportunities to the organization – is likely to be far more significant than the putative cost concerns that have been used to explain why it was time to “tear off the Band-Aid,” as Alberta Finance Minister Nate Horner put it last week.
Pension funds have an overriding duty to act in the interests of their beneficiaries. This requires a focus on long-term value creation (often the opposite of myopic political priorities). It is a higher standard than that which applies to corporate directors (even they are allowed to mediate the interests of shareholders and other stakeholders in determining the best interests of a corporation) and is singular in its focus on preserving trust property by risk mitigation and cautious investment.
The underlying concern from observers, of course, is that the government wants to put its hands in the cookie jar – directing investment decisions to satisfy political objectives. Premier Danielle Smith has talked about directing pension funds to invest more in oil. Is this what’s going on here?
Given that the future of $169-billion of Albertans’ pension and endowment savings are at stake, their provincial government owes them clear answers to the list of questions posed above – answers supported by independently sourced benchmarking information on pension fund returns and management costs.
Alberta should also provide assurances as to the integrity and independence of future governance and investment decision-making in the interests of the beneficiaries AIMCo serves.
Andrew Willis of the Globe and Mail also opines Alberta Premier Smith must resist the temptation to treat AIMCo as the province’s cookie jar:
As recently as two years ago, Alberta Premier Danielle Smith could have justified cleaning house at the province’s $169-billion asset manager.
The Alberta Investment Management Corp. posted a loss in 2022 and long-term performance lagged. Public service pension plans forced to commit savings to AIMCo sued the fund manager for $1.3-billion. And a newly recruited executive team’s turnaround plan had yet to prove its merits.
But AIMCo’s problems were history. Performance is now beating benchmarks, while costs have stayed in line with those of its peers. Chief executive officer Evan Siddall and a refreshed board of directors were taking care of business.
Last Thursday, Alberta’s government no longer had a reason to sack anyone. Ms. Smith’s only justification in dismissing the entire AIMCo leadership team – all 10 board members, Mr. Siddall and three other executives – is to clear the path for increased government control of investments at the country’s sixth largest pension plan.
The Premier is poised to raid the cookie jar. There’s a very real possibility the money funding retirement for thousands of Albertans will soon be invested in the United Conservative Party’s pet projects.
Increased political influence at AIMCo promises to be a disaster for Alberta retirees and a setback for what’s known around the world as the Canadian model: capital pools set up to deliver on the promise of a reliable pension.
In coming weeks, Ms. Smith will name a new AIMCo board and executive team. Interim chief executive officer Ray Gilmour is a career bureaucrat with zero asset management experience – he’s a placeholder, at best. If the Premier stacks the deck with UCP lackeys, who in turn advocate an Alberta-first investment mandate, the true purpose for last Thursday’s purge will be clear.
Conservative provincial politicians launched AIMCo in 2008 with a strategy to free retirees from the roller-coaster ride that is the oil patch. Alberta’s economy, while dynamic, is linked to fossil fuels and will remain that way for the foreseeable future. The oil and gas industry is cyclical but faces an existential threat from climate change.
Ms. Smith’s predecessors could have burdened AIMCo with a dual mandate of public funds such as the Caisse de dépôt et placement du Québec – set up to both invest prudently and contribute to the province’s economic development. They made a wiser choice.
AIMCo has always followed the global mandate adopted by the country’s other large pension funds – known globally as the Maple Eight – and Norway’s massive, oil-fuelled sovereign wealth fund. The Edmonton-based fund focused on earning the best possible risk-adjusted returns for Albertans. That remains the smart strategy. AIMCo’s approach offsets the biggest risk facing the province’s finances: a downturn in the oil patch.
If Ms. Smith’s UCP puts a finger on the AIMCo scale in favour of investments in Alberta, they are tying their citizens’ future retirement income to fossil fuels.
Since becoming Premier in 2022, Ms. Smith has taken a ready-fire-aim approach on a series of economic decisions. The UCP’s moratorium on renewable power development – announced without consultation in August, 2023 – triggered cancellation or delays on 95 wind and solar projects. The decision cost Alberta its leadership in the sector and enough green electricity to power every home in the province, according to the Pembina Institute.
A year ago, Ms. Smith made a bid to claim 53 per cent of savings in the Canada Pension Plan – a $344-billion cash grab based on made-in-Alberta math. The move threatens the health of a fund that provides critical retirement income for many Canadians. Trashing leadership at AIMCo, on dubious allegations that performance fell short and costs soared, fits the Premier’s pattern of dramatic actions based on faulty data.
If Ms. Smith wanted to revisit AIMCo’s mandate and consider an approach similar to Quebec’s Caisse, an approach articulately argued by fund managers such as Letko, Brosseau & Associates Inc., she could have done so with the previous board and executive team. The government’s decision to walk the entire leadership team out the door signals the UCP has a far more aggressive agenda for one of the country’s largest capital pools.
AIMCo invests for a work force that includes Alberta police officers, nurses and university professors. The only debate in the province should be what’s in the best interest of those clients. The answer to that question is stable leadership and a globally-focused investment strategy.
Great opinion pieces here from Keith Ambachtsheer, Ed Waitzer and Andrew Willis which bring up a lot of excellent points.
First, AIMCo was on the right track, it had an excellent board of directors made up of highly qualified and experienced people, it had an excellent senior management team, it was on the right track in terms of performance over the last three years after the vol blowup of 2020.
And I've said this before, the vol blowup wasn't good but it wasn't as bad as many people were led to believe because had they left that strategy run, they would have made up most of the losses, but yes, risk management wasn't tight on that program.
All this to reiterate, even in its darkest days back in 2020, I couldn't fathom the government of Alberta purging the organization of its board, CEO and senior execs, let alone now when things were running smoothly.
There is clearly an another agenda at play and while I've grown very fond of Premier Smith on LinkedIn and agree with almost all her views, on pensions her government has failed miserably.
Moreover, I can't fathom what AIMCo's clients are thinking right now but if I were them, I'd be extremely concerned.
This wasn't handled well and if former PM Stephen Harper is appointed full-time chair of AIMCo's board -- a big IF after this backlash (I would advise him not to take the job) -- then it will confirm that Alberta's government wants to lay its hands on the pension cookie jar.
"Well Leo, easy to criticize, what would you have done differently?"
For starters, I would have held public consultations with all AIMCo's clients and forced them to write down their concerns in writing so all stakeholders are aware of what their concerns are.
I would have ordered an in-depth, thorough performance audit of AIMCo, above and beyond what Alberta's auditor general does and really kicked the tires hard across all asset classes -- public and and private -- to see if risks they are taking are commensurate with their benchmarks and compensation.
I can tell you as an independent expert that AIMCo is very transparent with its benchmarks and they are in line with their underlying portfolios from what I see but I would have done a deeper, more thorough analysis.
All this information would have been made public and open to criticism from AIMCo's clients and their consultants.
What else? On investing more in Alberta, I would have debated this openly with the public at large and had expert opinions.
Can AIMCo adopt a dual mandate like CDPQ? Yes, it can but should it?
My opinion is no, Alberta's economy is dominated by the oil & gas industry and reminds me a lot of Norway's economy.
Their giant pension fund/ wealth fund invests 99% of its assets outside the country, mostly in global public equities and bonds but also a small chunk in real estate and renewable infrastructure (they tried to expand to private equity and were foolishly denied).
Unlike Quebec which has a more diversified economy, Alberta doesn't need its pension fund to invest more at home.
It already invests quite a bit in the province and if you drill down into their real estate holdings, the problem areas are mostly due to empty offices in Edmonton and Calgary.
Do you really want to add more into Alberta's economy or do you want to properly diversify that big fund across public and private assets all over the world?
That's the key question and here I am more in line with CPP Investments and think CDPQ's approach will not help Alberta over the long run.
There's another issue that irks me, the timing of this announcement, right after president Trump was elected for a second term.
President Trump and his administration will be good for the US and Canadian oil & gas industry and there will be good years for Alberta as oil prices should climb (barring a major global downturn).
My point is cash starved oil & gas companies that maybe were not getting the financing they rightly deserved will start to see more financing come their way, especially if the Liberals lose the next election which looks likely.
So why purge AIMCo now? It makes absolutely no sense unless the government wants to control the way the fund invests abroad and at home.
And that is a recipe for disaster.
You don't want bureaucrats making important investment decisions because a) they're not qualified; b) they are not looking after the best interests of beneficiaries but aligning themselves with political goals of the government and c) and even more importantly, if they bungle it up, they are not held accountable and will not lose their job or defined-benefit pension plan they enjoy no matter how well or lousy they perform.
In all seriousness, you don't want to mix politics with managing pension funds, ever.
CDPQ is a different animal, they went through a lot of ups and downs in their Quebec portfolio over five decades and I can tell you without question, they would have been better off over the long run had they not had this dual mandate.
But this is Quebec and they like doing things differently here.
Again, my opinion, stick to the CPP Investments model and improve the governance but do not turn AIMCo into another government controlled Crown corp, that will be its downfall.
Alright, not sure if Stephen Harper, Danielle Smith and Nate Horner read my comments but hopefully they do.
Just remember when it comes to pensions, always put the interests of beneficiaries first.
Below, my former boss at the National Bank over 20 years ago, Senator Clement Gignac, discusses the US election results and what it means for the Canadian economy and what changes are needed on the policy front.
He spoke with Brian Crombie earlier today and it's well worth listening to this interview.
As I keep stating, until we get a new federal government that puts the interests of all Canadians first, this country will keep sliding into the abyss.
Moreover, judging by some of the hardliners President-elect Trump is appointing to his new administration, we'd better wake up fast of risk being set back decades.
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