Mark Wiseman on Why Politicians Should Leave Pension Funds Alone

Mark Wiseman, former Chair of AIMCo, former CEO of CPP Investments and current Senior Advisor and Chairman of Lazard Canada wrote a comment for the Globe and Mail on why pension funds are a Canadian success story and politicians must leave them alone:

The Canadian pension fund model is the envy of the world and the centrepiece of our lauded social security framework. The system works exceptionally well, yet in the past year, we have seen increasing calls to change this model and use pension funds as a policy tool. This has culminated in an announcement from Ottawa to explore ways to have pension funds invest more domestically.
To fully understand the implications of these moves, it is critical to understand what has made the system so successful.
Canada’s largest public pension funds, commonly referred to as the Maple Eight, collectively manage approximately $2-trillion in assets, reflecting the winning formula of independent governance, scale, geographical diversification, and top-tier investment and managerial talent.
While Canada is ranked 38th by population, the CPP Investment Board (CPPIB) is the seventh-largest pension fund in the world. It was recently ranked the top global pension fund for governance by the Global Pension Transparency Benchmark. In September, 2024, four Maple Eight funds – Caisse de dépôt et placement du Québec (CDPQ), British Columbia Investment Management Corporation (BCI), Ontario Teachers’ Pension Plan (OTPP) and CPPIB – were in the top 10 globally for governance excellence.
A 2017 World Bank report, citing benchmarking analysis, found that Canadian public pension funds had net returns that substantially outperformed those of comparable global funds over the preceding decade. This outperformance aggregated to $4.2-billion per year over that period. And all major Canadian funds have delivered substantial added value when measured on an appropriate long-term standard, after taking all costs into account. Recently, it was reported that the Public Service Pension Plan (PSP) has a surplus of approximately $9-billion. This position of strength is a bright spot while many plans around the world are trapped in an inexorable deficit position.
Now there is a mounting push for an “invest in Canada” mandate for pension funds and efforts from politicians to potentially advance ideological and regional interests through closer control of fund management. We are looking at solutions in search of problems. This carries great risks for Canada’s economic future.
Given Canada’s economic challenges, including demographic shifts and miserable productivity, the stakes are high for millions of Canadians. In fact, especially for funds like CPPIB, it is essential to diversify investments outside the country, as the nightmare scenario is that overexposure to an underperforming Canadian economy sees poor investment returns at the same time as higher unemployment and low wage growth, leaving both diminished inflows and flaccid asset returns to pay fixed pension obligations for Canadians.
The bottom line is this: Politicians are desperate to get their hands on more cash. One problem – this money is not theirs. Pension funds are the pooled savings of millions of individual contributors and beneficiaries, and we should be wary of those who try to expropriate them for personal or political ends. Because while anyone can tear down an institution, building one up is not easy.
The origins of the Canadian pension system
The concept of a national pension system traces its origins to 19th-century Europe. Otto von Bismarck introduced state pension schemes in Germany to address aging populations and worker welfare. The foundation of the national modern pension era in Canada came in 1965 with the creation of the Canada Pension Plan (CPP).
Established under prime minister Lester B. Pearson’s minority government, the CPP aimed to provide retirement income security by financing benefits through payroll contributions from employers, employees, and self-employed individuals. The target benefit covered 25 per cent of an average worker’s preretirement earnings. Yet, the initial management of CPP funds was far from ideal. First, it was a pay-as-you-go scheme, with little in terms of reserves, depending on then current contributions to fund immediate benefits. Its small investment reserves were directed by government into discounted federal and provincial bonds, with minimal independence or oversight, offering little diversification of asset classes and low returns. While the reliance on a pay-as-you-go model sufficed in the early years, demographic and economic changes soon exposed its fragility.
By the 1980s and 1990s fertility rates dropped, and at the same time life expectancy was increasing. Immigration was insufficient to counteract the effects of a population that was getting significantly older, with more and more retirees relative to working to the working-age population.
With fewer contributors and more beneficiaries, by the late 1990s the CPP was on the verge of collapse, as it had limited ability to meet future obligations. In 1997, recognizing these challenges, Paul Martin’s Finance Department initiated reforms to funding mechanisms and created a reserve fund and an independent asset manager, CPPIB, to manage the reserve fund.
CPPIB also had the benefit of learning from the reform that took place in Ontario, where a series of government-commissioned reports in the 1980s highlighted the need for modernization for the pensions of teachers and public servants. The Ontario Teachers’ Pension Plan, established during this period, became a pioneer of the modern Canadian pension fund model.
OTPP president and CEO Claude Lamoureux was a visionary who championed the principle of independence. This vision led to the evolution of OTPP as an arm’s-length organization, insulated from political influence, underpinned by independent governance and enhanced through active asset management and experienced professional leadership that brought in modern, industry-leading financial practices.
In other words, Mr. Lamoureux, along with his brilliant chief investment officer, Bob Bertram, replaced a sleepy and inefficient bureaucracy with world-class asset management techniques. This approach would go on to serve as a benchmark for Canadian public pension funds, which quickly adopted similar professionalized, independent management. By the early 2000s, our pension system was transformed, with Canadian pension funds emerging as global leaders, growing massively in scale, effectiveness and investment influence.
A winning approach
A 2021 study in the Journal of Portfolio Management confirmed the outperformance of Canadian pension funds compared with their global counterparts. The study found that Canadian funds achieved higher risk-adjusted returns, with an average Sharpe ratio (a risk-adjusted measure of the performance) translating to 8 per cent real returns – substantially outpacing the 6-per-cent average of their global peers. This translates to billions in excess capital, meaning that unlike many U.S. peers, Canadian pensions are fully funded and, in some cases, in a surplus. By contrast CalPERS and CalSTRS in California, the two largest plans in the United States, are only funded 75 per cent and 75.9 per cent, respectively.
The report also highlights how Canadian pension funds managed 52 per cent of their assets internally, compared with the 23 per cent for funds in other countries. This trend was even more pronounced among funds managing over $50-billion, with Canadian pensions handling 80 per cent of assets in-house versus 34 per cent for their global peers.
This result matters for two reasons – first, while it increases internal costs, it substantially lowers total costs, as external management fees are substantially more expensive. Second, it allows Canadian pensions to truly exploit their comparative advantages, including scale, time horizon and risk tolerance, which has led to superior returns.
In fact, the study reported that Canadian pension funds reduced total costs by approximately one-third and the study also underscores how Canada’s model enables results by attracting top talent and maintaining independent governance and full accountability. From decades of experience working with Canadian pension funds, I can attest that these advantages allow the funds to attract the smartest, most driven talent that otherwise would just go to the private sector.
Active management has further distinguished Canada’s pension fund model. Unlike passive strategies tied to market indexes, active management allows funds to diversify into illiquid and alternative asset classes such as infrastructure, real estate, private credit and private equity. This approach not only enhances long-term risk-adjusted returns, but also allows for diversification and access to deal flow that is not otherwise available through indexing to public markets.
The Canadian funds’ scale allows them to negotiate favourable terms in private markets, access exclusive transactions, and align their investments with long-term liabilities. OTPP, for instance, owns Cadillac Fairview, a prominent real estate company. CPPIB owns a portion of the 407 electronic toll road and PSP owns a significant interest in the highly successful generative artificial-intelligence business, Cohere. None of these investments are available in public markets or to the average investor. By setting high standards for transparent reporting and risk management, these funds have become global leaders in private markets.
Additionally, the independent, long-term focus of Canadian pension funds allows them to be less beholden to market cycles and deliver sustainable returns over the long-term, which is the appropriate yardstick given the funds’ very long-term liabilities.
The successes of this model are hard to overstate. OTPP now manages over $250-billion, compared with $15-billion in 1997. CPPIB grew to $570-billion by 2023 from $35-billion in 1997. Alberta Investment Management Corporation (AIMCo) manages around $160-billion, compared with approximately $70-billion at its inception in 2008. Keeping in mind that direct return comparisons are not entirely fair because of differences in asset mix – the story is impressive across the board for the Maple Eight.
But the Maple Eight are becoming victims of their own success.
A wolf in sheep’s clothing
Strapped for cash, without the ability or willpower to raise revenue through more taxes, and running significant deficits, the federal government has appeared to signal that it wants a piece of the Maple Eight success.
In last year’s fall economic update, the government explicitly stated its intention to “work collaboratively with Canadian pension funds to create an environment that encourages and identifies more opportunities for investments in Canada.” In this year’s budget, Ottawa announced a working group to explore this. While creating a great investment environment in Canada is a good thing, those investments should be competed for equally by Canadian and foreign capital. Foreign direct investment is particularly beneficial to any economy, including helping to extend demand for Canadian currency.
Canadian funds are already heavily invested in Canada, with a strong home country bias. On average, the Maple Eight have 18 per cent of their portfolios invested in Canada, as compared with the approximately 3 per cent of global capital markets that Canada represents.
So, one has to ask, why governments are so keen to have pension funds invest more domestically?
Everyone wants a piece of the more than $2-trillion saved in Canadian public pension plans. There has been a flood of lobbying from business sectors, each vying for a slice of Canadians’ pension money. Some have suggested that pension funds should focus more on domestic investments, particularly in sectors such as mining or private equity.
A “dual mandate” for pension funds – where they are expected to not only maximize returns but also contribute to Canada’s economic development – is not new. It has long been the CDPQ mandate, and The Globe and Mail has reported that the Alberta government, which has replaced AIMCO’s board and chief executive, is looking to take a similar approach.
The approach is a wolf in sheep’s clothing. There are two critical issues with this approach.
The first concern is the risk of political interference. Canadian pension funds have been successful in large part because they have been managed independently. Since the 1980s, their governance has focused solely on maximizing risk-adjusted returns for pensioners. The moment governments start directing these funds toward political or economic objectives, it undermines this independent management. Public pension systems are already under scrutiny in many parts of the world, and any perception that Canadian funds are politicized would undermine public confidence. If that happens, the damage to the system’s credibility would be irreparable.
This is a point even understood by critics of active management, like The Globe’s Andrew Coyne, who has credibly argued that over certain time frames that S&P funds outperform the returns achieved by many professional investors and pension funds. Yet even Mr. Coyne agrees that regardless of how pension funds are invested, governments should keep their hands off them.
The second issue is that a dual mandate would encourage too much domestic concentration in pension portfolios, reducing the diversification that is crucial for managing risk.
Consider that Norway’s massive US$1-trillion sovereign wealth fund is not permitted to invest domestically – both to ensure diversification and to prevent political interference.
Having said this, it does make sense for Canadian pensions to invest disproportionately in Canada if they find the right investments; they know the market, Canada has predictable regulatory frameworks, and investors in their home market arguably have better access to information. Most investors have a home-country bias, including all Canadian pension funds. But having a home-country requirement would ultimately be detrimental to Canadians’ retirement savings.
While it is true that Canada faces economic stagnation and lagging productivity, the solution lies not in politically driven mandates but in more effective policy measures to actually address the underlying causes of economic malaise. Reducing interprovincial trade barriers, liberalizing foreign investment restrictions, and simplifying pathways to skills development could more directly address the country’s economic issues, without compromising its pension system and our social security.
It is also important to note that the independence of pension funds does not equal a lack of accountability. Rather the opposite, the Canadian funds are also world leaders in processes around transparency reporting (as per the aforementioned transparency benchmark), and are subject to robust government oversight.
All large Canadian public pension funds prepare comprehensive annual reporting data detailing their financial performance, investment activities, and governance practices. The Maple Eight also engage regularly in public meetings where contributors and beneficiaries engage with its leadership, ask questions, and receive updates.
What’s more, just as with other institutions like the Bank of Canada, while the government cannot provide strict direction to the pension funds, there are measures in place to ensure oversight. For example, the finance minister, in consultation with participating provinces, appoints members to CPPIB’s board. CPPIB submits its annual report to the finance minister, who tables it in Parliament, and every three years federal and provincial finance ministers review CPPIB’s performance to ensure its long-term sustainability. The chief actuary also conducts a comprehensive triennial financial review of the CPP.
These are all important factors that allow pension funds’ independent governance to co-exist and function while maintaining accountability to government and the people it represents.
A slippery slope
The dangers of political interference in pension funds are not hypothetical. In the United States, jurisdictions like Florida have banned pension systems from investing based on environmental, social, and governance (ESG) criteria. These edicts are purely driven by political motives. Similar actions have been taken in other states, resulting in lower returns. Left-wing advocacy to divest from our investment in fossil fuel sectors also misses the mark and comes with similar risk of placing politics over return-driven fiduciary responsibility.
Internationally, there are several cautionary tales.
In Ireland, for example, the government withdrew billions from its national pension fund to bail out its banks during the 2008 financial crisis. While this reduced immediate borrowing needs, it depleted pension resources, increased public debt to 125 per cent of GDP by 2013, and shifted the National Pension Reserve Fund’s focus away from the best interests of beneficiaries.
Similarly, Argentina nationalized $30-billion in private pension funds during the 2008 financial crisis to avoid default and stabilize public finances. While providing immediate relief, the move dismantled the pension system, shifted retirement savings to a state-managed pay-as-you-go scheme and increased long-term debt and inflation, weakening both individual retirement security and fiscal stability.
Even closer to home, CDPQ has seen its returns diminished compared with other funds that have remained focused solely on returns.
Governments should use fiscal policy to encourage economic growth. They should and can use tax dollars to help drive policy and they should be held accountable for those decisions, including at the ballot box. And, separate from pension monies, if there are sovereign funds, such as Alberta’s Heritage Fund, gleaned from government surpluses, natural resource royalties or otherwise, then governments should direct those funds as they see fit, with attendant political accountability.
But where there is a compelled retirement savings scheme, the story has to be different. Individuals’ savings must be managed as with a fiduciary interest of the beneficiaries in mind, not the country as a whole. Canadians would certainly be upset if the government directed their RRSP dollars. Their pensions are no different.
In 2005, the Paul Martin government eliminated the foreign property rule that prohibited the amount of foreign investments pension funds and individual’s RRSPs could own, because the government realized the distorting effect this had on capital markets and on the stability of Canadian’s savings. Now, the government is pondering going a step further. We are at risk of the government not only limiting or setting quotas for investments but saying exactly where and how pension funds should invest.
This matters because public trust in Canadian institutions is already waning, yet polling by research firm Discover shows that Canadians familiar with the CPPIB view it positively, with a significant majority agreeing that it protects their retirement savings. Any push for a dual mandate risks undermining this trust and eroding the credibility of pension funds as independent, reliable institutions.
The stakes are particularly high as Canada’s aging population presents new challenges for retirement security. With more Canadians living longer, the need for a strong, stable pension system is greater than ever. Approximately 75 per cent of private-sector workers do not have an employer-sponsored pension plan, and many near-retirees risk significant financial hardship.
After decades of success, there is no room for politicization in Canada’s pension system. The role of government should be to safeguard Canadians’ financial security – not exploit pension funds for political gain.
The combination of an independent mandate and the ability to compete (in-house) with the world’s leading investors placed these funds in a unique position to achieve strong returns That would have been impossible if short-term political considerations were in play.
The idea that politicians know better than professional, world-leading investors about how to deliver long-term risk-adjusted returns is simply unpalatable. It’s time to kill this idea, to embrace and protect our pension funds, and most importantly leave them alone.

Another excellent comment from Mark Wiseman who is well placed to discuss this issue.

It was a very hectic day given events in Ottawa so I'm going to discuss the economic update tomorrow and its implications for our large pension funds.

Today, my focus will solely be on Mark's comment and I'll share where I agree, disagree and why this is an important topic.

Notice he carefully left out recent events at AIMCo which is probably because he doesn't want to go there or can't discuss these events given his position as former chair of that organization.

Still, he provides an excellent overview of why Canada's Maple Eight funds have been successful over the long run, delving into their independent governance, ability to attract and retain top talent to be able to internalize asset management to deliver better risk-adjusted returns over the long run.

He also cites an important paper from Alexander D. Beath, Sebastien Betermier, Chris Flynn, and Quentin Spehner which presents a quantitative portrait of the Canadian pension fund model between 2004 and 2018, showing Canadian pension funds outperformed their international peers in terms of both asset performance and liability hedging:

A central factor driving this success is the implementation of a three-pillar business model that consists of (1) managing assets in-house to reduce costs, (2) redeploying resources to internal investment teams for each asset class, and (3) channeling capital toward growth assets that increase portfolio efficiency and hedge liability risks. This model works best for funds whose pension liabilities are indexed to inflation.

In fact, it was Alexander Beath of CEM Benchmarking who brought Mark Wiseman's comment to my attention, posting this on LinkedIn:

A great way to spend a Sunday is reading the national newspaper, in my case the Globe and Mail - a household staple. And so very neat to wake up today and see research I worked on a few years ago on the success of Canadian Model funds featured in an op-ed written by Mark Wiseman this weekend. This research introduced Christopher Flynn, CFA and I to Sebastien Betermier, associate professor at my alma mater McGill University and ED of the International Centre for Pension Management, as well as by-now good friend Quentin Spehner, both of whom I've had the joy of working with almost continuously these past five years on a variety of research projects.

One bone I would pick with the article (which I'm otherwise in agreement with) is the link drawn between the success of Canadian Model funds and the need to push back against the suggestion to invest more domestically. That the push comes from governments and outsiders is one thing - independence is a big part of the Canadian Model - but whether they should invest more in Canada is a separate question that I know they wrestle with.

As pointed out in the op-ed, and to be fair, Canadian Model funds are by some standard over-invested in Canada already. Canadian equity and debt makes up something like 3 percent of global markets (to pick a number, nobody really knows), but Canadian Model funds invest 18 percent of assets in Canada. It could be argued quite forcefully however that the success of Canadian Model funds is in part due to this domestic focus. As discussed in our research, the big edge Canadian Model funds had over U.S. peers was far better asset-liability matching, and that this due in part to the better inflation hedging characteristics of Canadian equity, not just superior portfolio construction, organizational design, etc.

The over-weight Canada trade has been good for Canadian Model funds on multiple fronts; not only are they over-weight Canadian equity, they are in fact far more over-weight domestically in their real estate portfolios, with around 80 percent invested in Canada. While this feature of being over-weight domestic real estate is not unique - U.S. pension funds invest the same fraction of their real estate portfolios in the U.S. - a big part of the success of Canadian Model real estate portfolios can be attributed to home country bias as well (I'll post something on this in the next week or so, if I ever find the time).

Should Canadians invest more domestically? Maybe, maybe not. Should Canadian pension funds have independence, definitely. But the questions are separate and should be treated separately, and a discussion on the topic is okay. It's common to read mission statements stating the goal of maximizing returns without taking undue risk, but this isn't the only thing stakeholders care about. If you improve other aspects of your stakeholders lives in addition to maximizing return, isn't that better? Does investing more domestically do that, it might be.

I posted this reply:

Great post Alexander, well articulated insights. The success of the Canadian Model is indisputable but lately people are wondering where’s the beef as returns have waned relative to public markets which are soaring due to a handful of large tech names.
Moreover, the Canadian Model has been criticized as compensation levels are being openly scrutinized at these organizations.
Lastly, as far as independence, it’s a chimera as we saw what happened at AIMCo. At the end of the day, governments can step in and shut it all down or radically transform how they operate and where they invest.

Still, despite all the criticism, Canada’s mighty pension funds keep chugging along, delivering outstanding long-term returns and while we can debate where and how they should invest domestically or whether their compensation levels are appropriate, we can’t argue about their long-term success and the proof is in the funding levels of the plans they serve.

I don't mince my words and I will not mince them here.

The governance model at Canada's large pension funds is excellent but it can and should be improved.

For example, Mark Wiseman talks about transparency. Well, I think it's high time all our pension funds provide detailed information on where they invest (public and private markets) by country, providing long-term returns.

So, you want to invest billions in India, great, show me what your active strategy is and what's the long-term performance and the same goes for all countries.

Also, when it comes to investing domestically, I'm a huge proponent of investing in infrastructure as long as the conditions the government lays out are on par with those of other countries like the UK and Australia.

The delayed Fall Economic Statement addresses investment and implements a lot of the recommendations from former Bank of Canada Governor Stephen Poloz's task force looking into how our pension funds can invest more domestically and where, including removing the 30% cap ownership on Canadian companies.