Barbara Shecter of the National Post wrote a comment asking whether the Canadian pension model can survive a new era of politicization:
Rachel Reeves, the U.K.’s new chancellor of the exchequer, had a goal in
mind when she flew to Toronto last August to meet with the heads of
some of Canada’s largest pension funds.
“I want British schemes to learn lessons from the Canadian model and
fire up the U.K. economy, which would deliver better returns for savers
and unlock billions of pounds of investment,” Reeves told U.S. investors
in New York on the first leg of her trip, according to the Financial
Times.
Reeves had at least half of the equation right. The informal group of
large institutional investors known as the Maple 8, which includes the Ontario Teachers’ Pension Plan and the Canada Pension Plan Investment Board,
has been envied globally over the past decade-plus for their ability to
earn world-class returns through a diverse blend of investment
strategies. But the group’s unique achievement has been a model that
shelters the funds from government influence when it comes to investment
decisions.
In other words, the funds aren’t there to fire up the economy or
pursue the political cause of the day — they are there to invest for
their beneficiaries, full-stop.
That fundamental advantage
came under pressure at home like never before in 2024, raising concerns
that it’s only a matter of time before Canada’s biggest funds are forced
to make concessions to government. It’s a threat pension veterans
aren’t taking lightly.
“Governments need cash. They are
turning over every stone to look for it, but the (pension) money is not
theirs for the taking,” Mark Wiseman, the former chief executive of the
CPPIB, said in a recent interview with the Financial Post. “It’s the
retirement savings of millions of Canadians — no different than the
monies in their bank accounts and RRSPs.”
Developments over the past couple of years have prompted pioneers of
the Canadian pension model, including Wiseman and Claude Lamoureux, the
first CEO of the Ontario Teachers’ Pension Plan, to pen articles
sounding the alarm and warning that the survival of vaunted model was at
risk.
Ottawa triggered the concerns when it stated
explicitly in the fall economic statement in 2023 that it wanted major
pensions to invest more in Canada, a longstanding ambition of Justin
Trudeau’s Liberal government. That prompted dozens of business leaders
from industries ranging from telecom to transportation to sign an open
letter in 2024 calling on the government to create new rules and
incentives to reverse a decline in domestic investment. Last year, the
government pushed ahead to try to meet its objectives while assuaging
some of the concerns in the pensions industry, creating a task force led
by former Bank of Canada governor Stephen Poloz to shepherd the
process.
But Lamoureux and others argued the approach is the wrong way to improve the country’s economic prospects.
“The
federal government should ask itself how we (can) create champions, not
where our champion pension plans should invest,” he said.
Proponents of the Canadian pension model were already
on high alert when, in November, Alberta’s government — which was
already contemplating pulling out of the Canada Pension Plan — reached
into Alberta Investment Management Corp. (AIMCo),
the province’s main public asset manager, and fired the entire board
and chief executive before installing former Prime Minister Stephen
Harper as chairman and putting a government bureaucrat permanently on
the board of directors.
The shakeup stoked fears that the Alberta government wants a more direct hand in how AIMCo invests.
Months
before that overhaul unfolded, the Global Risk Institute published a
paper with a blunt warning: directing pension funds to invest more at
home would “undermine careful risk-return calibrations, compromise
existing governance functions, and expose pension plan members to
potential financial losses.”
Wiseman, meanwhile, had warned at a summer conference that pulling
pensions away from their core mission could be a slippery slope, even if
it begins with the gentle ask from governments facing down deficits and
sluggish economic outlooks.
By the end of the year, there were signs the federal government was
getting the message. Lost amid the drama surrounding the resignation of
finance minister Chrystia Freeland in December, the Liberals’ fall
economic statement tabled the same day tempered some concerns that
Ottawa will tell pensions where to invest their money.
Instead,
it promised to examine raising a 10 per cent ownership cap on municipal
utilities and potentially re-thinking airport land lease agreements to
allow pensions to invest in the development of surrounding vacant land.
In addition, it pledged that pensions would no longer be subject to a
cap of 30 per cent control of companies they invest in.
Those
small steps, combined with the upheaval and a potential change in
government in Ottawa, have tamped down concern for some about the
immediate threats to the Canadian pension model. But the fear is not
gone.
“Nothing is ever totally out of the woods,” said
Keith Ambachtscheer, a veteran pension expert and one of the authors of
the June GRI paper. “(But) Ottawa has bigger things to worry about than
pension fund investing.”
While Ambachtscheer was willing to declare the Canadian pension model
“alive and well,” for now, Lamoureux said the political chaos has just
introduced another level of uncertainty.
One
of the major concerns that arose last year was that established fund
managers such as the Canada Pension Plan Investment Board and AIMCo
could be made to carry dual mandates like the Caisse de dépôt et placement du Québec.
A rarity among the Maple 8, the Caisse’s investment decisions must
consider both maximizing risk-adjusted returns for beneficiaries and
contributions to Quebec’s economic development.
There are
worries some kind of dual mandate could be coming to AIMCo soon, based
on comments Alberta Premier Danielle Smith has made and the November
leadership purge.
Speaking at a Calgary Chamber of Commerce
event in the fall of 2023, for example, Smith said the province’s
Heritage Savings Trust Fund, managed by AIMCo, could become more like a
sovereign wealth fund and invest in projects that are having difficulty
securing financing elsewhere.
That didn’t sit well with Gil McGowan, president of Alberta’s Federation
of Labour, who said thousands of AFL members are concerned their
retirement money, managed by AIMCo, could end up being used to support
the government-favoured projects, such as in the oil and gas sector,
that might not be in retirees’ best interests economically.
“Risking the retirement security of that many people with a
Quebec-style dual mandate would be bad enough — but what the UCP (United
Conservative Party) government in Alberta has in mind is actually
worse,” McGowan said via email in December. “They’re not just talking
about using pension funds to promote Alberta-based economic growth and
job creation (a la Quebec), they’re talking about using the money (other
people’s money!) to prop up oil and gas businesses that are finding it
more difficult to raise cash from international investors and capital
markets.”
Lamoureux, too, said it would be a mistake for
governments to demand a dual mandate, adding that institutional
investors subject to such mandates, like the Caisse, tend to
underperform those that aren’t — even when both beat their established
benchmarks.
The Caisse ranked last among the Maple 8, for
example, in a global pension fund ranking by data platform Global SWF
that measured the compound annual growth rates of single-year investment
returns between 2013 and 2022.
Lamoureux said the benefits
of the Canadian pension model are in the data. Teachers’, the pension
plan he was instrumental in creating in its current form, had an $8
billion deficit when it was run by the province of Ontario. Both returns
and funding status across Canada’s largest funds including Teachers’
have much improved since governments opened up globetrotting investment
potential by removing rules that limited foreign investment first to 20
per cent and then 30 per cent.
“Canada, according to UBS, represents 2.5 per cent of the world
capitalization, the U.S. 60 per cent. Where you should invest is easy to
answer,” Lamoureux said. “Would the Teachers’ pension fund be
100-per-cent-plus funded if we had not been allowed to invest (or use
derivatives) more outside Canada?”
But even some critics of
the perceived interference with Canada’s successful pensions say it’s
not entirely unfounded for the government to question why the
multi-billion funds aren’t investing more at home.
Domestic
allocation has been declining for years, said Alex Beath, a former
senior research associate at CEM Benchmarking, an independent provider
of comparative performance data for institutional investors including
pensions.
In public markets, Canadian pension funds reduced
their holdings in domestic companies to less than four per cent of
their total assets at the end of 2023 from 28 per cent in 2000,
according to the open letter signed by 90 business leaders in March. The
letter also said the country’s eight largest pensions have invested
some $88 billion in China, more than the roughly $81 billion they had in
Canadian public and private companies combined.
This trend is not unique to Canada; shrinking domestic allocations
have also been the reality in the United Kingdom. Nevertheless, there
are arguments governments can make as a result, according to Beath.
“Big
DB (defined benefit) pension funds are tax exempt investors, (so) the
Canadian government and population is in some sense spending an
extraordinary amount of money helping subsidize them,” he said.
“(Perhaps) that investment comes with a quid pro quo, left unsaid, that
some of that expense should be invested back domestically.”
The pensions could find a reprieve from such questioning if Trudeau’s
minority government falls this year. Opposition parties have pledged to
bring down the government as soon as a prorogued Parliament resumes in
March. And if Conservative Party of Canada leader Pierre Poilievre comes
to power, the trend toward more government involvement in pensions
could even be reversed, said a former senior pension executive who spoke
on condition of anonymity in order to discuss the delicate situation in
Ottawa.
“The federal Conservatives seem to have a better grasp of the principle (of independence),” the former executive said.
Indeed,
senior pension officials have privately complained for years that
Trudeau’s government has failed to heed what they were told about how
public-private investment vehicles such as the Canada Infrastructure
Bank should be structured and governed to encourage investments by
institutional investors. Even more frustratingly for the pensions was
that the lack of investment by institutional investors led to the
government taking a heavier hand.
The Global Risk
Institute’s paper from last summer touched on this theme, suggesting a
way to create the conditions to entice large-scale investment without
government interference in pension fund allocation — a strategy that
could deliver the kind of economic boost the U.K.’s chancellor of the
exchequer described during in her summer visit to North America.
If
Canadian governments want more investment dollars from large
institutional investors like pensions, including Canadian ones, the
paper said, an easy way to make that happen would be to make available
the types of assets they shop around the world to buy: large-scale
infrastructure projects from airports and toll roads to ports and
railroads, to utilities and transmission grids.
“Government
initiatives that reduce the barriers to domestic investing by
facilitating access to strategic asset classes will not only retain and
attract capital from Canadian pension funds but also bring in additional
capital from the much larger pool of foreign investors,” the authors
concluded.
It would be an elegant solution for Canada because it would fulfill
the government’s objectives of boosting domestic investment without
fiddling with the Canadian pension model or spooking institutional
investors in Canada or abroad.
“Canada lacks infrastructure
investment opportunities relative to other countries,” said
Ambachtscheer, one of the report’s authors. “Canadian funds would be
happy to invest in Canadian investment opportunities if they existed.”
Great article by Barbara Shecter who gathered insights from the usual suspects -- Wiseman, Lamoureux and Ambachtscheer -- but left out the most important commentator, Mr. Pension Pulse.
Sometimes I feel like Jack Nicholson in "A Few Good Men": You want the truth on Canada's Maple Eight? You can't handle the truth!
In all seriousness, this is a good article but there are passages in here where I would vehemently disagree with Wiseman, Lamoureux and Ambachtscheer and other passages where I agree with them.
First, stop putting down CDPQ and its dual mandate and stop comparing pension fund returns when you're comparing apples to oranges.
AIMCo, BCI and CDPQ do not have the same asset mix as OTPP and CPP Investments or OMERS which allocate more to privates and it's simply not right comparing their returns over the long run (Lamoureux knows better).
Moreover, the true measure of success of any pension plan/ fund is the funded status of the plans they serve and by this measure all of them are doing great.
And if you really want to pick a winner over the last 20 years, I'd argue that HOOPP which only recently started investing in infrastructure performed the best in terms of long-term return and funded status (blew the competition away).
But again, they are all winners in my book, even CDPQ with its dual mandate.
Would Quebecers have been better off if we had invested our pension savings in the Canada Pension Plan managed by CPP Investments?
No doubt returns would have been better since inception of CPP Investments in 1999 (CDPQ goes back to the 60s) because asset mix was different. But CDPQ also contributes directly to Quebec's economy so there are other things you need to take into consideration and run a proper cost benefit analysis.
In other words, while I'm not a huge proponent of CDPQ's dual mandate, especially for AIMCo and other funds, I understand its purpose and if done properly with proper governance and full transparency, it can indeed be a useful tool.
What are some of the other things that caught my attention above?
Mark Wiseman is right, it's not the government's money, it belongs to members, retired and active, but he forgets that these funds are backstopped by governments and they indeed have a lot of say in the way they manage their activities.
I've said it before, while political storms may be gathering on the Maple Eight, the real issue is as these funds become bigger, more powerful and pay their senior members hefty compensation by any standard, they will attract attention from governments.
In my humble opinion, it's up to Canada's Maple Eight to manage these relationships very carefully and if they think for one second that they can tell governments to buzz off and claim they are independent from all demands, well, they're sorely mistaken.
I might not like what Alberta did to AIMCo but let's call a spade a spade here, the government there basically showed the CEO and most board members the door and there was nothing AIMCo's members can do about it.
In fact, some of AIMCo's members brought this on so now they have to live with the consequences.
My point is this can happen in Ontario, Quebec and British Columbia and while it's highly unlikely, never say never.
At the end of the day, the so-called "independence" Canada's Maple Eight enjoy is illusory, the governments -- provincial and federal -- can step in at any time to rip that governance model down as they did in Alberta.
Is it the right thing to do? Of course not but it doesn't mean it can't be done.
Also, note while the federal government listened to Stephen Poloz and implemented some much needed recommendations to help Canada's large pension funds invest more domestically, it also told them they need to provide more transparency on geographic and sector allocations to OSFI, the federal banking, insurance and pensions regulator.
I would also like to remind my readers that while fiscal profligacy shouldn't give governments a pass to raid our asset rich pensions, if we ever experience a Greece type crisis, the bond vigilantes will have their say (at a minimum, pension benefits will get slashed).
What else? Alex Beath is right that our large DB pensions are tax-exempt investors so there is an argument to be made to invest more domestically but I prefer the insights from PSP's former CEO Neil Cunningham on what we can do with the $9 billion PSPP surplus to help invest more in Canada.
In other words, we have a lot of smart people out there above and beyond Wiseman, Lamoureux and Ambachtscheer and we need to listen to all their views.
Alright, now that I got all this off my chest, I still like Barbara Shecter and she wrote a great comment above but next time, come to Mr. Pension Pulse and I'll share the truth and nothing but the truth.
Time to enjoy my evening, it looks like President Trump wasted no time handing out goodies to his powerful buddies (see here and here and a lot more embedded in the 200+ executive orders he signed over the last 24 hours).
I guess that's all part of Making America Great Again. -:)
Below, earlier today, Alberta Premier Danielle Smith spoke with reporters from Washington, D.C., the day after the inauguration of US President Donald Trump. She emphasizes diplomacy rather than retaliatory tariffs as the best path forward.
I might not like her pension policy toward AIMCo but let me be clear, she is by far the best politician in Canada and knows how to negotiate properly and secure the best interests of Albertans and Canadians.
Also, Lee Munson, president
and chief investment officer of Portfolio Wealth Advisors, joins Yahoo Morning
Brief to share his insight on Trump's tariff plans, predicting they’re
likely a "bluff." "I think the idea
that we're going to slap on these big horrible tariffs that are going to
push inflation higher — I don't think I buy it," Munson says. Among
other reasons for his skepticism, Munson notes that the Trump
administration doesn't have enough of a plan for China to carry out the
tariff plan successfully. Munson also shares his top trade picks, including aerospace and cybersecurity defense.
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