Political Storm Clouds Gathering On Canada's Maple Eight?
They are the demigods of our corporate world. They manage over $2 trillion of our retirement money, with investments and influence that span the globe. But they’re starting to attract political attention. And with that comes debate.
Bestriding our financial community, the eight largest public pension funds in Canada are known by the adulatory nickname “the Maple Eight.” Among them are AIMCo, BCI, CPP Investment Board, OMERS, and PSP.
These pension funds are touted as shining examples of well-run and high-performing pension funds and are often held up as models for other countries. Recently, the U.K.’s chancellor of the exchequer made a special trip to Toronto to study the Canadian model of pension governance and pitch them on more investment in her homeland.
Known for the “Canadian Model” of fund governance—active investing strategies run by internal managers, diverse asset portfolios, and arm’s length relations with government—the Maple Eight invest our retirement savings in everything from airports to office towers, EV battery factories to shopping malls.
But are they becoming political problems for their government masters? Look closely at the political weather reports and you’ll see storm patterns developing.
The westerly winds from Alberta
The Alberta government pulled rank over AIMCo in November when it suddenly turfed the AIMCo board of directors, its CEO, and other executives, allegedly for unacceptable cost increases, poor investment returns, and disagreements over direction. In came former prime minister Stephen Harper as board chair and Ray Gilmour, a top public servant, as interim CEO. Who knows what the future holds, but it’ll be significantly different than the status quo.
Even though momentum on this front has stalled, Alberta is also still reviewing that province’s membership in the Canada Pension Plan. If they move forward, Alberta leaving the CPP to set up its own plan would be a massive lift and shift. It would also be a tectonic change to the Canadian Pension Plan (CPP) and its manager, the CPP Investment Board (CPPIB).
The CPP Fund will soon hold $1 trillion of our money. How much is too much?
The CPP Fund is now a global financial titan. Others may disagree, but in my view, it’s a Canadian success story. In the past twenty years, the CPP Fund grew from $70.5 billion to $675.1 billion today, with that number predicted to hit $1 trillion in the next eight years. But must it hold that much of our money for its core mission of ensuring the sustainability of CPP benefits?
According to the latest annual report, the CPP Fund today has almost $200 billion in excess of earlier projections. In 2015, Canada’s chief actuary predicted that the CPP Fund would hold $625 billion by 2031, more than enough to finance the CPP into the 2090s. That projection has been twice revised upward to just over $1 trillion, an eye-watering upswing of $375 billion in just a few years.
If holding $625 billion by 2031 was enough to finance CPP benefits until the end of this century, then why do we need over $1 trillion? That’s a gargantuan surplus owned by Canadians who live outside Quebec.
Moreover, as it stands, the CPP Fund spins off a surplus of tens of billions each year.
All this at a time of crumbling schools, a starved military, and lousy public transit to name a few problems that money can actually address–to say nothing of financially-strapped households. Would you keep contributing to your flush RRSP if your roof needed repairs?
To be clear, politicians should not direct the CPPIB where to invest the money; but we may need to wholly withdraw a large dividend from the CPP Fund itself in the form of increased benefits, lower premiums, or a general return to government or Canadian citizens themselves.
As I’ve written before at The Hub, a debate about the size of the CPP Fund and what we should do with any surplus is overdue and healthy, not heretical.
Other issues are breaking out
A sampling of the debate over a pension fund surplus may be the current punch-up between Treasury Board President Anita Anand and federal public sector unions over a $1.9 billion surplus in the PSP Fund that was shifted to government coffers because it exceeded permitted limits. Anand accused the union of spreading “completely inaccurate” information. The union shot back, accusing her of raiding their members’ retirement fund. The final use of this surplus remains to be debated, but it’ll get hotly political.
Another of the Maple Eight to sail into rough waters is OMERS, Ontario’s big retirement fund for municipal employees. In October, the provincial government ordered a sweeping governance review of OMERS that will examine its top-level decision-making structures and practices. Things must have been pretty bad to get the responsible minister to order a governance review of an arm’s length pension fund. (Leo here: umm, NO!!)
And political winds may now be shifting on broader issues like ESG and domestic investment levels. Pension funds are among the most powerful spearheads for the ESG movement that may now be at odds with current political momentum, likely caused by President Trump’s oil and coal policies. Time will tell how far and fast things shift, but the big pension funds will need to adjust accordingly.
If that’s not enough, the pension funds’ foreign investment levels are now being questioned. In March, over ninety business leaders issued a public letter calling for more domestic investment by Canada’s pension funds. Of the roughly $2 trillion under their control, 80 percent is invested outside Canada, a massive outflow of money from our economy.
There may be very sound reasons for this. As a relatively small economy, we simply don’t have enough high-quality opportunities in which to responsibly invest the amounts of money we’re talking about. The debate continues.
By nature, the debate will be political
Importantly, our pensions have been managed successfully. But success also brings needed attention, especially when it involves other people’s money.
Issues are piling up. Three of the eight–AIMCo, PSP, and OMERS–are in high-profile imbroglios about governance and funding. The CPP Fund is overfed and overstuffed. And it could take a torpedo hit if Alberta withdraws from the CPP. Canadians are demanding that these funds invest more at home, and in April, the feds tasked former Bank of Canada governor Stephen Poloz to generate ideas to persuade pension funds to invest more domestically.
Whether pension fund managers like it or not, the debate now sits at the popular and political levels. The Maple Eight will need to reconcile themselves to this new reality, brave the weather, and navigate the way ahead.
Let me begin by stating that I don't know Mark Johnson but I read this article and feel compelled to tackle it because he got so much wrong here and some things right.
Nowadays, almost anyone can publish anything on our large pension investment managers and the public reads it and thinks it's written by a pension expert.
Where do I begin? First, there will be no Alberta Pension Plan, ever.
Get that out of your head, Albertans will never vote to leave the Canada Pension Plan.
Never mind the Quebec Pension Plan and CDPQ and its dual mandate, not going to happen in Alberta, ever, just like Alberta will never separate from Canada.
What did happen in Alberta is the government there effectively killed AIMCo's governance when it fired its CEO and its board late last year.
It remains to be seen how this all plays out but in my opinion, the government there bungled it up. AIMCo will never be the same again, there will be political pressure to invest more at home, compensation will take a beating and along with all this meddling, AIMCo's returns will suffer over the long run.
That's my two cents, hope I am wrong but there wasn't much thought that went into this "shakeup at AIMCo."
Just remember this: when governments meddle in pension funds, it's always a disaster in the making and nobody will be held accountable for the poor performance over the long run.
Having said this, compensation at the Maple Eight is being scrutinized (as it rightly should be) and while some former pension fund heavyweights think politicians should leave pension funds alone, at the end of the day, politicians have right to ask for more transparency and accountability.
Importantly, there is this myth that Canada's pension funds can operate at arm's length and do whatever they want and that's completely and utterly false.
If you piss off the political powers that are a major stakeholder, act too arrogant, be prepared for major consequences.
Again, there is a fine line between asking for more transparency and accountability and meddling directly into where Canada's large pension funds invest.
Other things Mark Johnson got wrong on CPP Investments and OMERS.
CPP Investments is a success story, I agree with him there, but it's been managing assets of base CPP for years which is a partially funded plan. Only recently did it start managing assets for enhanced CPP which is a fully funded plan.
Not to bore you with the actuarial details but base CPP is where they can take on a lot more equity risk (public and private) and enhanced CPP is where they can't and need to invest more conservatively.
Yes, there are more than enough assets to meet future liabilities but that doesn't mean the Fund is too big, it simply means there are more than enough assets to meet future liabilities at the present time.
It's up to the politicians to decide what to do with any "surplus" but with CPP, they need 2/3 of the finance ministers to agree on any changes.
Can they raid the CPP Fund to pay down debt? In theory yes, in practice highly unlikely as the optics look terrible and no politician would dare do such a bonehead move.
I would much prefer they increase CPP benefits if the Fund continues doing well in the future but in my experience, it's always best to have a cushion because when the next financial crisis/ major recession strikes, the Fund will need that money to capitalize on opportunities.
That brings me to PSP Investments where the federal government can do what it wants.
As I recently explained, PSAC got it wrong on the Public Sector Pension Plan surplus, it has no say in what the federal government can do with that money because members are not -- I repeat not -- sharing the risk of that plan equally.
There are legitimate questions on what should be done with that $9 billion surplus and I agree with PSP's former CEO Neil Cunningham that a lot more thought needs to go into what to do with that surplus.
But it's up to the federal government to decide what to do with that surplus, not PSAC or anyone else.
On OMERS' governance review, I covered it in detail here, it has nothing to do with the way the plan is being managed but with whether it really needs two boards.
Mark Johnson got that completely wrong.
What else? On investing domestically, Stephen Poloz's task force came up with great recommendations after consultations with pension funds and other stakeholders and they were embedded in the fall economic statement.
In short, I think Mark Johnson raises some valid concerns but he got a lot wrong in his comment.
Below, Aaron Wealth Management explains three big changes to CPP and OAS in 2025.
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