Ottawa Tells Pension Funds to Invest at Home in Age of 'Economic Nationalism'
Canada is calling on its C$3tn (US$2.1tn) pension system to boost domestic investment as it seeks C$500bn in new finance to reboot the economy and lower its dependence on the US.
Industry minister Mélanie Joly told the Financial Times the new wave of “economic nationalism” means Canada’s financial institutions must foster homegrown investments and major infrastructure projects to kick-start the country’s sluggish economy.
“I’ve had lots of conversations with our banks, and our pension funds. There’s a sentiment that we need to think about Canada first and that we need to put capital where our mouth is,” she said.
This month Joly launched an industrial strategy aimed at creating jobs and attracting foreign investment in response to US President Donald Trump’s tariffs on Canada.
“For a long time pension funds have said that they need to provide yields to their beneficiaries . . . but they can have a discussion with their beneficiaries about their impact in their own country, their own environment, where beneficiaries live,” she said.
Like the UK, Canada has been examining how to channel more pension assets to domestic targets to combat weak productivity and poor business investment.
Last year more than 90 Canadian corporate executives signed an open letter calling on the government to amend rules which would allow them to increase domestic investments, saying the amount they allocated to Canadian equities had dwindled from 28 per cent in 2000 to 4 per cent by 2023.
Ottawa in December lifted its 30 per cent cap for investments in Canadian entities at a time when Trump was threatening tariffs and trade wars against its major trading partner.
“This will make it easier for Canadian pension funds to make significant investments in Canadian entities,” said the finance ministry’s Fall Economic Statement.
The Canada Pension Plan Investment Board, the country’s largest fund with C$714bn of assets, revealed its total allocation to Canadian assets dropped to 12 per cent of the fund in March from 14 per cent two years earlier, although the total value of Canadian assets still increased.
But Paul Beaudry, a former Bank of Canada deputy governor, warned forcing funds to invest locally was “very dangerous” as it risked creating “a type of crony capitalism”.
Beaudry said the government could identify either socially beneficial projects or mid-level companies that big funds overlooked for investment.
“I’m not against pushing it but I like it to be more on the incentive part than on the idea of kind of forcing it,” he said.
Prime Minister Mark Carney launched a “Buy Canada” campaign last month that prioritises local products for procurement as a way to make Canada “the strongest economy in the G7”.
It is an ambitious goal considering the country’s economy shrunk more than expected in the second quarter while exports fell 7.5 per cent compared with the first three months of the year because of the tariffs, according to Statistics Canada.
Canada has also set up its Major Projects Office to fast track national infrastructure proposals and to create a positive investment environment for financial institutions such as its pension funds.
The government is also potentially lowering the 90 per cent threshold that limits municipal-owned utilities from attracting more than 10 per cent private sector ownership, in particular from Canadian pension funds.
CPP Investments has nearly 50 per cent of all its assets invested in the US, despite pressure from Ottawa to invest more in its home market. Similarly Omers, the pension fund for Ontarian municipal workers with C$141bn of assets, had 16 per cent invested in Canada and 55 per cent invested in the US at the end of June.
“Dozens of policymakers have frequently commented in recent years about welcoming more investments into Canada and our approach remains unwavering and steadfast,” CPP Investments said. “We act in the best interests of contributors and beneficiaries in line with the pension promise.”
CPP Investments in July announced a C$225mn investment in a new data centre in Cambridge, Ontario. It also has a $1.7bn investment in Canadian Natural Resources, the country’s largest energy producer.
Other Canadian funds have a higher domestic allocation, such as the C$123bn Healthcare of Ontario Pension Plan, which has more than 55 per cent of assets invested in Canada, and the C$270bn Ontario Teachers’ Pension Plan which has 36 per cent.
I must admit these articles are starting to irritate me.
Industry Minister Mélanie Joly shouldn't be publicly commenting on Canadian pension plans as they don't fall under her purview.
I don't know why she's giving interviews to the FT to discuss this matter publicly, it sends all the wrong messages to people reading it throughout the world, namely, that Ottawa dictates where Canada's large pension funds invest.
But the truth is Canada's large pension funds/ plans operate independently from governments, a form of governance that has ensured their long term success.
Yes, the board of directors at the two largest Crown corporations in Canada -- CPP Investments and PSP Investments -- is nominated by the federal government and provincial governments (in the case of CPP Investments) but that's about it.
Governments have no say whatsoever on how they manage pension assets or where they invest, all they can do is hold these pension funds to the highest standards of transparency and force them to divulge a lot of details on where they invest.
Governments can hold consultations with these large pension funds and they hold enormous influence over them but they cannot manage their day to day operations or force them to invest more domestically.
That's just silly and counterproductive, you don't want government bureaucrats with no skin in the game telling large pension funds where to invest.
What governments can do is create the winning conditions to allow large domestic pension funds to invest more domestically, in particular in infrastructure assets.
I discussed this in my last comment here and this is where the federal and provincial governments can play a critical role:
At the heart of this report lies "The Investible Window" which provides the winning conditions for pension funds to invest more domestically:
Basically, in a nutshell, pension funds want to invest in highly scalable projects that provide competitive risk-adjusted returns, they want good governance rights and they prefer brownfield over greenfield assets, meaning an asset that is already operational and has know cash flows.The report also explicitly states: "Benchmarking against global peers is the norm. The fact that a project is domestic is not sufficient justification for sub-commercial returns."
What does this mean in practice? It means Canada's large pension funds aren't averse to investing in large domestic projects where they have no currency risk as long as these projects are scalable and offer competitive returns relative to what they can get elsewhere.
The report offers a lot more details and provides more context but I'm boiling it down to what is critically important.
Anyway, take the time to read the entire report here, well worth it and I certainly hope it helps bridging the disconnect between policy and practical pension investments.
What about CDPQ and its dual mandate to maximize returns and help develop Quebec's economy?
What about it? It's going well now but I remember a time not too long ago when it was a disaster and fraught with scandals, corruption and outright fraud.
Moreover, if we were honest with Quebecers, we would publish the opportunity cost of all this domestic investment relative to going global and investing and co-investing alongside top alternative funds which CDPQ also does and does well.
So, while the dual mandate works at CDPQ and can work at other large Canadian pension funds, I'm far from certain it's in the best interest of pension contributors and beneficiaries or the Canadian economy.
Besides, you would need to adopt new laws to change the governance at these funds, no easy feat.
All this to say with all due respect to Industry Minister Mélanie Joly, please stay in your lane and let experts like the Minister of Energy and Natural Resources Timothy Hodgson who actually sat on pension boards discuss this matter publicly.
One final thing, the article ends by noting:
Other Canadian funds have a higher domestic allocation, such as the C$123bn Healthcare of Ontario Pension Plan, which has more than 55 per cent of assets invested in Canada, and the C$270bn Ontario Teachers’ Pension Plan which has 36 per cent.
Again, regular people reading this have no context and don't understand the liability-driven investments at HOOPP and OTPP which necessitates a high allocation to Canadian fixed income.
In other words, every pension fund and plan is different with their own demographics, a different mandate and asset mix but regular people reading this article are totally clueless.
And CPP Investments is managing close to $800 billion in assets, I'd be very concerned if their allocation to Canada was similar to smaller funds or plans.
I can go on and on but let me stop there, I take all these articles with a grain of salt, they're mostly meaningless gibberish.
Below,Industry Minister Melanie Joly address the news that GM will end production of its BrightDrop EV in Ingersoll, Ontario.
Like I said, Joly should be talking about industries, that's her job, leave pension funds to experts who understand all the intricacies involved.
And CNBC's 'Fast Money' team discusses General Motors as the automaker beats earnings expectations on the top and bottom lines.
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