National Conference on Public Employee Retirement Systems

The Voice for Public Pensions

Blog

Worthwhile Canadian Initiative?

  • By: admin
  • On: 07/31/2024 09:17:33
  • In: News
  • Comments: 0
Here's what to know about the Canadian federal government's new goal of encouraging pension funds to invest domestically. 
By: Neil Hrab

“Worthwhile Canadian Initiative” was once, with tongue firmly in cheek, selected by the New Republic magazine in an informal contest as the most boring headline imaginable. The recent news that Canada's federal government has officially set itself a goal of “Encouraging Pension Funds to Invest in Canada” might be similarly greeted by deep yawns south of the border.

However, the broader issues raised by this decision will be of more than slight interest to American defined benefit (DB) plans and their stakeholders.

This effort will be brought to life through an official working group headed by a highly-respected former Bank of Canada governor, Stephen Poloz (equivalent to a US Federal Reserve chief) and aided by the federal Canadian Ministry of Finance. In typical understated Canadian style, it will likely rely more on private meetings and written submissions to gather input than large-scale public hearings.

The working group's goal is, as summarized by the government, to “explore how to catalyze greater domestic investment opportunities for Canadian pension funds. This working group will identify priority investment opportunities that will grow Canadians' pension savings – that meet Canadian pension plans' fiduciary and actuarial responsibility, spur innovation, and drive economic growth.”

To put this into the American political vernacular, it sounds as if the Canadian government believes it can separate “winners and losers” when it comes to domestic investment opportunities, and wants to try to steer the pensions accordingly.

This development may come as a surprise to informed American ears. Haven't many of the large Canadian pensions for years been attributing a good degree of their consistent success in generating steady returns to the fact that they are run at arms-length from pressures coming from elected officials, or other self-interested parties?

Hasn't that long been part of the Canadian pensions' “secret sauce” – that their leaders and managers answer for the success or failure of their strategies to independent boards of directors, allowing the plans to orient themselves to making optimal asset allocations based on their projected liabilities?

What happens to that successful formula if the large Canadian pensions become answerable in some way for their investment mix to distant bureaucrats working in Ottawa, Canada's capital?

With a timely paper, the reigning academic authority on Canada's pensions, Keith Ambachtsheer has, with help from two colleagues, answered this question in precise terms.

To sum up, Ambachtsheer's paper makes the case that if the arms'-length character of the Canadian pension plans' operations and decision-making is undermined through government-directed investments, this would “compromise existing governance functions” and “expose pension plan members to potential financial losses.”

The paper goes on to argue that the government would be wiser to try to foster more pension investment in the domestic market by helping these pools of capital to become more active investors in cash-generative parts of Canada's infrastructure that are currently out of the pensions' reach for a variety of reasons. This would include the country's major airports, for example.

Ambachtsheer's paper subtly makes another crucial point that Canada's government may want to consider while it awaits the working group's findings. As his paper notes in passing, the large Canadian pensions collectively serve the interests of “millions” of individuals by investing their retirement savings.

The implied warning to elected officials in the Ambachtsheer paper could be taken to mean something like: Tread carefully here, because there are far more people watching than you may think. Especially if they stand to lose money because of government trying to “fix” something that isn't broken.

Interestingly, shortly after the paper's appearance, Stephen Poloz, the government-announced working group's head, emphasized publicly that he is more focused on achievable and “actionable ideas” rather than proposing major changes to how the pensions currently invest at home.

This could be taken to mean Poloz is more likely to focus in his final report on what government can do to make domestic investing more attractive and profitable for the pensions, rather than how the pensions can be muscled into following government investment diktats that could prove costly to their respective memberships.

One expression that Canadian and US politics share is that of “the third rail,” in reference to policy proposals which are so controversial as to be absolutely untouchable – like the dangerous electrified third rail in a railway line.

As the government reviews Keith Ambachtsheer's paper, it may come to realize it owes him a debt of thanks. In careful and nuanced language, he's reminded elected officials to be careful and not get singed -- or worse -- by carelessly playing on the pension third rail.


Neil Hrab worked for more than 12 years in the Canadian pension sector. This piece is written in a purely personal capacity. 

Comments

There have been no comments made on this article. Why not be the first and add your own comment using the form below.

Leave a comment

Please complete the form below to submit a comment on this article. A valid email address is required to submit a comment though it will not be displayed on the site.

HTML has been disabled but if you wish to add any hyperlinks or text formatting you can use any of the following codes: [B]bold text[/B], [I]italic text[/I], [U]underlined text[/U], [S]strike through text[/S], [URL]http://www.yourlink.com[/URL], [URL=http//www.yourlink.com]your text[/URL]

Contributors