The Agenda with Steve Paikin (Audio) - Why Don't Canadian Pension Funds Invest More at Home?

Episode Date: May 7, 2024

The Liberal government wants to know how to encourage Canadian pension funds to invest more at home. But that is not always in the interests of beneficiaries. A look at Canada's potential, and problems, when it comes to attracting massive investments.See omnystudio.com/listener for privacy information.

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urges Canadian pension funds to invest more in this country. And now, a working group created in the last federal budget and headed by a former Bank of Canada governor will explore how to make Canada more attractive for pension funds to invest here. But is it churlish of us to ask whether pension funds actually are underinvested in Canada? And if they are, is there a good reason for it? Tonight, three people who would know. Barbara Zwan, president and CEO of University Pension Plan Ontario. She's also former chief risk and strategy officer for the Ontario Teachers Pension Plan. Jim Leach, former President and CEO of the aforementioned Ontario Teachers' Pension Plan. He was there from 2007 to 2014.

He's also Chair of the Advisory Board for the Institute for Sustainable Finance. And Keith Ambacher, Director Emeritus of the International Centre for Pension Management at the U of T's Rotman School of Management. And we are delighted to have everybody from A, Umbachir, to Zed, Zvon, and Leach in between. We're going to get the A to Z's today on pension investments here in this country. And just before we start, I'm going to ask our director, Sheldon Osmond, to bring up a couple of graphics showing some stats about Canada's eight largest pension funds. These are known as the Maple Eight, and among them, they have about $2 trillion in assets.

And here's how it's allocated. I'm not going to go through all the hundreds of billions of dollars of valuation, but just to give you a sense, the Canada Pension Plan has got 14% of its money invested in Canada. The Caisse du Depot et Placement in Quebec, 27%. The Ontario Teachers' Pension Plan, about a third. The public sector, about 22%. Let's keep going. BC Investment Management, about 29%. Alberta Investment Management, 43%. OMERS, the Ontario Municipal Employees, 24%.

And Healthcare of Ontario is the biggest one there at 55%. Okay, Keith, to you first. Given this data, how would you characterize the Maple 8's level of investment in Canada? They're overinvested. Overinvested? They're overinvested. Even though one's only over 50%? If you use sort of the normal standard of the structure of the global financial market, and you look at Canada's position in that, certainly on the equity side, for example, it's 3%, or 3% of the total financial market. And you look at Canada's position in that,

certainly on the equity side, for example, it's 3%, or 3% of the total global market. So when you see numbers like 10% and 20% and 30%, that's overinvested. Barbara, what would you say? Well, it depends. So all these pension plans have Canadian dollar liabilities, or they own a pension promise in Canadian dollars. So there's certain types of assets that you want in Canadian dollars. So take Canadian government bonds as a nice hedge portfolio, and there's less desire to go foreign for that.

But in other areas, we just don't see the opportunities in Canada and certain types of asset classes, like infrastructure is a great example. And to really to get that diversification across countries, as well as types of assets, we go go elsewhere what's your percentage at your fund we're about 40 percent 40 so that's on the high side compared to the maple eight that's right and you're comfortable with that obviously we're comfortable that

given the makeup of it yes okay Jim leach what do you say well they're both right it depends on as Barb said first first of all, there's reasons to be in Canada. One is currency. All of the obligations of these pension plans are in Canadian dollars. So that's a reason to be overweight in Canada. Another reason is that we have a bit of an informational advantage in Canada. We're here, we know what's going on compared to our foreign competitors, etc. By the same token, you have to have a diversified portfolio. And as Keith said, only 3% of the equity markets are in Canada. So anything over

3% in equity would, you know, be termed as overweighted. But there's another type of diversification one needs to get from the demographics. So different countries have different demographics. You may want to spread into a younger population or an older population to be investing in. And secondly is different industries. So, for example, if you want big exposure to five Canadian banks and a whole bunch of strong resource companies, yes, the Toronto Stock Exchange is the place to be. But if you want exposure to technology, to consumer products, et cetera, large manufacturing, you're not getting it by investing in the Toronto Stock Exchange, unfortunately. You said you're at 40-ish percent? That's right.

How did you land on that number? Well, we do, most pension plans will do something called an asset liability. They look at their liabilities, they look at the different assets they can invest in, and they look at 10, 20 years and, you know, factor in as much of the modelling as you can. It's never a perfect exercise. And then they use judgment in terms of, you know, where is the growth, where our opportunities are. And then, you know, usually that leads to a certain amount of bonds that you want as a hedge to interest rates. You're looking for certain

types of inflation protection because we all provide pensions that are indexed to the CPI. So we need that in our assets and we need assets that provide economic growth and that's really where we try to get the Diversification across globally. So that's how it comes out So Keith when this letter came out signed by all these CEOs saying come on pension funds You ought to be investing more in Canada. What was your reaction when you saw that? Laughter because because there's just such a big gap between the original writers of that letter,

the Montreal investment managers who manage Canadian assets, and they've been on this track for a long time. And I was actually flabbergasted that they got so many CEOs signing that letter when they should know better. When you were running Teachers, I'm checking here. Okay, teachers, $248 billion. That's big, eh? 35%.

Do you remember what the numbers were when you were there? Probably close to the same. It wouldn't have been much different. And why would you say that that's the right mix? Well, it's the right mix, given the opportunities. As I said, and Barb said before, we'd rather be investing in Canada, or there's an advantage to us investing in Canada, but there aren't the opportunities. I think this question isn't so much much how do we force Canadian pension plans to invest more in Canada. Because you can't, presumably. Well, they could pass legislation,

which would be absolutely. But we've had it. We had the 10% more property rule way back when 90% of the assets had to be invested in Canada. And we spent a long time and a lot of effort getting rid of that rule. And why we got rid of the rule is because all the pension plans were in deficit and couldn't get out of deficit. Once those rules were relaxed, once the restructuring and transitioning of the plans happened in the 1980s, 90s, since then, all the plans have moved into balance, primarily because of higher investment returns. So it is a better thing that there's no legal obligation for these funds to invest in Canada? Yes.

But- As odd as that sounds. As odd as that sounds, it's a better thing. By the same token, the issue, I think, has actually been worded properly in the budget, which is how do we, the government, Mr. Polas, et cetera, work with the pension plans to determine ways in which they can encourage Canadian pension plans to invest more in Canada, not require, encourage. Australia is a classic example there, where the government there has gone out of their way

to make it easy for super funds in Australia to invest in infrastructure in Australia we haven't done that yeah so I think actually you have to change the whole question to how do we just get more money in Canada from domestic and for it the pension plans the foreign investment is a good thing and pension plans don't act any different than say if you are an individual that have to save for your own retirement. You go to usually a retail branch of some sort, and you get a group RRSP or maybe from your employer or a defined contribution plan.

No one's talking about those monies, right? Because at the end of the day, that member or that person is responsible for their retirement income. These pension plans are responsible for the retirement income for all those people in that pension plan. And so we don't want to confuse the mandate. So I have to serve in the best interest of the members in my pension plan. Ontario Teachers has to serve in the best interest of their members. And it is providing their pension.

Because if there's a shortfall, they pay for it. Not the federal government. I think that's a good point. And I think it may lead, Keith, to your amazement that 90 people signed that letter. There was a lot of disinformation going around at that time. I've seen emails from Letco and Brosseau that said these plans are guaranteed by the government. And that is totally wrong. I mean, if these plans go into deficit, it's going to be their members and their employers who bear the burden of increased contributions or lower benefits. Canada pension plan is not guaranteed by the government of Canada. Thank you very much.

It is not government of Canada money. It's money contributed by employers and employees. And so hands off. Now, you were saying something about the Aussies earlier. What are they doing? Or what did they do? So it's the same thing. You've got toll roads, you've got airports, et cetera, et cetera. And there the government has said, what can we do as a government to facilitate super funds in Australia? and for that matter, other countries as well, like Canadian funds, to become investors in Australian infrastructure? And it's going very well. Why is it going well? How do they encourage it? Because the rules are set up so that they're clear, they're welcoming, and that's all it takes.

And of course, to have an economy that actually is going to generate the returns that you need as a pension fund. Barbara. So I was going to expand on that. So the rules, you know, every country, when they privatize infrastructure, it's their choice. They usually set some sort of regulatory framework

that an investor can look at and say, will I be able to understand the risk profile of this regulatory framework? Will it change on me? You know, what's my implicit rate of return? What am I accountable for? And it's a great investment, because usually it means, you know,

there's a good cash yield. There's usually inflation protection involved. But many ways when these investments come to the larger pension plans and even the smaller one through the investors that we use or the managers we use, they governance rights so they sit on the boards of these companies they look at the operating of these companies you know and so that and these are companies you're going to own for a long time so that's really important and so you need the attractive you know return for the risk that you're taking you need the governance so you can make sure that it stays that way over the long

period of time and then there's a investment on the time so you can make sure that it stays that way over the long period of time. And then there's an investment on the time. So you can't come here and say, oh, there's one investment. You're not going to get the mass attraction of investors that are going to come here for one investment. You need that pipeline of opportunities to really attract the investors to say, look, Canada's privatizing. We're going to privatize these things. They'll start spending the time and effort in researching it. That's one thing, not so much. Okay. But Jim, when you were running teachers, was there a part of, I mean, you're a proud Canadian,

was there not part of you that thought, you know, it would be really good for the country if I could overweight my portfolio towards Canadian companies? Well, I certainly spent a lot of time talking to politicians and saying, Canadian companies? Well, I certainly spent a lot of time talking to politicians and saying we would like to invest more in Canada. I would be asked all the time, how come teachers doesn't have much in infrastructure, where you've got lots of infrastructure investments in Australia, in the UK, in Chile, etc. And at one point, this is where I'm leading, one point said we only invest in regimes that are stable political regimes. And I said that because our first infrastructure investment that we made in Canada was in AltaLink, which was the electrical distribution business in Alberta that was being sold off. And so we invested in it on the premise of, as Barb said, what the regulations were, anticipated returns,

and all of this stuff. Within 12 months of making that investment, the Alberta government regulatory agent halved the allowable rate of return. They cut it in half because we were a pension plan. And I can remember sitting there with our chief investment officer, with the minister from Alberta, and saying, like, are you guys crazy?

Because the message you're sending, not just to me, not just to teachers, but to everybody in the world, is we can't trust you. We cannot trust you. And just to say, I mean, they did it in Ontario too, when Dalton McGuinty's government endeavoured to abrogate the contract that was on 407. Now, I'm not saying that contract was good. I think the government blew with that contract.

But you don't try to abrogate it all of a sudden because you didn't like the deal that you made. because you didn't like the deal that you made. There was also a recent, when November 2022, the federal government had, since the early 90s, issued something called inflation-protected bonds. So they're bonds that are indexed to the CPI. They form a great base in any pension plan portfolio because we provide inflation protection in the pensions. And November 2022, they all of a sudden announced

they're stopping the issuance. And so these pension plans own a significant portion of these bonds. And so it effectively becomes a stranded asset over time with no warning, no notice. So you love it when they change the rules in the middle of the game. Yes. That's right. Yeah. Keith, let me raise it.

I raise the issue of patriotism because in the province of Quebec, as I understand it, they do have this double mandate. of Quebec, as I understand it, they do have this double mandate. They not only are expected the pension funds to seek the best return possible, but they are, as part of their mission statement, supposed to promote the province of Quebec's economy. We don't do that in Ontario, should we? Absolutely not. In fact, I think there's a lot of work that we need to do to understand what La Caisse has really done over time. Certainly, when you look at just the returns last 10 years, they're considerably lower than, for example, CPP Investment Board. What that's attributed to, you need to dig into the details and understand that. But as soon as you start muddying the waters, then it becomes an uncertain issue as to what qualifies, what doesn't qualify. The classic example for the world to be looking at right now is what La Caisse is doing with the Montreal transit system.

And the fact that they're moving closer to actually playing an operational role, my understanding of it, in actually managing the system. Where does this go? Well, it's an interesting question. Are you a fan of that idea? It's risky. It's risky. And again, just not to pick on like ass, Thames Water in the UK, it's the water system for London, greater London area. It's owned by pension funds, including Canadian ones. It's not doing very well. So there's a downside to actually picking the investments and thinking through what does this investment need to be in order to provide sustainable long-term returns. And so the other thing I want to mention in all this that's kind of interesting is the global pension investment community.

They all know each other. So they have their own culture and they talk to each other all the time. So it isn't like it's one-off things. They're all understanding what's happening in the different countries. Gotcha. That's what I think politicians don't understand. When we use AltaLink, when we use

Highway 407, when we, all different examples, the ponds, et cetera, they may think these are little one-offs, but they're not. They all accumulate and everybody in the world knows about it. When I would go to a conference in France or Switzerland or whatever, there are all of them are compatriots from all over the world. And the first question they ask is, what's going on in that province of Ontario where they're trying to cancel a contract? And it's well known.

Contracts are a big deal in your world. Money has a long memory. It has a very long memory. The other irony in all this is that what's evolving at the international level is the adoption of the Canadian pension model from a design point of view, which is an arm's length organization with a clear mandate, good governance, ability to insource if you want. And so that's becoming the global model. And it's being applied very well in various places, but only to the degree that the investments are there and that you don't have the government interference. Barbara, let me ask you about an asset

that has become very well-known in the last week or so. There's a pipeline in Western Canada called the Trans Mountain that some people may be interested in. I suspect the federal government would be interested in selling off parts of that. Would you be interested in buying parts of that? Yeah, so when we look at co-investments or doing investments like that, one of the main things that we look at now, say going forward for something like that,

because it's quite a liquid asset, you're going to hold this decade or more, is what is the climate transition plan for that pipeline? So how does it align with going to net zero by 2050 for Canada? And I would say that that's not really clearly articulated right now. And so most of these pension plans are looking forward, and they have made sustainable finance goals, and they have made commitments around climate. And I think that's going to be one of the hurdles for pension plans looking at that pipeline if you were running teachers would you want a piece of that pipeline i think the answer is exactly the same would we look at it for sure we'd look at it because it's a major asset it has a long-term life

subject to the sustainability issues surrounding it but it's it's the type of asset that a pension plan would look at. What about when you were running teachers, was there ever a situation where, let's say, and let's just remind everybody, I don't know how many hundreds of thousands or millions of teachers' pensions. About 340,000 teachers. Okay, okay.

So a lot of teachers have their pensions and their futures wrapped up in that pension plan. Would a Premier of Ontario ever call you and say, you know what, it'd really help us out a lot if you invested in X, Y, or Z? It's happened, and it wasn't at the Premier level, lower, but the message was coming from the Premier a couple times. So a Cabinet Minister called you. Yeah, but also the unions would every once in a while too. Both got the same answer. Which was what?

Thank you very much. Thanks for your advice. And did you do what they asked? I can't think of any of the cases where we did what they asked. But you understand that as part of their job they sometimes have to do that. But as Keith said, it's governance that is independent of the sponsors. And it isn't just government. It's also the unions would get upset if we made certain investments.

And we'd say, no, our pension plans are there for one reason and one reason only, and that is to secure the financial future of their members for the long term, forever. Because if they're not secure, they're going to become a burden on the economy, and they're going to drag the economy down. So that's the only reason they exist. They don't exist for government policy. Economic development. Economic development.

Government policy that says people shouldn't be destitute in their old age, yes, but not for public policy of economics. Let's understand, when you look at the funding of a pension plan, 20% comes from the contributions from members and the employers. So 80% is the investments over the life of that pension. So they better be good. They better be good. It's the big driver. So a 1% change in returns would be around 20, 25% of total assets. So if you've got a $200 billion plan, who's going to make up the other $40, $50 billion? Right. Talking real money here. The other interesting part of this

discussion is I had one with my sisters. We get together a number of times a year. One of them is a retired teacher and her husband is a retired teacher. They get very emotional when they read things like, that's our money and you better not touch it. So I think that's the other dimension in all this, is people take this very personally. And when they see other people- It's their money. It is their money. We give them a statement every year that says this is their money. Well, somebody, I can't remember who brought this up, but Stephen Poloz, the former governor of the Bank of Canada, is now being tasked by the federal government to set up this working group to attract more investment into Canada. So let's get some

wisdom for him on this. What would you tell him? The makeup of his... First of all, have anybody asked you to be on the committee? We have received an email about participating. I'm not sure being on the committee or how many people are going to be in this working group, but we have received an email to participate. Okay. He's right there in that camera. What would you tell him? So I'll tell him what I already told him. So I think he has to hit the pension plans, of course,

because I think they have a depth of experience, like folks like Jim and Keith, who've run the plans, have been through it, have been asked to do this by multiple groups before, and some of the complications to actually doing these sorts of investments. Like what does it really mean? Because people always think it's just the risk and return. It's about the pipeline. It's about the governance, all those things. I would also say look at the work that was recently done by another group called the Sustainable Finance

Action Council. So same budget and same fall economic statement, next page. And this was a group of 25 Canadian financial institutions. So all the big banks, all the big insurance, the property and casualty and pension plans got together and said, what do we actually need in Canada to attract capital that's aligned with a climate transition? And we made recommendations over the course of three years, largely unanswered by the government today.

So here's a really great example where they convened 25, and we all agreed. Like, this is a phenomenal thing. We all agreed. So we agreed on what is needed from a disclosure point of view, what is needed from what is called a taxonomy or a guide. It's quite common now globally. There's over 40 that are in development today. Would you give those recommendations to? To the Government of Canada, the Department of Finance,

and Environment of Climate Change. Who would you have expected to hear back from on that? Minister, Deputy Prime Minister Freeland and Minister Guilbeault. And you heard nothing? We have not heard anything officially back yet. So we've submitted, so I chaired the taxonomy group and we submitted our paper in fall of 2022. This is almost two years ago now. And you know what this does for, you know, taxonomy is kind of not a common word, but think of you know when you go buy an appliance. Jim wants to buy a new dishwasher. He wants an energy

efficient dishwasher. You see the energy star rating on it and you can tell immediately is that energy efficient or not. I don't think Jim would argue with the salesperson. He would believe that there's standards associated with that. It's the same idea for different types of investments. What sort of buildings are green? What sort of buildings are on the transition pathway? What sort of energy usage does that mean, et cetera, in the emissions profile? And so this is a technical guide. It would be custom for Canada, but we'll let global markets come because they can understand the transition. This is what the roadmap we put together. So we're at a year and a half, no answer. We even published further papers and guidance on how to structure the governance,

not published yet. So again, I feel like, okay, here's a really great example. You want money from the pension community, but yet separate panel, three years of effort, no answer. I don't mean to put you on the spot here, but is there any excuse for a lack of response all this time later? Well, I get the, it perhaps is because the answer isn't the answer they wanted to have or they feel comfortable with. I mean, in my meetings with government over the years, I've said five things you need to do to attract capital to this country. The first one was that your rules have to be very clear and they can't change. You need regulatory bodies that set out the principles in advance to attract money that's going to invest here for 10, 20 years. They can't be at the whim of a change. You need to address interprovincial trade barriers. Every single study that's ever been done

says that costs us somewhere around three quarters of a point of GDP every single year. It's a political mountain too high to climb. Anyway, but I take your point. Look at the assets that you own that are not core to your mission. If you need money for health care, you've got a couple sources. Just like a household, if they have money or if they want money for something, they can either get a higher paying job, i.e. tax, if you're a government, or sell something. And there's no reason why the province of Ontario needs to be in the liquor business. There is no reason that the federal government needs to be in the liquor business. There is no reason that the province

or that the federal government needs to be in the airport business. There's no reason why Canada doesn't have toll roads or toll bridges like every single other nation in the world. Why don't we do these things? It's politically tough. You're going to get attacked from the left. You're going to get attacked from the unions and all of that stuff. But don't put it on the backs of pensioners. Do the job that you're supposed to do. I think there are ways they can and they have taken steps here to endeavor to reduce risk, to attract in institutional funding through the Canada Infrastructure Bank, through the Ontario Infrastructure Bank. These are mechanisms that have been set up. And finally they can use their own tax structure or tax policy to attract

money. Things like flow through shares, things like fast write-offs, all of those types of the traditional tax mechanisms that they've used in the past. And I sit back and look at this also in the context of the recent budget that has increased capital gains tax. That moves against. I mean, that, let's not get into the merits of whether they need the money is the best way to get the money and all that stuff. But the signal they're sending is not an incentive for risk-taking. Governor Poloz, we have lots of advice for you here, apparently, and it's all free of charge. All you've got to do is flip on TVO.

We want to thank Keith Ambershire and Barbara Zvon on that side of the table and Jim Leach on this side. You guys used to own the Toronto Maple Leafs, didn't you? Yes, we did. I won't ask. I won't ask. Did you buy them? You bought them? I didn't win then either. You bought them and sold them?

Yes. Yeah. Okay. Next year. Thanks a lot, everybody. Okay. The Agenda with Steve Paikin is made possible through generous philanthropic contributions from viewers like you. Thank you for supporting TVO's journalism.