Rachel Reeves, on her first overseas trip as British Prime Minister, told pension funds “we want them to learn lessons from the Canadian model” ahead of a roundtable discussion with eight of the UK’s biggest retirement funds, giants of the global pension industry. said.
She hoped these lessons would attract huge amounts of money to Britain’s infrastructure and burgeoning businesses.
But Britain is seeking to fast-track its path to a system that took 30 years to develop, and it is under new domestic political pressure.
Canada’s pension system has been the envy of the world since pioneering the so-called Maple model in the early 1990s.
Its model combines robust governance and independent managers. Large, high-income teams that choose their own investments. According to the OECD, large allocations to the private market helped create the world’s second-largest pension system.
Canadian public sector employees are also provided with sustainable defined benefit pensions through both national pensions and supplementary plans. For example, the average teacher in Ontario can retire in their late 50s with an annual income of C$50,000 in addition to the Canada Pension Plan. ($35,000) for members of the Ontario Teachers Plan.
In contrast, the average annual pension paid by UK local authority pension schemes in 2023 will be around £5,400, and the full state pension will be around £11,500 per year.
However, there are questions as to whether applying the three core elements of the Maple model to UK local authority pension systems would achieve similar success.
“Thirty years ago, these three factors were very compelling,” said Rashay Jethalal, CEO of Toronto-based consultancy CEM Benchmarking. But, he added, “I have a little doubt about whether we would establish a model like the Canadians. Would we establish it the same way today?”
In 1990, the Ontario Teachers’ Pension Plan was facing a significant funding shortfall. As the state-run fund’s returns were lackluster, its managers hired a former insurance executive to replace it and run the fund like a business.
Current chief executive Joe Taylor said he has built a team of investment professionals, expanded into private markets and has historically made returns of about 20 percent a year from private equity holdings.
This became the blueprint that was rolled out across the country’s public sector funds, from the Canada Pension Plan Investment Board in 1997 to the youngest of the Maple 8, the Alberta Investment Management Corporation, in 2008.
All public sector plans in Canada offer defined benefit pensions, but they take different approaches to suit the needs of their members and stakeholders.
CPPIB, the country’s largest, helps finance Canada’s national pension, most of which is paid for by the government.
Pension plans in Quebec, British Columbia and Alberta are set up as multi-fund asset management companies, while teachers, health-care workers and municipal workers in Ontario receive their pensions from separate companies. are.
However, what these companies have in common are significant investments in private equity, real estate, and infrastructure.
With international offices that invest in critical infrastructure from London’s ports to Brazilian utilities to India’s transportation networks, Canada’s pension funds have become major players in global private markets. A high proportion of its holdings are international, in part because many of Canada’s critical infrastructure assets, such as airports, are publicly owned.
Infrastructure holdings give Canadian funds access to assets that act like bonds, helping meet pension obligations, but with higher returns.
Over the long term, its risk-adjusted performance outperforms its rivals “in every respect,” according to CEM Benchmarking researchers.
According to CEM Benchmarking, the firm’s in-house model gives it access to private market strategies at about half the cost of competing funds that do not manage their assets in-house.
However, our expansive global private market portfolio and international offices increase investment, operational and governance risks.
Earnings have been weak over the past two years as rapidly rising interest rates have hit investment valuations, especially commercial real estate.
Both the Ontario Municipal Employees’ Retirement Plan and OTPP returned less than 5% in the 12 months ending in June, well below their long-term average of more than 7%, due to their relatively high exposure to real estate. .
On the other hand, the management of some privately held stocks is deteriorating. In March last year, Omars issued a “full write-down” of its 31.7% stake in British water company Thames Water, which was valued at £700m at the end of 2022.
In November, three former employees of Québec Deposit’s India office conspired with Adani Green Energy to bribe Indian authorities to secure lucrative solar power contracts to close pension income gaps. He was indicted by U.S. authorities on charges of paying He put money into his portfolio and tried to hide it.
“My impression is that (Maple 8) was a little too bullish,” said Oliver Gottschalk, founder of Gottschalk Analytics, referring to the fund’s high exposure to private markets. “There are question marks as to how realistically that can be achieved.”
The platform has also become increasingly subject to political interference. Some of the Maple 8s have high domestic exposure, such as the Healthcare of Ontario Pension Plan, which accounts for more than half of its investments in Canada, but only a small portion of the Canada Pension Plan’s assets are invested domestically. Approximately 12 percent.
Last March, more than 90 Canadian business executives released a public statement calling for the government to revise the rules governing Canada’s pension funds and increase domestic investment, alleging that their allocation to Canadian equities had fallen from 28%. signed the letter. 4% in 2000, increasing to 4% by 2023.
Britain’s Rachel Reeves said Canada’s model would “boost the British economy,” but research by think tank New Financial found that British pension funds invested more money in domestic equities in the early part of this century. It was being distributed. In 2000, the figure was nearly 50%. By 2024, it has shrunk to 4%.
Like the United Kingdom, Canada has been considering ways to redirect Canadian pension assets toward domestic goals at a time when the country is grappling with declining productivity and weak business investment.
“Maple8’s entire business model is based on the premise that they can operate at arm’s length from the government,” said Sébastien Betelmier, an associate professor of finance at McGill University. “Over the past year, we have seen evidence of increasing politicization, and that concerns me.”
The high point of government intervention came in November, when the Alberta government abruptly fired the entire Alberta Investment Management Corporation (Aimco) pension board.
Alberta said the decision, which led to former Prime Minister Stephen Harper becoming chair, was due to a “significant increase” in costs. Aimco’s operating costs were 0.66% of assets under management in 2023, up from 0.63% a year earlier, roughly in line with other large pension plans in Canada.
But Canadian pension experts say restructuring Aimco, moving away from its green investment strategy and encouraging more investment in domestic oil and gas to boost local economies is part of the broader agenda. Some said it was.
“The official argument is that the costs are above standards, but that argument didn’t make any sense. . . . This is highly political, and in fact the Alberta government opposed to Aimco’s environmental policies.” “It seems like something to do with it,” said Canadian pension consultant Alexander Bies.
The events at Aimco have raised questions about whether managers of public sector pension schemes can truly operate independently of government.
“This is a signal to the rest of Canada and the rest of the world, and it’s scary,” said a former Aimco employee.
The layoffs could also make it difficult for pension funds to re-hire high-quality professionals to their organizations, which could undermine one of the pillars of the success of Canada’s pension sector.
CPP CEO John Graham earned C$5.38 million in 2023. By contrast, the highest salary paid at Border to Coast, one of the UK’s largest so-called pools that manages more than £50bn on behalf of local authority pension fund assets, was — £489,000.
Joe Taylor, CEO of the Ontario Teachers’ Association, warned that while the Canadian model has served Canadian pensioners well, it may be difficult to replicate it in Britain today.
“We’ve spent 35 years building a very good investment business around the world that knows how to invest in private companies. For me, that’s the argument that we have to build it in the UK. “It’s a huge asset for us,” he said.
Michel LeDuc, Senior Managing Director of CPP, added:
“It’s more unpredictable, it’s more uncertain. . . . You don’t want to create a platform now to deal with the future.”
