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© Copyright 2000 Rogers Media. The following article first appeared in the October 2000 edition of
BENEFITS CANADA magazine.
View Point
Cinderella no more
By Michael Cohen
Falling in love with Canadian financial markets.
Time was when the most exciting thing governments could think of doing with their employees' pension fund
money was to keep it invested in internal government bonds. What could be safer than a Canada or Ontario
bond, right?
Well, first the provincial governments discovered the joys of investing in the capital market in the 1990s.
Now the federal government has suddenly discovered the same frisson of investing. Since April 1, 1999 the
Canada Pension Plan (CPP) has been investing in Canadian and foreign markets. However, the cash flow is
relatively low, so substantial sums will not be going into the market before five years or so. On the first
April Fool's day of the new millennium the federal government was at it again--all new funds from the three
large public service plans started to be invested in the marketplace, in the same way as private sector
plans and the majority of other public sector funds. And these funds promise to be the ugly sisters of
investing--the combined inflow for the three funds--for public servants, the Armed Forces and the RCMP--are
estimated at $3 billion a year.
The CPP, in contrast, is not expected to reach this level of cash flow in the markets for another five or
six years.
To add to this love affair with the capital markets, a number of federal Crown corporations have, or will
shortly be, withdrawing from the plan for federal public servants. This will add several billion dollars to
the total funds looking for a loving home.
The accumulated $100 billion or so of assets for service in the three public service plans will stay as
non-negotiable government bonds for the time being. But who knows when the government might decide the time
is right to move some of this into the market.
The first year's cash flow will put the federal plans in the top 20 pension plans in Canada, and pretty
soon they will rival such grand dames as the Ontario Teachers' Pension Plan and the Ontario Municipal
Employees Retirement System. Will this love affair spoil the ultimate manifestation of lady luck, namely
the stock markets, or will the lady take it in stride?
Fortunately, federal Finance Minister Paul Martin has come to the rescue. The infamous foreign property
limit is being raised to 30% next year, probably enough to relieve the pressure on the Canadian equity
market.
When we originally looked at the possible impact of CPP funds on the market, we felt that the market could
absorb the magnitude of funds. We didn't know that the rest of the public service pension plans would be
invited to Prince Charming's ball. Now the glass slipper seems to be groaning under the additional weight
of lovers of the Arctic market. With Canada's spectacular market performance the rest of the world might be
tempted to join the ball as well.
Now that the Toronto Stock Exchange is the world's top performer, the best foreign market may indeed be
Canada's. The time is now right to abolish the Foreign Property Rule entirely, and let each fund decide on
the appropriate level of foreign exposure. Now that federal public sector plans have an interest in market
performance, not only in Canada but across the world, a global perspective is the only way to ensure that
the ball continues way beyond midnight.
Michael Cohen is principal with William M. Mercer Limited in Ottawa. michael.cohen@ca.wmmercer.com.
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