Size matters when it comes to Canada’s much-vaunted model of pension investment.
Sebastien Betermier, an associate professor of finance at McGill University’s Desautels Faculty of Management, says the in-house capabilities and direct, private-asset investment that characterize the approach pioneered by the Maple 8 aren’t replicable by just any pension fund.
“You need to be really big. When you’re doing it right, these investments require operational expertise that smaller plans typically don’t have. If you’re too small, the level of due diligence you have to do is never going to be worth the gains.”
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But the model that exemplifies the Maple 8 — Canada’s eight largest public pension plans, which hold more than $2.4 trillion in assets under management between them — remains a viable template for pension funds in a lower tier of magnitude, he says, as long as they’re prepared to lower their deal-value sights, “pick their battles” in terms of asset types and commit to a robust risk management process.
“You see a few of them — in the $10 to $25 billion range, maybe up to $30 billion — that are in a bit of a sweet spot. These funds are big enough to be fairly direct and good co-investors at multiple levels and small enough to bring all the key decision-makers around the table on a regular basis to make investment decisions quickly.”
Aaron Bennett, the $12.8-billion University Pension Plan’s chief investment officer, has a name for the small band of Canadian pension plans in that AUM range. “We think of ourselves as part of that ‘Maple Middle.’
“We can’t do everything the Maple 8 do,” he adds. “But there are also some things we can do that the Maple 8 can’t and that’s because of our size and because of our ability to be a little more targeted in the assets we look at.”
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International attention
In the U.K., Chancellor Rachel Reeves — the country’s finance minister equivalent — specifically cited Canada as an inspiration for her planned reform of her nation’s local government pension schemes, which would see 86 smaller plans pool their assets to create a mega fund resembling one of the Maple 8 titans.
“I want British schemes to learn lessons from the Canadian model and fire up the U.K. economy, which would deliver better returns for savers and unlock billions of pounds of investment,” she said in a statement ahead of meetings with Maple 8 representatives last summer.
But August Cruikshanks, an investment consulting principal at Eckler Ltd., warns that bigger isn’t always better in the pension investment world. “Look at most manager fee schedules and you’ll see that, when you gain more assets, the marginal fees tend to go down. That’s basic, but it only goes so far, and scale comes with its own challenges.”
The U.K experience of one Maple 8 member highlights his point: the Ontario Municipal Employees Retirement System took heat on both sides of the Atlantic for its involvement with the failed utility Thames Water Utilities Ltd., which ultimately resulted in a full write-down of the pension fund’s $1.25-billion investment in the company.
Key takeaways
• Size is a key plank of the Canadian model of pension investment, pioneered by the Maple 8 pension funds and revered in jurisdictions around the world.
• Bigger isn’t necessarily always better when it comes to pension investment: the largest pension funds attract a higher level of political and public attention with their scale also precluding them from pursuing certain niche or capacity-constrained strategies.
• ‘Maple Middle’ pension plans are in a sweet spot that allows them to operate on the same principles as the Maple 8 in a more selective way, pursuing private assets on a smaller scale and filling mid-market gaps left by their larger counterparts.
Closer to home, the Ontario Teachers’ Pension Plan has come under fire for its investment in the notorious collapsed cryptocurrency exchange FTX, while the recent executive-level shake-up at the Alberta Investment Management Corp. raised concerns about the independence of its governance structure.
“There’s a political aspect in the degree to which mega plans are scrutinized now,” says Cruikshanks, noting the domestic investment levels of the country’s largest pension funds remain a matter of perennial debate in Canadian business and political circles.
Outsourcing investment
At the smaller end of the spectrum, Isabelle Tremblay, director of client solutions and asset owner segment lead at RBC Investor Services, says growing pension funds have an important decision to make when internal resources begin to become stretched.
“When pension funds hit a certain size, the opportunity arises to bring down average costs per participant for both administration and investment management. They need to consider what is truly core to the business to keep in house and what is better delivered through a custodian, [outsourced chief investment officer] or specialist provider.”
A growing number of Canadian plans are turning to OCIOs as a route of access to the economies of scale and alternative assets that have become the bedrock of the Maple 8’s investment success, according to Erwan Pirou, chief investment officer for Canada at Aon.
OCIOs can help very small pension funds, with AUMs around $25 to $50 million, diversify their investments with lower fees, he adds. “If you’re below $500 million when you switch to the OCIO model, you tend to see significant fee savings, because [consultants] aggregate all of [their] clients together.”
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Still, Pirou says fund size and fees aren’t the only factors for pension plan sponsors deciding whether to call in an OCIO. “I don’t know if size is the biggest driver. We find it tends to be more [about] the set up: do they have an internal team that’s dedicated to this? Ten or 20 years ago, investment was a bit more simple. Many [plan sponsors] had a balanced mandate with one manager, maybe two if you were feeling advanced.
“The trend we’re seeing is more small-to-medium [plan sponsors] are recognizing the complexity of the investment world today and are considering outsourcing it,” he adds.
Niche and nimble
The sheer size of the mega plans also counts them out of the market for deals in more niche and specialized strategies, including in the venture capital space, according to Yusuke Khan, a partner and investments leader at Mercer Canada.
“Those are the types of strategies that are sometimes capacity-constrained, so it becomes a situation where scale is not an advantage. If you have too much capital to deploy, the capacity and the strategy of the asset class is not sufficient to be able to absorb that. I think you also see managers, particularly in the alternatives and private space, being vey mindful of not having investors who are individually too large.”
Maple Middle plans have been willing to fill the gap left by their larger counterparts in these areas. At the UPP, Maple 8 funds aren’t typically on the radar of the general partners it teams up with for co-investments, says Bennett. For example, when the pension plan recently struck a deal for a minority stake in U.K. rolling stock company Angel Trains, its GP was European asset manager Arjun Infrastructure Partners.
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“They’re looking for folks that can . . . do co-investments like this that are sub-$100 million and, in some cases, sub-$50 million. That’s not the Maple 8, because the Maple 8 need to be doing that times-two or -three for it to make sense for them.”
Beyond the cash, he says the UPP team brings a wealth of specialized knowledge and experience to every co-investment deal with each of its carefully selected GPs. “They’re meaningful to us and we want to be meaningful to them. Mid-market players sometimes don’t always have all the tools to really be aware of and thinking about best practices in responsible investing. We can help them with that.”
Despite the smaller ticket prices and lower levels of control associated with Maple Middle transactions, Bennett says there are plenty of similarities between the direct-investment mega deals executed by Canada’s largest pension funds. “The due diligence, the negotiation, the people and the processes are still very much the same level of quality that you find at the Maple 8, just at a smaller scale, because we take a more targeted approach.”
Another example is the OPSEU Pension Trust, which operates on the same key principles that have made the Maple 8 a global financial force, according to James Davis, its chief investment officer, but with the “nimbleness afforded to a smaller asset base.”
Read: OPTrust returns 9.6% in 2024, remains fully funded
Still, he says, his aim isn’t to emulate the Maple 8, but to implement an investment strategy and approach that is aligned with the interests of its 114,000-strong membership. “We focus internal efforts on where we feel we have the skills and scale. We are very mindful of our capabilities and only enter markets or pursue strategies where we believe we have a competitive advantage.”
Davis highlights the plan’s combined private equity and infrastructure team as a unique feature of its approach, helping prevent deals from falling “through the cracks of asset class silos.”
“Our private markets teams evaluate a broader range of opportunities, across funds and direct investments, debt and equity,” he says. “We also operate from early-stage development opportunities in infrastructure through to later-stage private equity buyout deals.”
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In more liquid asset classes, the OPTrust’s size allows Davis’ team to be “more dynamic with our factor exposures” than its larger counterparts. “We can also readily shift our focus and capital between asset classes as the macroeconomic and market environment changes,” he adds.
While it’s tempting to compare investment performance based on a plan’s annual or longer-term average returns, those figures don’t tell the full story, says Davis. “Risk appetite can differ substantially across plans and must be considered when comparing returns. OPTrust is quite mature, so our risk profile is lower than that of a younger plan. Our job as pension investors, first and foremost, is to keep the plan fully funded.
“The funded status should be the north star of any defined benefit pension plan and it should be the primary means by which it is evaluated.”
Michael McKiernan is a freelance writer.
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