The Ontario government announced in its last budget that it would provide the Ontario Teachers’ Pension Plan with the legal authority to act as an investment manager for smaller pension plans. This budgetary announcement was quickly followed by a speech from the Ontario Municipal Employees Retirement System (OMERS) president, in which he announced both a desire for OMERS to perform a similar function and a belief that other funds should be merged into OMERS to allow for the newly created superfund to take advantage of its newfound size.
The move toward allowing large public sector pension plans to act as investment managers for smaller pension plans is a response to the report by the Ontario Expert Commission on Pensions. The theory behind it is that allowing smaller funds to gain access to the expertise and investment opportunities of larger funds will enable the smaller funds to enhance their returns.
While this is a laudable objective, the proposal raises a large number of questions that require further thought.
Presumably, Teachers’ and OMERS will charge the smaller funds a fee for managing their assets. Will this fee be the same as what OMERS and Teachers’ currently spend on investing their own assets?
The investment expense of Teachers’ and OMERS is almost certainly less than the current market rate charged by the money managers that smaller funds currently use. If this is the case, does charging the internal cost incurred by Teachers’ and OMERS to third-party funds amount to their members subsidizing the operations of smaller plans? Will the legislation address this issue?
If Teachers’ and OMERS charge a market rate for managing money and thereby earn a profit on their third-party money management activities, who will get the profits? Will they accrue to the benefit of plan members? If so, how will they be allocated? Will the profits be used to reduce the cost per member of the Teachers’ and OMERS plans? How much outside money will they need to manage in order to earn a reasonable rate of return for these plans?
Will Teachers’ and OMERS offer the smaller plans one-size-fits-all pooled fund products, or will they try to manage the investments in accordance with the investment policy of each client?
Other public sector plans also have admirable investment track records. Will these plans have their powers expanded to allow them to offer investment management services to smaller plans?
Is there potential for conflict of interest in investment decisions? Will Teachers’ and OMERS be able to place the interests of their members and beneficiaries ahead of their new clients? Is this in agreement with securities legislation?
Are pension plans merely money managers? Is their goal to maximize returns, or is it to meet the benefit obligations owed to the plan beneficiaries?
Allowing Teachers’ and OMERS to manage the assets of smaller pension plans could have a revolutionary impact on the money management industry as a whole. If Teachers’ and OMERS offer smaller plans a more attractive rate than what they currently pay to other managers, then it will benefit all plans, as the competitive pressure will almost certainly cause other money managers to reduce their fees. In addition, the presence of Teachers’ and OMERS may also lead to other money managers offering better products to the smaller funds.
Broadening the powers of successful plans like Teachers’ and OMERS carries a certain appeal—not the least of which is the potential for smaller plans to share in the success of the larger plans. However, as with all good ideas, the devil is in the details. As this idea is implemented, it will be interesting to see how these details are handled.
Hugh O’Reilly heads the pension and benefits practice group at Cavalluzzo Hayes Shilton McIntyre & Cornish in Toronto.
horeilly@cavalluzzo.com
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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the June 2009 edition of BENEFITS CANADA magazine.