For years, a major public sector pension governance time bomb has been hidden in plain sight.
But it may be too late to alert the bomb squad; the coronavirus pandemic and climate change may have already activated a countdown that can’t be stopped.
Investment management is a key component of sustainability and central to any pension governance scheme. Public sector pension funds face increased pressure to deliver higher investment returns so public pension stakeholders can avoid mandatory contribution increases. By definition, this means fund managers must take on greater risk to achieve the higher returns. But in the investment industry, greater risk means increased potential for loss.
The key question is whether those responsible for overseeing Canada’s public fund managers have the requisite legal power and board experience to investigate and redress governance failures that will inevitably arise from increased levels of risk, especially in light of the multitude of investment challenges created by the pandemic and climate change.
In April, it was revealed that the Alberta Investment Management Corp. lost around $2.1 billion of the approximately $118 billion of pension and trust fund assets it manages. The loss represented about a third of the AIMCo’s 2019 investment income.
In a press release, the organization’s chief executive officer Kevin Uebelein said the difficulties arose from a “bet” on stock market volatility that led to losses because “markets behaved in a manner never before seen . . . .”
The AIMCo’s board of directors launched an internal review, acknowledging that oversight of investment strategies and risk management is a board responsibility and concluded the volatility losses arose from a governance failure. The board quickly adopted changes designed to strengthen the organization’s risk culture, including a more stringent analysis, review and approval process that volatility investments or other derivative-based investment strategies would need to satisfy, including board approval above certain levels of exposure.
The AIMCo is closely aligned with the provincial government, which appoints all directors who must have experience in investment management, finance, accounting or law or have served as an executive or director with a large, publicly-traded company. However, the Alberta Investment Management Corporation Act places the onus on the board to set strategic direction for the AIMCo and to oversee the development and implementation of policies and procedures that govern the day-to-day conduct of its investment management business. From a governance perspective, Alberta has ensured that the AIMCo board has both the legal power and talent to investigate and redress governance failures.
In British Columbia, the B.C. Investment Management Corp. has more than $160 billion assets, with a lay board of seven directors. The chief investment officer, selected by the board, must “supervise the day-to-day operations of the . . . corporation, including a determination of which assets to buy and sell,” according to the province’s public sector Public Sector Pension Plans Act. In this regard, the board is hemmed in by the act, which states “the . . . board must not be involved in the investment decisions of . . . the corporation.” Hence, investment power within the BCI lies entirely with a single person — the CIO who is selected by a board that’s prohibited by law from considering precisely the work he’s hired to do.
If the CIO’s investments turn sour — he decides to place a losing “bet” on stock market volatility, for example — the board can terminate his employment. But poor investment outcomes have repercussions for years, decades even, and the BCI’s pension fund clients and their beneficiaries would be left holding the proverbial bag.
Modern pension governance theory dictates that an investment management board be composed of highly capable and experienced investment professionals from whom the CIO can receive guidance and who speak the CIO’s language. A diverse group of independent-minded people who bring knowledge, experience and careers’ worth of industry contacts to the boardroom table, who can contribute to policy-making and advance the objective of effectively investing funds.
The Public Sector Pension Plans Act has created a governance model for the BCI whereby the CIO has exclusive investment power over $160 billion in assets in a manner that doesn’t include board oversight, thereby putting the financial future of hundreds of thousands of B. C. beneficiaries in the hands of a single person.
I don’t see any justification for the B.C. government to allow this time bomb to continue ticking. Legislative amendments are required to provide the BCI with a professional board with onus to set strategic direction and to oversee the development and implementation of policies and procedures that govern the day-to-day conduct of the BCI’s investment management business.
While it may be inconvenient to address pension governance in the middle of a global pandemic, it’s precisely because of the multitude of investment challenges created by the current crisis and climate change that now is the correct time to undertake this review.