In the 20 years since the inaugural Global Investment Conference, pension investors and plan participants have seen many positive changes, including the 2005 dropping of the foreign property rule that restricted investments outside Canada. But, thanks to two bear markets, there has also been a sea-change in the way plan sponsors think about liability and governance.
This message came across loud and clear during a keynote panel session at the 2015 Global Investment Conference entitled “20 Years—Past and Future,” during which moderator Stan Hamilton, emeritus professor at UBC’s Sauder School of Business, asked veteran plan sponsors to outline the most impactful decisions and events of the last two decades.
The rise of the third pillar
“The transition between the Mulroney government and the Liberals, when we also had a major recession—it was then that the major elements of the registered retirement savings plan (RRSP) were established and the third pillar came into being,” said panellist Blair Richards, CEO, Halifax Port ILA/HEA. “Changes to [the] Canada Pension Plan and the creation of the CPP Investment Board mean a great deal to us.” For Richards, that was an important transformation that solidified the second pillar of workplace pensions and the third pillar of voluntary savings.
And though it took some time, he added, the capital control-oriented governments of the 1970s eventually gave way to governments that relented on investing outside of Canada.
“We ended up being faced by repetitive red herrings,” recalled Russell Hiscock, president and CEO, CN Investment Division, talking about fears over what would happen if the foreign property rule was dropped. “There’d be a massive exit of funds out of Canada. There’d be pressure on the dollar—since it was a tax-exempt asset, there is a duty to invest in Canada.”
Then, as Teachers’, the CPPIB and OMERS began accumulating massive funds, there came recognition that Canada was too small a place to invest in.
But something else happened.
The era of surpluses
“I’m going to start with 1995,” explained Richards. “We were in really good markets for a number of years, and that led to the creation of surpluses—as you remember, there were a lot of contests over who owned the surpluses.”
That’s a blast from a different era, reported Michael Boychuk, president, Bimcor, and in large part, that’s due to declining interest rates. “That’s the sword of Damocles—it hangs over all of us who run a defined benefit pension plan.”
Boychuk remembered that, in 1981, 10-year U.S. Treasuries yielded 15%. A decade later, it was half that, and now the yields are around 2%. Low interest rates have been the biggest hindrance to Bell’s pension plan, and Boychuk thinks that was almost certainly one of the factors in Bell’s failure to go private in 2008.
“The biggest single lesson that we learned was on the liability side. There such was a big disconnect between the company that ran the assets and the company that sponsored the liabilities,” Boychuk explained.
No more. Liabilities are so much at the forefront that some, such as Richards, think the pendulum may have swung too far.