Canada’s top pension funds boost their value, but ignore a big risk

Canada’s ten largest public pension funds saw their assets under management triple between 2003 and 2014. But some economists worry that these mega players aren’t fully prepared for the future because they’re ignoring a major risk: climate change.

The pension funds saw their total assets under management jump from $385 billion in 2003 to more than $1.1 trillion in 2014—the equivalent of more than 45% of Canada’s Gross Domestic Product.

These are the findings of a new Boston Consulting Group survey commissioned by the top ten pension funds.

As much as 80% of this increase in value came from investment returns. The pension funds posted about $600 billion in net investment returns between 2003 and 2014.

The investors, ranked by size of net pension assets under management, are: The Canada Pension Plan Investment Board, The Caisse de dépôt et placement du Québec, The Ontario Teachers’ Pension Plan Board, PSP Investments, The British Columbia Investment Management Corporation, The Ontario Municipal Employees Retirement System, The Healthcare of Ontario Pension Plan, The Alberta Investment Management Corp., The Ontario Pension Board and The OPSEU Pension Trust.

Three of the Canadian giants—CPPIB, The Caisse and Teachers’—are part of the world’s top 20 public pension funds, according to the report.

The top ten pension funds are also major alternative asset investors. A total of 32% of their assets are allocated to alternatives. Seven funds have made it to the list of the top 30 global infrastructure investors and five have made it to the list of the top 30 global real estate investors, the survey notes.

“Climate change denial”

But missing from the report is any mention of the losses pension funds sustained due to holding fossil-fuel assets in their portfolios.

In the second half of 2014, when the bulk of the commodity price decline happened, Canada’s five biggest public pension funds lost about $2.5 billion because of their fossil fuel exposure, according to a study by the Canadian Centre for Policy Alternatives.

The report estimated Teachers’ suffered the biggest loss—$1.77 billion.

“These pension funds are actually very exposed to fossil fuels at a time when the rest of the world is wrestling with how to reduce the amount of carbon pollution,” Marc Lee, senior economist at the Canadian Centre for Policy Alternatives, said in an interview.

“Our belief, from reviewing the annual reports of pension funds and the behaviours they’ve engaged in is that they’re living in a form of climate change denial.”

To ensure high future returns, Canada’s top pension funds have to understand that climate change threatens their sustainability, Lee noted.

The total amount of proven coal, oil and gas reserves is three to five times larger than the carbon emissions the world can safely put into the atmosphere, Lee explained.

“Pension funds should be thinking about divesting from these activities—which we know are not consistent with a habitable planet—and re-investing in areas where we do need that investment,” such as green infrastructure and public transit, he added.