It’s that time of the year when the larger Canadian public pension funds share their 2025 results.
Every year, this reporting period leads to comparisons and discussions about how good these pension funds really are. This year won’t be different and, given the variability in the performances, perhaps more intense than ever.
Some independent thinkers will try their best to prove these plans are inefficient and underperforming, while other observers think these organizations have done a great job. The two views might actually be more aligned when addressing how future-proof are these public pension funds. This question goes beyond the yearly performance discussion.
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There’s a lot of variability in performance this year. We already know the performance of five of the Maple 8 pension funds. The absolute 2025 performances range from just higher than four per cent to more than nine per cent — quite a gap. However, the 10-year performance is much more stable and hovers around seven per cent. The performances of the remaining three plans might show absolute numbers at the low end of the range due to the fall in equities during the first quarter of 2026, but the 10-year performance isn’t likely to significantly change.
However, there will be people who point out the 2025 relative returns are negative and, in some cases, quite significant too. This underperformance can be largely explained by the lagging performance of private assets versus their public market benchmarks.
Institutional investor researcher Alexander Beath explained this is largely due to the choice of the benchmark. He looked into the private equity performance, but his message is true for other private asset classes too. Still, is there cause for concern? After the global financial crisis of 2008/09, the additional performance of private assets started to dissipate due to the effect of monetary and fiscal policies benefitting public markets. This trend reversed, but lately the public markets are performing very well again. Does this mean the private markets are dead? No, far from it and the possibility to earn a premium is still likely in the long run.
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If the numbers still look fine, why is there a rationalization process happening at many funds? Several funds have closed foreign offices and laid off people. It’s far-fetched to claim these cost-saving measures will benefit the members.
Assets under management are significantly larger than the operating costs and even if the funds were to reduce their workforce by 10 per cent, the impact on the performance is a couple of basis points at best. Moreover, it raises the question of whether these funds can do this without jeopardizing the quality of the investment organization. Weren’t those foreign offices essential in gaining access to better local deals? And wasn’t the internalization also a way to become smarter investors?
Perhaps the investment organizations, and/or their boards, have come to the realization that their operations simply grew too big. But if that’s true, the conversation should be about cost effectiveness instead of cost savings.
One could argue that technological developments, including artificial intelligence, will make many investment processes more efficient. Some experimentation does take place, but the reality is that many of the Canadian funds haven’t reaped the benefits of AI yet.
So, what’s really going on here? Is it a short-term and rather futile cost-cutting strategy or have the funds come to the conclusion that the Canadian investment model as we know it is no longer effective? Would a cost-cutting exercise make the model effective again? No, the effectiveness must be seen in relation to how markets evolve over time and the purpose of the organization. Markets have only become more complex. The combination of technology, skills and agility is crucial to being a successful institutional investor. The scale that the Canadian public pension plans have provides a solid foundation to continue to be successful. What remains is the purpose.
In the 1990s, the purpose was to meet the pension promise, especially related to the baby boomers. Significantly better investment returns were needed and this gave rise to the Canadian investment model. Fast forward to today, this could still be the purpose but the challenge is very different now — the funds are in good shape, 25 to 30 years older and the cashflow flipped from being positive to neutral or negative. As a result, the funds might step away from the return ambitions of the 1990s and focus on resilience going forward. But the solution would come primarily from a different asset allocation — not necessarily from a change in the Canadian investment model.
Real change could come from the broadening of the purpose. Listening to claims many people make, the purpose could be more than just meeting the pension promise. This includes creating a stronger Canada, helping local start-ups and opening up the public pension plans for a large group of Canadians who don’t have access to an employer-sponsored pension plan.
These changes won’t happen overnight, but ignoring the discussion on purpose isn’t helping anyone. It’s important to think very carefully about the funds’ purpose, before cutting into the Canadian investment model too deeply.
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