Governance, innovation touted as keys to Canadian pension funds’ success

Independent governance has been one of the key factors in the success of Canadian public pension plans, according to a new report commissioned by the World Bank.

“Strong, independent governance is perhaps the most important element of the Canadian model,” the report, released on Wednesday, stated. “Canadian pension organizations are governed to run as high-performing, arm’s-length entities that meet high standards of transparency, accountability, and ethical conduct.”

The report, which aims to better understand how the Canadian model has developed over the past three decades, was conducted by Toronto-based Common Wealth in partnership with four Canadian public pension funds: the Alberta Investment Management Corp., the the Caisse de dépôt et placement du Québec, the Healthcare of Ontario Pension Plan and OPSEU Pension Trust, as well as the government of Ontario. It noted how Canadian plans had evolved since the 1980s from being organizations invested largely in domestic government bonds and funded primarily on a pay-as-you- go basis to a model that combines independent governance, professional in-house investment management, scale and extensive geographic and diversification of asset classes.

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At the launch of the report in Toronto on Wednesday, a panel of representatives from the four pension funds discussed what the report identified as key elements in any plan’s success: independent governance; people and organization; investments; administration; plan design and funding; and regulation and public policy.

One factor that has set Canadian public pension plans apart has been their ability to withstand financial crises, said Jim Keohane, president and chief executive officer of HOOPP, speaking on a panel at the launch of the report in Toronto on Wednesday.

“There are three factors that can adversely affect pension plans: a decline in long-term interest rates, a decline in equity markets and an unexpected rise in inflation,” said Keohane.“It’s about understanding and controlling those risks.”

Innovation is another factor behind Canadian public pension plans’ success, said another panellist, Hugh O’Reilly, president and chief executive officer at OPTrust. “We need to see the future,” he said. “Emerging economies tend to be much quicker at adopting innovative technologies. We need to work with them to better understand how we do business, how we invest and how our society is going to be affected.”

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Kevin Uebelein, chief executive officer of AIMCo, noted that setting a foundation for governance is critically important. “It’s hard to build without the right balance between independence and accountability to all stakeholders,” he said.

And Kim Thomassin, executive vice-president of legal affairs and secretariat at the Caisse, pointed out that investing in infrastructure over a long period of time is necessary for establishing market credibility and attracting global talent. “It should be a natural evolution that involves transparency,” she said. The Caisse, she noted, “seeks partnerships with organizations across the globe so that we can learn more about developing infrastructure from each other.”

The report also identified some of the challenges and risks that lie ahead for Canadian public pension plans, including:

  • Maturity of plans and ensuring intergenerational equity;
  • Competitiveness for good investment opportunities;
  • Increasing demands for accountability and transparency;
  • Reforms in the regulatory environment; and
  • Market downturns or financial crises.

Read: Pension ambassadors: Who’s praising DB plans and why?

“This report is the story of innovation,” said O’Reilly. “And innovation comes from failures — learning from mistakes and moving forward. Because of the foundation we have built, Canadian pension plans are a beacon around the world.”

The World Bank says it will use the information gathered in the report to strengthen retirement security in emerging economies and increase discussions about successful pension models in Canada.

“The World Bank has two main objectives: ending extreme poverty and boosting shared income in a sustainable way,” said Joaquim Levy, managing director and chief financial officer of the World Bank Group, during the event. “Pension plans have an important role in ensuring people have adequate income in old age, and we support the development of good quality pension plans around the world.”

Read: U.S. pension funds looking at Canadian model for investment practices