For more than 30 years, Canada’s public sector pension organizations have distinguished themselves by delivering secure, sustainable defined benefit pensions and, in the process, have earned a reputation as global leaders. That wasn’t always the case, so will it continue to be the case in 30 years?
Six years ago, The Economist published a report that described how Canada’s public pension funds were changing the deal-making landscape around the world, with investments in Manhattan real estate, Chilean utilities, international airports and the high-speed railway connecting London, England, to the tunnel beneath the English Channel.
It wasn’t surprising that, among the 40 largest public pension funds in 2011, four were Canadian. But what was most intriguing to The Economist’s reporters wasn’t the size of Canada’s pension funds but their approach to investing. The report noted Canadians prefer to run their pension portfolios internally and invest directly, putting more into buyouts, infrastructure and property in the belief that they’ll produce greater long-term returns than public equities and bonds.
In 2017, a report commissioned by the World Bank confirmed the status of Canada’s world-class pension organizations. Its purpose was to document the evolution of the Canadian pension model and provide guidance to emerging economies seeking to design their own retirement systems. The report also aimed to gain a better understanding of how our public sector pension model had developed over the last 30 years from plans invested principally in domestic government bonds to an approach that combines professional internal investment management and extensive diversification across geographies and asset classes.
One criticism of the World Bank report is that it overlooked British Columbia’s successful public sector pension model. That model, which consists of the four public sector pension plans (municipal, public service, teachers and colleges), includes the British Columbia Investment Management Corp., which acts as the investment manager to all four plans. (The author of this article is the executive director of three of those four plans.)
With a combined membership of 565,000 and assets in excess of $105 billion, all four public sector plans were fully funded (or nearly so) at their most recent actuarial valuations. In addition to the bcIMC’s investment leadership, the hallmark of success for British Columbia’s public sectors pension plans is a combination of strong professional administrative services provided by a single pension services provider, the BC Pension Corp.; collaboration between diverse stakeholder groups, including organized labour and government; a strong legislative framework; sharing risks and rewards between employees and employers; a high degree of transparency, accountability and ethical behaviour among the four public sector pension plans and their administrative and investment agents, B.C. Pension Corp. and bcIMC; and strong governance provided by jointly-trusteed independent lay boards appointed by stakeholders.
Canadian plans, including bcIMC, offer a template to other public pension funds around the globe. While the main draw to Canadian pension plans is fee savings, internal investment management teams have the added advantage of allowing those organizations to have more control over their investments, often including seats at the board table with a significant say on responsible investing issues. In addition, as active asset managers, they’re able to monitor environmental, social and governance factors and engage with regulators and companies to raise awareness of the importance of good governance for effective management of long-term assets.
Public pension funds have a much longer investment horizon than typical private equity firms. That allows them to optimize the timing of investment and divestment. Because internal investment management results in substantial fee savings, returns don’t have to be as high and investment managers can bid more for assets they wish to acquire. Longer time horizons, lower costs and reduced pressure to chase higher returns leads to less risky portfolios and the ability to wait out rocky markets.
The situation is different in the private sector. Its defined benefit plans have been closing to new members since the 1970s due to uncertainty, balance-sheet issues and a lack of long-term time horizons. As a result, the World Bank’s report looked to the public sector to find successful pension models that emerging economies can emulate.
Of course, a fund must be of significant size to open foreign offices, buy large companies, invest in major infrastructure or real estate projects and absorb the costs of building professional internal investment teams. Unfortunately, smaller funds are often unable to follow suit.
As a result, government should encourage the large public sector plans to extend their expertise to provide sustainable defined benefit pensions to other organizations, as is the case in Nova Scotia and, to a limited extent, Ontario through, for example, the merger of the Royal Ontario Museum plan with the Colleges of Applied Arts and Technology pension plan.
If we’re to provide a majority of Canadians with secure lifetime pensions, we need to find ways to extend those endeavours to other provinces. Governments should embrace them as a way of reducing reliance on government programs for poor, elderly Canadians. As research conducted by the Canadian Public Pension Leadership Council confirmed in 2017, Canadians want a secure source of retirement income and are willing to pay more for the peace of mind that comes with such security.