For years, a major public sector pension governance time bomb has been hidden in plain sight.

But it may be too late to alert the bomb squad; the coronavirus pandemic and climate change may have already activated a countdown that can’t be stopped.

Investment management is a key component of sustainability and central to any pension governance scheme. Public sector pension funds face increased pressure to deliver higher investment returns so public pension stakeholders can avoid mandatory contribution increases. By definition, this means fund managers must take on greater risk to achieve the higher returns. But in the investment industry, greater risk means increased potential for loss.

Read: PSAC calling for change to federal government’s public sector pension liabilities reporting

The key question is whether those responsible for overseeing Canada’s public fund managers have the requisite legal power and board experience to investigate and redress governance failures that will inevitably arise from increased levels of risk, especially in light of the multitude of investment challenges created by the pandemic and climate change. 

In April, it was revealed that the Alberta Investment Management Corp. lost around $2.1 billion of the approximately $118 billion of pension and trust fund assets it manages. The loss represented about a third of the AIMCo’s 2019 investment income.

In a press release, the organization’s chief executive officer Kevin Uebelein said the difficulties arose from a “bet” on stock market volatility that led to losses because “markets behaved in a manner never before seen . . . .”

The AIMCo’s board of directors launched an internal review, acknowledging that oversight of investment strategies and risk management is a board responsibility and concluded the volatility losses arose from a governance failure. The board quickly adopted changes designed to strengthen the organization’s risk culture, including a more stringent analysis, review and approval process that volatility investments or other derivative-based investment strategies would need to satisfy, including board approval above certain levels of exposure.

Read: AIMCo calls reports of losses on volatility strategy ‘dramatically’ overstated

The AIMCo is closely aligned with the provincial government, which appoints all directors who must have experience in investment management, finance, accounting or law or have served as an executive or director with a large, publicly-traded company. However, the Alberta Investment Management Corporation Act places the onus on the board to set strategic direction for the AIMCo and to oversee the development and implementation of policies and procedures that govern the day-to-day conduct of its investment management business. From a governance perspective, Alberta has ensured that the AIMCo board has both the legal power and talent to investigate and redress governance failures.

In British Columbia, the B.C. Investment Management Corp. has more than $160 billion assets, with a lay board of seven directors. The chief investment officer, selected by the board, must “supervise the day-to-day operations of the . .  . corporation, including a determination of which assets to buy and sell,” according to the province’s public sector Public Sector Pension Plans Act. In this regard, the board is hemmed in by the act, which states “the . . . board must not be involved in the investment decisions of . . . the corporation.” Hence, investment power within the BCI lies entirely with a single person — the CIO who is selected by a board that’s prohibited by law from considering precisely the work he’s hired to do.

If the CIO’s investments turn sour — he decides to place a losing “bet” on stock market volatility, for example — the board can terminate his employment. But poor investment outcomes have repercussions for years, decades even, and the BCI’s pension fund clients and their beneficiaries would be left holding the proverbial bag.

Read: Do Taiwan’s cuts to public sector pensions offer lessons for Canada?

Modern pension governance theory dictates that an investment management board be composed of highly capable and experienced investment professionals from whom the CIO can receive guidance and who speak the CIO’s language. A diverse group of independent-minded people who bring knowledge, experience and careers’ worth of industry contacts to the boardroom table, who can contribute to policy-making and advance the objective of effectively investing funds.

The Public Sector Pension Plans Act has created a governance model for the BCI whereby the CIO has exclusive investment power over $160 billion in assets in a manner that doesn’t include board oversight, thereby putting the financial future of hundreds of thousands of B. C. beneficiaries in the hands of a single person. 

I don’t see any justification for the B.C. government to allow this time bomb to continue ticking. Legislative amendments are required to provide the BCI with a professional board with onus to set strategic direction and to oversee the development and implementation of policies and procedures that govern the day-to-day conduct of the BCI’s investment management business. 

While it may be inconvenient to address pension governance in the middle of a global pandemic, it’s precisely because of the multitude of investment challenges created by the current crisis and climate change that now is the correct time to undertake this review. 

Read: Canadian model offers lessons for U.S. public pensions: report

Claude Marchessault is an educator, lawyer and the former executive director of the British Columbia Teachers’, College and Public Service pension plans. The views expressed are those of the author and not necessarily those of the pension plans or Benefits Canada.
Copyright © 2020 Transcontinental Media G.P. Originally published on benefitscanada.com

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gerry:

The title of this article is misleading. B.C. and Alberta pension legislation re: governance is not a problem. The governance structure of BCI, however, may be an issue. In fact, B.C. and Alberta pension legislation have the strongest provincial requirements regarding pension governance of all the provinces.

Tuesday, November 10 at 12:31 pm | Reply

Andy:

The public sector pension plans in the province of B.C. has a sound and robust governance structure. An incorrect statement that “Hence, investment power within the BCI lies entirely with a single person … the CIO.”

Tuesday, November 10 at 4:20 pm | Reply

Dennis Blatchford:

I’ve never met the author, but I have served for over 20 years as trustee to one of the BC public sector plans. I also served as director of BCI during the most important 7 years of BCI’s 20-plus years existence. That experience tells me that Mr. Marchessault is misinformed. BCI’s processes are rigorous, they have a culture of excellence, accountability and innovation and they have attracted some of the best talent — both experienced and up and coming — that can be found.
Uniformly, BCI client boards have put forward talented people in their own right and the province has ensured the chair position is filled with a proven, experienced leader. This model ensures the board is not simply a rubber stamp club. I believe the results speak for themselves and have no idea how events in Alberta have anything to do BCI.

Wednesday, November 11 at 11:36 pm | Reply

gerry:

This article is off the mark. CPPIB is the one that should be brought to task. It has the luxury of low benefit payouts while enjoying higher contributions. CPPIB crows about its returns without saying the deck is stacked in their favour. The average Canadian worker pays for CPPIB’s easy ride (and big exec salaries). Let’s point at the real problem — the federal government not paying an adequate CPP benefit.

Thursday, November 12 at 7:36 pm | Reply

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