Canada pension warns against rash legislation aimed at SWFs

The $121 billion CPPIB today argued before US lawmakers that it should not be lumped in with all sovereign wealth funds, as legislators in California attempt to bar the US’ largest pension groups from investing in private equity funds tied to sovereign wealth funds.

An official from Canada’s second-largest pension plan today warned US legislators against introducing rash, protectionist laws aimed at curbing sovereign wealth fund involvement in private equity.

Canada Pensions Plan Investment Board’s chief executive officer David Denison called for politicians to look “beyond the labels” of sovereign wealth and realize its importance to the US economy.

The statement comes as California legislators attempt to prevent the country’s two largest pension schemes, the California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS), from investing in private equity funds and firms partially or wholly owned by some sovereign wealth funds.

The legislation, introduced in February and being debated by CalSTRS today, would bar the respective $240 billion and $173 billion plans’ abilities to invest in future funds operated by the likes of The Carlyle Group and Apollo Management. In 2007, two different arms of the Abu Dhabi government bought stakes in Apollo and Carlyle, respectively.

Last night, CalSTRS voted to oppose the bill, arguing it would be a “blow to the retirement security of teachers while doing nothing to ensure a better world.”

However, appearing in Washington today before a special task force set up by the US House Financial Services Committee to investigate the issue, Denison said pension funds such as Canada Pensions – which managed C$119.4 billion ($121 billion) at the end of 2007 for 17 million Canadians – were increasingly reliant on the free flow of cross-border capital owing to the country’s economic size and demographics.

“We believe policy makers can make better policy decisions by looking beyond the labels to examine the underlying characteristic of these large pools of capital such as their governance frameworks transparency and whether objectives are politicized or purely investment driven,” he said in the statement.

Denison said many funds could be caught out by legislation targeted at sovereign wealth because, as in Canada Pension’s case, they were set up by governments. However he argued Canada Pensions operated as any other private sector company, with a board of directors approving investment decisions, not government officials.

“Although we have the word `Canada’ in our name and were created by an act of Parliament … [we are] in short a familiar private sector model, but with public accountability,” he told the committee.

Politicians across the globe are increasingly concerned about the growing appetite of resource-rich emerging countries for European industrial and financial companies. Reports have estimated funds from rich oil-producing Middle East countries have invested about $18bn in Europe and the US during the past four months alone.

The European Commission and the International Monetary Fund, which estimates that 20 state-backed funds, collectively control $1,900 billion and $2,900 billion in global assets, are both proposing voluntary guidelines governing fund investment activities.

During the hearing in Washington, congressmen were warned by Professor Matthew Slaughter, associate dean at the Tuck School of Business in Dartmouth, that US restrictions on inward investment “may well be met similar restrictions against US companies abroad that would harm their competiveness”.

Executive director of Temasek Holdings, Simon Israel, also said the Singapore sovereign wealth fund had invested $4.4 billion in Merrill Lynch last December, while indirectly employing almost 10,000 people in the US through three of its investments.