There’s no denying there’s a certain something about Canadian pension funds. Over the last few decades they have burgeoned into giants within the alternative assets arena, with seemingly more in common with leading asset managers than with their pension fund counterparts in other countries.
Canada’s total pension assets increased from $965 billion in 2006 to $1.58 trillion in 2016, a 10-year compound annual growth rate of 5 percent, according to the latest global pensions asset study from Willis Towers Watson.
But while undoubtedly impressive, do they really perform better than other pension plans?
CEM Benchmarking founder Keith Ambachtsheer analysed the overall investment returns from eight Canadian funds, the majority of which are public, from 2006-2015 and found that the ‘Canada Model’ of pension fund management did indeed produce superior returns – as much as 0.6 percent above a passive index.
Ambachtsheer defines the ‘Canada Model’ as including three key features: a clear mission, a strong independent governance function and the ability to attract and retain the requisite talent to be successful.
The analysis used ‘net value add’ – gross return minus the cost of running the investment operation minus the return on the passively managed reference portfolio – to compare the Canadian funds’ performance to a passive benchmark and a broader pool of 132 unspecified pension funds.
While the Canadian funds produced NVA of 0.6 percent per year above the passive benchmark, the broader pool produced just 0.1 percent NVA on average.
Similar research into Australian superannuation funds cited by Ambachtsheer found a negative average NVA of 1.3 percent below the benchmark between 1997 and 2016.
A key finding was that ‘Canada Model’ pension funds insource the investment function to a much greater degree than the wider pool – 75 percent on average, versus 17 percent. Canadian funds are also more inclined to invest in private market, on average 23 percent versus 11 percent.
Canadian pension plans have moved more decisively into direct investment than many of their international peers. This means that exposure to the same businesses should bring superior results by dint of lower costs associated, Mark Redman, global head of private equity at the Ontario Municipal Employees Retirement System, told Private Equity International. OMERS is aiming for more than 90 percent direct investment in its private equity programme by 2020.
“All things being equal, we should deliver better returns,” Redman said. “Our cost of running the business is less than 2 and 20.”
He added that OMERS’ returns from its direct portfolio “have been materially ahead of our funds portfolio”. OMERS posted a net investment return of 10.3 percent in 2016; its private equity programme generated a net return of 12.6 percent for the same period.
And OMERS is not the only one posting these kinds of results. Toronto-based Canada Pension Plan Investment Board, which had 18.5 percent of its C$316.7 billion ($234.5 billion; €208.8 billion) net assets in private equity as at the end of its 2017 fiscal year on 31 March, posted net annual returns of 11.8 percent across all assets. Its three private equity portfolios generated an average of 13.3 percent net returns, as reported by PEI.
Redman pointed to “entrepreneurial leadership” both within the pensions industry and government bodies, which allowed the Canadian funds to develop as they have.
“The Canadians decided they weren’t just going to give up on defined benefit schemes, but what could they do to make them more efficient and deliver more returns? Government, both national and provincial, was minded to be supportive of that. It is genuinely impressive,” he said.
Redman said that, had he been asked in 2009 when he joined OMERS, he would have said there would be “a whole phalanx of sovereign wealth funds and pension funds who would have done what we’ve done at OMERS”, but the fact there isn’t shows it isn’t easy, for a variety of reasons.
“I find it astonishing others aren’t being as proactive about this, but you can understand why,” he said.
Key to OMERS’ and other Canadian pension funds’ success, as pointed out by Ambachtsheer, is the ability to remunerate its staff at a market competitive rate, something which ranges from unpopular to impossible in other jurisdictions.
Redman said OMERS private markets remuneration is benchmarked against what it considers to be GP peers.
“You’ve got to be sufficiently market competitive to be able to attract the right people,” he said.
“There’s sensitivity around that, but the most important thing is to deliver the returns to pay the pension promise.”