Canada's ten largest public pension funds, dubbed "the Top Ten," provide Canadians with one of the strongest retirement income systems in the world and also contribute significantly to national prosperity, a new study concludes.You can read the full press release on CPPIB's website by clicking here. Canadians need to understand the incredible benefits that stem from having their retirement assets managed by large, independent pension funds that operate at arms-length from the government.
The landmark study commissioned by several members of the Top Ten and conducted by The Boston Consulting Group (BCG) provides, for the first time, data on the aggregate impact of these global organizations. The study is an in-depth examination of the economic impact of these pension funds to the end of fiscal 2011. The study concludes the Top Ten are a Canadian success story on the world stage.
The Top Ten represent a major cornerstone of the Canadian financial system and the economy at large. Over the last 10-15 years, the Top Ten have established the reputation of Canadian pension funds management as truly world-class. This reputation has opened doors around the world to investment opportunities that benefit the Canadians receiving pensions as well as their communities as a whole.
"This study is the first of its kind covering a group of financial institutions whose daily activities have an enormous impact on the retirement prospects of current and future generations of Canadians, and on the economy at large," said Kilian Berz, Senior Partner and Head of BCG Canada. "Several factors have enabled their success, with a core factor being a strong governance structure that allows the funds to operate as a business in the best interests of their members."
Among the key findings:
- The Top Ten pension funds are healthy, growing, and increasingly important to Canada as it faces challenging demographics and economics
- They have created a centre of excellence in Canada for managers of quality, large-scale investments
- They manage ~35% of Canada's retirement assets
- Their net assets grew by more than 100% in the previous eight years
- They have invested roughly $400 billion in Canada , including $100 billion in real estate, infrastructure and private equity
- They are strong proponents of good corporate governance practices, ultimately improving the efficiency and effectiveness of capital markets
- They comprise four of the top 20 global commercial real estate investors
- They also comprise four of the top 20 global investors in infrastructure assets
- They directly employ 5,000 professionals in the Canadian financial sector and an additional 5,000 employees in their real estate subsidiaries.
BCG's study focused on the ten largest public sector pension funds (ranked here by size of pension assets): The Canada Pension Plan Investment Board (CPPIB), The Caisse de dépôt et placement du Québec (Caisse), The Ontario Teachers' Pension Plan Board (OTPP), The British Columbia Investment Management Corporation (bcIMC), The Public Sector Pension Investment Board (PSP Investments), The Ontario Municipal Employees Retirement System (OMERS), The Healthcare of Ontario Pension Plan (HOOPP), The Alberta Investment Management Corp. (AIMCo), The Ontario Pension Board (OPB), and The OPSEU Pension Trust (OPTrust).
Global investment scale
The Top Ten funds managed, at the end of 2011*, $714 billion in pension funds - ~35% of Canada's total retirement assets. This total includes all public and private sector pension plans, RRSPs and other registered savings plans. This is broadly distributed among the ten and ranges from the $162 billion managed by the Canada Pension Plan Investment Board (CPPIB) to $14 billion by the OPSEU Pension Trust (OPTrust). Since BCG's study, which was conducted in the fall of 2012, the funds have continued to grow, with recent reporting periods indicating a total of roughly $775 billion in pension assets.
Growing Canadians' retirement investments
The Top Ten's $714 billion in pension assets under management in 2011 is an increase of more than 100% since 2003, over a period in which the world faced one of its most challenging economic periods. Two-thirds of the increase has been driven by solid investment returns of $240 billion vs. net inflows to the funds made by members and their employers of $125 billion .
"During a highly volatile period of time that encompassed the worst financial downturn since the Great Depression, the Top Ten have managed to more than double their pension assets, driven primarily through their investment activities," said Michael Block , the project lead from BCG. "This strong performance underscores the Top Ten's role as a cornerstone of Canada's well-regarded retirement income system."
The funds have focused on prudent investments offering attractive, risk-adjusted returns in public and private equities, infrastructure, real estate and bonds. The Top Ten are "major long-term investors in Canada ," with over $400 billion invested across various asset classes in Canada . BCG also found the Top Ten to have a broader impact on the Canadian financial sector with a $1.5 billion payroll and ability to attract and retain top Canadian talent.
Canadian pension funds are highly regarded around the world, having invested in, for example: one of the largest electricity transmission and distribution companies in the U.S.; the operator of seven UK airports including Heathrow; three Chilean water utilities; and one of the largest and most profitable insurance providers in South Korea ; among many, many others.
The keys to success
Canada has become a centre of excellence for managers of quality, large-scale investments with more than 5,000 men and women employed in investment origination, asset management and operations at the Top Ten. The funds are recognized widely by global media and financial communities as significant long term players, and these institutional investors have participated in some of the largest deals in recent years.
"The Top Ten benefit from two key strengths: professional, active management of diverse assets and a low cost structure," the study concludes. "Management expense ratios of the Top Ten on average are much lower than other actively managed pension funds, and mutual funds, and are comparable to the cost of passive index Exchange Traded Funds."
BCG found the funds' successes can be strongly attributed to a well-developed governance structure that allows them to operate in the best interests of their contributors - a structure BCG believes to encourage good corporate governance practices throughout Canada's capital markets. Other success factors are their discipline and freedom to manage as businesses; sufficient scale to gain access to large, capital intense assets.
Excellence in fund management
Like many other nations, Canada is experiencing challenging demographics and economics that make excellence in the management of these funds even more necessary. These factors include longer lifespans, lower and declining retirement ages, a dwindling ratio of workers to retirees, low interest rates and volatile capital markets.
The study examined external rankings of retirement systems and found Canada's to be among the strongest in the world; ahead of the United Kingdom , the United States and Germany . This achievement is strengthened by professional investment excellence, a consolidated approach to managing capital and recognition that scale is critical to success.
Disclaimer:
These materials excerpted by the Top Ten from the Study referenced are provided for discussion purposes only and may not be relied on as a stand-alone document. The Study was prepared by BCG at the request of several members of the Top Ten using public and/or confidential data and assumptions provided to BCG by the Top Ten. BCG has not independently verified the data and assumptions and changes in the underlying data or operating assumptions will affect any analyses and conclusions set out in the Study. BCG shall have no liability whatsoever to any third party with regard to these materials or the Study, including the accuracy or completeness thereof.
* Due to differences in reporting periods the data quoted for some pension funds is from its fiscal year 2012, which ended on March 31, 2012
Importantly, by pooling assets, lowering costs, internalizing investment activities and diversifying across public, private and hedge fund assets across the world, these large pension funds are managing hundreds of billions in the best interest of contributors.
And while large Canadian pension funds are not immune to wild market gyrations, they are able to take a long-term view and ride out serious downturns like the last financial crisis. Also, many of Canada's Top Ten are increasingly shifting assets into private markets like private equity, real estate and infrastructure because they believe it will allow them to lower overall fund volatility and achieve their target rate of return in a more consistent and stable manner.
Earlier this week, I wrote on how CPPIB is scooping up foreign shopping malls. I also mentioned that the Caisse's real estate subsidiary, Ivanhoé Cambridge, just acquired the Wells Fargo Center, a 47-storey, Class A, office tower in Seattle's financial district.
And then there are direct investments in infrastructure. Canada's Top Ten are are among the most active infrastructure investors in the world. In early May, PSP Investments announced it is buying the airports unit of construction group Hochtief in a deal valued at $1.4-billion (U.S.). The deal was attractively priced and I believe this big bet on airports will benefit PSP's contributors as infrastructure is a very long-term asset class that offers stable returns (between bonds and equities).
These are just a few examples of how these large Canadian pension funds are able to invest directly or co-invest with top-tier investment partners around the world to capitalize on investment opportunities in private markets.
In public markets, there are significant advantages to managing assets internally. The Healthcare of Ontario Pension Plan (HOOPP) is a world leader in this regard, managing assets and liabilities very closely, delivering stellar results. But many of the Top Ten are running equally impressive internal operations and unlike HOOPP, they also invest with top global managers where they see value or are unable to replicate strategies internally.
It's worth noting that there are important differences between Canada's Top Ten so making direct comparisons isn't always easy or worthwhile. Some funds invest more in private markets, others are able to use a lot more leverage to achieve their returns, and others are relatively young organizations that have a different liquidity profile than more mature funds.
But this BCG study highlights their key success factors and the benefits of Canada's Top Ten. It comes at an opportune time where Canadian politicians have to make key decisions on our retirement system. I'm firmly in the camp that says we need to expand C/QPP and disagree with those who think this is bad news for Canadians. The only bad news for Canadians is maintaining the status quo, leaving far too many vulnerable to pension poverty.
Let me end with the study's closing thoughts:
The Top Ten represent a major cornerstone of the Canadian financial system and, more broadly, the Canadian economy. They have elevated the reputation of Canadian pension funds to a world-class level, and their ‘best practice’ model has benefitted the pension industry at home and abroad.Indeed, Canadians should be proud of Canada's Top Ten and our politicians should build on their success, offering millions the ability to improve their chances of retiring in dignity and security.
Their innovative approach to investing has helped provide stability and solid returns to plan members in what has been a highly volatile period for capital markets. As well, their focus on long-term value creation is a model worth emulation by other investors and by the business community in general.
Canada’s Top Ten public pension funds are truly a Canadian success story and a driver of national prosperity.
Below, Mark Wiseman, President and CEO of CPPIB, speaks with Reuters' Chrystia Freeland from the World Economic Forum in Davos (January 24, 2013). And Jim Leech, President and CEO of the Ontario Teachers' Pension Plan, discusses the state of pensions and the factors that have contributed to Teachers' success (May 28, 2013).
Listen carefully to their comments and think about our public policy on pensions and what is in the best interest of all Canadians. Hope our politicians see the benefits of bolstering our large pension funds.