Hands off my pension!

Last week, 92 prominent senior executives, investment managers and individual investors signed an open letter to the federal and provincial ministers of finance expressing concern with “the decline in Canadian investments by pension funds and its impact on the Canadian economy.” Aggregate public and private Canadian equity investments are down to about a tenth of the total of more than $3 trillion in total pension assets.

Since pension funds receive crucial government sponsorship and tax assistance, the letter argues, “Government has the right, responsibility, and obligation to regulate how this savings regime operates.” It supports amending the rules to “encourage” pension funds to invest more in Canada, without specifying how this should be done or to what extent.

The signatories are pushing on an open door. Finance Minister Chrystia Freeland said in her fall economic statement that “The federal government will work collaboratively with Canadian pension funds to create an environment that encourages and identifies more opportunities for investments in Canada by pension funds.”

Many of the signatories have skin in this game. New capital investment could bolster stock prices and reduce the cost of equity capital for companies they own or manage. Self-interest aside, however, they raise a top-ofmind and contentious public policy issue.

Pension fund managers predictably hold a contrary view. Everyone can agree that diversification is an important investment consideration. Last year, Canada’s stock market capitalization represented just 2.7 per cent of the $109-trillion global market. It is therefore prudent to invest a significant percentage of assets under management in other countries to mitigate concentration risk and enhance returns. Liquidity is also a constraint: only very large companies and infrastructure projects are suitable for huge funds, and there just aren’t many of those in Canada.

But let’s also acknowledge the elephant in the room. The fact that experienced pension managers are investing a small and declining proportion of pension fund assets in the Canadian stock market is a stark condemnation of government policies that have eroded corporate productivity, profitability and growth and made returns less attractive. Specifically, federal government hostility to the energy sector is deliberately designed to damage its growth prospects with a view to “transitioning” it out of business or at least significantly shrinking its 11.8 per cent share of the Canadian economy.

More generally, Canada’s real GDP per capita is stagnant and our prospects are the worst among 38 wealthy countries over the next 40 years, according to the OECD. This is a direct result of government policies that discourage capital investment through punitive fiscal policy and obstructive regulations. For the government to force pension funds to invest in a market that it has intentionally and/or incompetently undermined is unfair and imprudent.

The public does not want governments playing politics with their pensions. The Alberta government is hearing that message from many Albertans in response to its proposal to leave the CPP and set up a provincial pension fund — even if doing so would reduce contributions or increase benefits. Pensioners are hypersensitive about their retirement pensions.

Quebec’s Caisse de dépôt is an obvious precedent for the proposal. Created in 1965, it was given a dual mandate of profitability but also support for Quebec’s long-term development. It has a higher proportion of its assets invested in Quebec than the CPP Investment Board (CPPIB) does in Canada.

As a matter of financial theory, if investment decisions are constrained by non-economic considerations, average returns will suffer. The Caisse’s additional focus may well have resulted in its lower cumulative return over the past 10 years — 7.4 per cent versus 9.3 per cent for the CPPIB. Because of the “miracle of compounding,” over a decade that difference in return translates to $207 million per $1 billion in assets invested.

Politically, governments would never deprive pensioners of their defined benefits. But over time the investment performance of a Crown agency can affect contribution rates, benefit increases or taxpayers’ burden. For private pensions, where returns do impact benefits, managers’ fiduciary responsibility is even more consequential. Therefore, the inevitable cost of a mandating or subsidizing an increase in capital investment by public or private pension funds would be borne by ordinary Canadians, whether as pensioners or taxpayers.

We should be very hesitant to tamper with the independence of the CPPIB in pursuing its single mandate of achieving a maximum return without undue risk of loss. A dual mandate can create a slippery slope that leads to political meddling in investment decisions, either directly or through disincentives of one kind or another.

We know only too well that in pursuing industrial policies governments are better at picking losers than winners. Imagine an investment committee comprised of Justin Trudeau, Steven Guilbeault and Jagmeet Singh. Viewer discretion is advised.