Push to bring our pension money home can go wrong

The trend for investors everywhere is toward more risky deals that carry the promise of higher returns: private equity

Canada’s pension plans are back in the spotlight, and the news for you as a future very old person may not be great — though not for the reasons you might imagine.

About a decade ago pension plans made the news by raising concerns about systemic risk, as an era of ultra-low interest rates tested their ability to fully fund future obligations to millions of retirees.

Now the plans are flush with cash: the eight biggest pension plans in Canada collectively manage $2.14 trillion and all are in surplus. The two biggest plans alone — the Canada Pension Plan Investment Board (CPP Investments) and Quebec’s Caisse de dépôt et placement — decide where to invest more than $1 trillion. Public and private plans combined manage more than $3 trillion in assets.

Made up of Canadian workers’ savings, pension plans were first legally required to invest 90 per cent of their assets in Canada. Limits to foreign investment were gradually reduced until, in 2005, they were completely eliminated.

Last year only 23 per cent of public pension assets were invested at home. Even if a small share of the other 77 per cent came back to Canada, it would be a big infusion of capital.

So the federal government tasked Stephen Poloz, the former Bank of Canada governor, with nudging them to invest more of that cash in Canada.

Bring it home is not just a political slogan, though it is that too. Pension plans invest to provide benefits for Canadians when they retire. Why not benefit Canadian workers before they retire? Loads of Canadian businesses need capital; Canadians have loads of capital in their pension plans.

Where the plans choose to invest within Canada is precisely the next problem. The trend for investors everywhere is toward more risky deals that carry the promise of higher returns: private equity — not publicly traded stocks or bonds, but deals brokered behind closed doors.

Canadian pension funds are increasingly banking on private equity to produce needed returns. More than a third of pension funds’ eyepopping asset growth of $654 billion between 2019 and 2023 was derived from it.

Private equity is itself evolving, shifting away from the risks of creating new enterprises through venture capital and toward buying out existing businesses.

Profits made through buyouts come from forming or expanding corporate chains. Small chains are

The returns are not really calculated in a manner I would regard as honest.

BILLIONAIRE WARREN BUFFETT ABOUT PRIVATE EQUITY

being bought to form bigger chains. Corporate consolidation increases market share and the ability to set prices or lobby for changes to rules. No surprise, regulators are starting to worry about how big these entities are getting.

More risk comes from the fact that mergers and acquisitions are usually saddled with debt, debt that the new owner makes the acquired company pay back through their own sales revenue. In the U.S., companies bought by private equity are 10 times more likely to go bankrupt as those that aren’t.

Alarm bells should sound when the enterprises that private equity targets exist to take care of us: child care, health care, long-term care. That’s already happened in the U.S., the U.K., Australia and pockets of Europe. Canada’s joining the parade.

Perhaps the most famous among successful investors, Warren Buffett, leans heavily in the direction of avoiding private equity, “where the returns are not really calculated in a manner I would regard as honest.”

The spread of private equity is most advanced in the U.S. but is catching up elsewhere. The international Financial Stability Board — whose job it is to monitor systemic risk in the G20 nations — recently reported on the rapid expansion of investments in private equity by European pension funds, suggesting “there may be vulnerabilities from cross-border exposures and global interconnectedness.” Anyone remember subprime mortgages?

The vulnerable include workers. Private equity has to keep the money moving, buying, selling, reinvesting, usually in seven years or less. With every rotation, new owners typically shed payroll costs by either laying off workers or adding workload, cutting benefits or paying lower rates.

This is clearly not the version of pension investment the government is looking to leverage for more investments in digital or physical infrastructure, airports or housing.

But once you’ve welcomed the funds back home, they may find the wrong targets — like the lucrative, deeply subsidized and built-forgrowth care economy, including long-term care.

The latest case of death by private equity is Red Lobster. In fact, 2023 saw a record number of bankruptcies for firms owned by private equity, and the lion’s share are in the health-care category.

We’re starting to see what happens to seniors in Canada when private equity meets long-term care. Why wait for the same story to unfold in health care and child care?

Pension plans are workers’ savings. They should be making jobs better, not worse, for today’s workers.

Bring it home, sure. But make it safer, not riskier. Put up the guardrails before you speed up the race for cash.