‘Not theirs for the taking’: Can the Canadian pension model survive a new era of politicization?

Maple 8 envied internationally for diverse portfolios, world-class returns and arms-length government relationships, but third leg at risk

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Published Jan 16, 2025  •  9 minute read

A Bay Street sign in Toronto's Financial District. Photo by Photo Peter J. Thompson/National Post files

Rachel Reeves, the U.K.’s new chancellor of the exchequer, had a goal in mind when she flew to Toronto last August to meet with the heads of some of Canada’s largest pension funds.

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“I want British schemes to learn lessons from the Canadian model and fire up the U.K. economy, which would deliver better returns for savers and unlock billions of pounds of investment,” Reeves told U.S. investors in New York on the first leg of her trip, according to the Financial Times.

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Reeves had at least half of the equation right. The informal group of large institutional investors known as the Maple 8, which includes the Ontario Teachers’ Pension Plan and the Canada Pension Plan Investment Board, has been envied globally over the past decade-plus for their ability to earn world-class returns through a diverse blend of investment strategies. But the group’s unique achievement has been a model that shelters the funds from government influence when it comes to investment decisions.

Rachel Reeves, the U.K.’s new chancellor of the exchequer, delivering a statement to members of parliament in the House of Commons, in London, U.K. Photo by Handout/U.K. House of Commons/AFP via Getty Images files

In other words, the funds aren’t there to fire up the economy or pursue the political cause of the day — they are there to invest for their beneficiaries, full-stop.

That fundamental advantage came under pressure at home like never before in 2024, raising concerns that it’s only a matter of time before Canada’s biggest funds are forced to make concessions to government. It’s a threat pension veterans aren’t taking lightly.

“Governments need cash. They are turning over every stone to look for it, but the (pension) money is not theirs for the taking,” Mark Wiseman, the former chief executive of the CPPIB, said in a recent interview with the Financial Post. “It’s the retirement savings of millions of Canadians — no different than the monies in their bank accounts and RRSPs.”

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Developments over the past couple of years have prompted pioneers of the Canadian pension model, including Wiseman and Claude Lamoureux, the first CEO of the Ontario Teachers’ Pension Plan, to pen articles sounding the alarm and warning that the survival of vaunted model was at risk.

Ottawa triggered the concerns when it stated explicitly in the fall economic statement in 2023 that it wanted major pensions to invest more in Canada, a longstanding ambition of Justin Trudeau’s Liberal government. That prompted dozens of business leaders from industries ranging from telecom to transportation to sign an open letter in 2024 calling on the government to create new rules and incentives to reverse a decline in domestic investment. Last year, the government pushed ahead to try to meet its objectives while assuaging some of the concerns in the pensions industry, creating a task force led by former Bank of Canada governor Stephen Poloz to shepherd the process.

But Lamoureux and others argued the approach is the wrong way to improve the country’s economic prospects.

“The federal government should ask itself how we (can) create champions, not where our champion pension plans should invest,” he said.

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Proponents of the Canadian pension model were already on high alert when, in November, Alberta’s government — which was already contemplating pulling out of the Canada Pension Plan — reached into Alberta Investment Management Corp. (AIMCo), the province’s main public asset manager, and fired the entire board and chief executive before installing former Prime Minister Stephen Harper as chairman and putting a government bureaucrat permanently on the board of directors.

The shakeup stoked fears that the Alberta government wants a more direct hand in how AIMCo invests.

Months before that overhaul unfolded, the Global Risk Institute published a paper with a blunt warning: directing pension funds to invest more at home would “undermine careful risk-return calibrations, compromise existing governance functions, and expose pension plan members to potential financial losses.”

Mark Wiseman, the former chief executive of the Canada Pension Plan Investment Board, during an interview in Toronto, Ont., in 2015. Photo by Kevin Van Paassen/Bloomberg files

Wiseman, meanwhile, had warned at a summer conference that pulling pensions away from their core mission could be a slippery slope, even if it begins with the gentle ask from governments facing down deficits and sluggish economic outlooks.

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By the end of the year, there were signs the federal government was getting the message. Lost amid the drama surrounding the resignation of finance minister Chrystia Freeland in December, the Liberals’ fall economic statement tabled the same day tempered some concerns that Ottawa will tell pensions where to invest their money.

Instead, it promised to examine raising a 10 per cent ownership cap on municipal utilities and potentially re-thinking airport land lease agreements to allow pensions to invest in the development of surrounding vacant land. In addition, it pledged that pensions would no longer be subject to a cap of 30 per cent control of companies they invest in.

Those small steps, combined with the upheaval and a potential change in government in Ottawa, have tamped down concern for some about the immediate threats to the Canadian pension model. But the fear is not gone.

“Nothing is ever totally out of the woods,” said Keith Ambachtscheer, a veteran pension expert and one of the authors of the June GRI paper. “(But) Ottawa has bigger things to worry about than pension fund investing.”

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While Ambachtscheer was willing to declare the Canadian pension model “alive and well,” for now, Lamoureux said the political chaos has just introduced another level of uncertainty.

One of the major concerns that arose last year was that established fund managers such as the Canada Pension Plan Investment Board and AIMCo could be made to carry dual mandates like the Caisse de dépôt et placement du Québec. A rarity among the Maple 8, the Caisse’s investment decisions must consider both maximizing risk-adjusted returns for beneficiaries and contributions to Quebec’s economic development.

There are worries some kind of dual mandate could be coming to AIMCo soon, based on comments Alberta Premier Danielle Smith has made and the November leadership purge.

Speaking at a Calgary Chamber of Commerce event in the fall of 2023, for example, Smith said the province’s Heritage Savings Trust Fund, managed by AIMCo, could become more like a sovereign wealth fund and invest in projects that are having difficulty securing financing elsewhere.

Alberta Premier Danielle Smith in Calgary. Photo by Darren Makowichuk/Postmedia files

That didn’t sit well with Gil McGowan, president of Alberta’s Federation of Labour, who said thousands of AFL members are concerned their retirement money, managed by AIMCo, could end up being used to support the government-favoured projects, such as in the oil and gas sector, that might not be in retirees’ best interests economically.

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“Risking the retirement security of that many people with a Quebec-style dual mandate would be bad enough — but what the UCP (United Conservative Party) government in Alberta has in mind is actually worse,” McGowan said via email in December. “They’re not just talking about using pension funds to promote Alberta-based economic growth and job creation (a la Quebec), they’re talking about using the money (other people’s money!) to prop up oil and gas businesses that are finding it more difficult to raise cash from international investors and capital markets.”

Lamoureux, too, said it would be a mistake for governments to demand a dual mandate, adding that institutional investors subject to such mandates, like the Caisse, tend to underperform those that aren’t — even when both beat their established benchmarks.

The Caisse ranked last among the Maple 8, for example, in a global pension fund ranking by data platform Global SWF that measured the compound annual growth rates of single-year investment returns between 2013 and 2022.

Lamoureux said the benefits of the Canadian pension model are in the data. Teachers’, the pension plan he was instrumental in creating in its current form, had an $8 billion deficit when it was run by the province of Ontario. Both returns and funding status across Canada’s largest funds including Teachers’ have much improved since governments opened up globetrotting investment potential by removing rules that limited foreign investment first to 20 per cent and then 30 per cent.

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A person walks past signage for The Ontario Teachers Pension Plan in Toronto’s Financial District. Photo by Peter J. Thompson/National Post files

“Canada, according to UBS, represents 2.5 per cent of the world capitalization, the U.S. 60 per cent. Where you should invest is easy to answer,” Lamoureux said. “Would the Teachers’ pension fund be 100-per-cent-plus funded if we had not been allowed to invest (or use derivatives) more outside Canada?”

But even some critics of the perceived interference with Canada’s successful pensions say it’s not entirely unfounded for the government to question why the multi-billion funds aren’t investing more at home.

Domestic allocation has been declining for years, said Alex Beath, a former senior research associate at CEM Benchmarking, an independent provider of comparative performance data for institutional investors including pensions.

In public markets, Canadian pension funds reduced their holdings in domestic companies to less than four per cent of their total assets at the end of 2023 from 28 per cent in 2000, according to the open letter signed by 90 business leaders in March. The letter also said the country’s eight largest pensions have invested some $88 billion in China, more than the roughly $81 billion they had in Canadian public and private companies combined.

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This trend is not unique to Canada; shrinking domestic allocations have also been the reality in the United Kingdom. Nevertheless, there are arguments governments can make as a result, according to Beath.

“Big DB (defined benefit) pension funds are tax exempt investors, (so) the Canadian government and population is in some sense spending an extraordinary amount of money helping subsidize them,” he said. “(Perhaps) that investment comes with a quid pro quo, left unsaid, that some of that expense should be invested back domestically.”

Conservative Party of Canada leader Pierre Poilievre holds a press conference in Ottawa. Photo by DAVE CHAN/AFP via Getty Images files

The pensions could find a reprieve from such questioning if Trudeau’s minority government falls this year. Opposition parties have pledged to bring down the government as soon as a prorogued Parliament resumes in March. And if Conservative Party of Canada leader Pierre Poilievre comes to power, the trend toward more government involvement in pensions could even be reversed, said a former senior pension executive who spoke on condition of anonymity in order to discuss the delicate situation in Ottawa. 

“The federal Conservatives seem to have a better grasp of the principle (of independence),” the former executive said.

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Indeed, senior pension officials have privately complained for years that Trudeau’s government has failed to heed what they were told about how public-private investment vehicles such as the Canada Infrastructure Bank should be structured and governed to encourage investments by institutional investors. Even more frustratingly for the pensions was that the lack of investment by institutional investors led to the government taking a heavier hand.

The Global Risk Institute’s paper from last summer touched on this theme, suggesting a way to create the conditions to entice large-scale investment without government interference in pension fund allocation — a strategy that could deliver the kind of economic boost the U.K.’s chancellor of the exchequer described during in her summer visit to North America.

If Canadian governments want more investment dollars from large institutional investors like pensions, including Canadian ones, the paper said, an easy way to make that happen would be to make available the types of assets they shop around the world to buy: large-scale infrastructure projects from airports and toll roads to ports and railroads, to utilities and transmission grids.

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“Government initiatives that reduce the barriers to domestic investing by facilitating access to strategic asset classes will not only retain and attract capital from Canadian pension funds but also bring in additional capital from the much larger pool of foreign investors,” the authors concluded.

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It would be an elegant solution for Canada because it would fulfill the government’s objectives of boosting domestic investment without fiddling with the Canadian pension model or spooking institutional investors in Canada or abroad.

“Canada lacks infrastructure investment opportunities relative to other countries,” said Ambachtscheer, one of the report’s authors. “Canadian funds would be happy to invest in Canadian investment opportunities if they existed.”

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