Letter from the editor: Playing pension politics


A little over 10 years ago, Quebec held a parliamentary commission on the Caisse de dépôt et placement du Québec (CDPQ), after the pension fund lost $39.8 billion in one year. François Legault, then the Opposition finance critic, suggested the fund substantially increase its proportion of investments made in Quebec and adopt a mandate of protecting the province’s large corporations.

That same week, protesters mounted a demonstration outside the Caisse’s Montreal headquarters. They accused the fund’s newly appointed president and CEO—St. Catharines, Ont.-born Michael Sabia—of being a federalist in the pockets of Ottawa and the Desmarais-led Power Corporation.

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The demonstrators’ goal was to get “the head of Mr. Sabia,” said their spokesman, Patrick Bourgeois.

Fast forward a decade and Legault is now the 32nd premier of Quebec. Sabia, who went on to lead a remarkable turnaround at the Caisse, announced last week that he would be leaving to run the Munk School of Global Affairs and Public Policy at the University of Toronto.

Sabia’s departure has reignited debate over the future direction of CDPQ, with concerns mounting that the pension fund’s next leader will be a political appointee driven by Quebec nationalism. 

A similar discussion is happening in Alberta, where Premier Jason Kenney is threatening to pull the province out of the Canada Pension Plan, moving Albertans’ retirement savings to the Alberta Investment Management Corporation.

Both Alberta and Quebec run the risk of letting politics get in the way of sound economics.

Canada’s pension system is one of the country’s most celebrated exports. Though the country’s financial markets make up only three per cent of global equity markets, its Big Eight are among the world’s largest pension funds, with assets under management ranging from $79 billion to $530 billion.

“The idea that these big funds we’ve got now can operate just inside Canada is impossible from a diversification point of view,” pension analyst Keith Ambachtsheer told me in a phone interview this week.

The “Canadian model” has added $4.2 billion annually in additional value over the past 10 years relative to other comparable global funds, according to estimates from CEM Benchmarking, which Ambachtsheer co-founded. 

“It isn’t hypothetical,” he told me. “We’ve got a good database that’s now almost 30 years long that demonstrates that this combination of scale, good governance and insourcing generates net positive returns over time.”

A 2017 World Bank report highlighted that “strong, independent governance is perhaps the most important element” of the internationally admired Canadian model, adding that “Canadian pension organizations are governed to run as high-performing, arm’s-length entities that meet high standards of transparency, accountability, and ethical conduct.”

That arm’s length approach is critical.

Pension funds have two main inputs: contribution capital—the money that employees or citizens save for their retirement—and investment capital, the money generated as returns on that contribution capital.

If contributions are from employees in a dominant industry, as is the case with Alberta’s resource sector, when that industry suffers a downturn, it reduces the amount of capital the pension can then invest on behalf of its beneficiaries. 

If a pension then uses that retirement money to invest in specific sectors, there is a risk of what’s known as “double jeopardy”—when it invests in businesses it’s dependent on for future revenues.

“If you create an Alberta Pension Plan, and you manage your own Alberta-related pension assets, and if you start investing those assets in trying to save your industry, it breaks the fundamental diversification principle,” Ambachtsheer explained.

If markets cooperate, it is possible to have your cake and eat it, too.

Under Sabia’s guidance, the Caisse produced annual returns of almost 10 per cent, while the size of its net assets almost tripled to $326.7 billion. The institution diversified its holdings with a particular focus on infrastructure and private equity.  

Sabia also managed to defy his critics by maintaining a delicate balance of Quebec investment—think SNC-Lavalin, Bombardier, Element AI and Lightspeed POS—and global expansion: almost two-thirds of CDPQ investments are now outside of Canada, and the fund has offices in 10 countries. 

Pensions exist to support the wellbeing of their members. Canada’s pension funds are already confronting a shrinking workforce that will strain the capital they can invest, adding economic nationalism into the mix will further limit their investments.

Politicians playing politics with pensions in the short term will only alienate their constituents in the long term.