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An Exploration of Canadian Pension Funds

September 5, 2017

Over the past few years, many pension fund systems have been praised for adopting innovative approaches to investment and management of assets. An example of such funds are Canadian pension funds, which have been successful at generating positive net value despite conditions of global economic and political turmoil. There are various factors which contribute to the strong performance of these funds.

Strengths of Canadian Pension Funds 

Canadian pension funds recorded an increase of 1.4 percent during the second quarter of 2017, according to RBC Investor & Treasury Services. Some of these successes can be attributed to prudent management of portfolio allocations. However, many Canadian pension funds are uniquely structured compared to other funds, and they are considered an innovative model in many respects. 

The Canadian approach to pension fund structure involves several distinct factors:

  • Management of a high proportion of assets in-house
  • Larger allocation to private markets and direct investments than peers
  • Smaller deals when acting alone, while often serving as “co-sponsors” with other private equity firms for larger deals, allowing for more control over investments and reducing fees
  • Longer investment horizon than private equity firms, which allow Canadian organizations to reduce some of the risks associated with illiquid assets
  • Less pressure to chase high returns
  • Added focus on buyouts, infrastructure, and property, which can often yield higher returns than traditional sources such as publicly traded stocks  

One main advantage of the Canadian pension fund approach is a marked reduction in costs. This is mainly the result of the choice to run operations directly and in-house, which greatly reduces fees paid to outside consultants and experts.

Additional Factors

In addition to these strategic approaches, Canadian pension funds have also achieved great success in two areas: governance and compensation. Canadian pension fund board members tend to have backgrounds in business and finance, rather than politics and unions. This reduces political interference in board operations and can help to stimulate diversity in the board makeup.

Canadian funds also ensure that pay for executives is competitive. This allows them to recruit from among the best executives; compensation packages typically include a base salary as well as performance and annual bonuses. This helps to promote a long-term outlook for fund executives. 

Drawbacks of Implementing The Canadian Pension Fund Model in Other Countries

There are some aspects of the Canadian pension fund model that can act as impediments in other settings. Most of these have to do with the feasibility of transplanting the approach. Some of these drawbacks are:

  • The enhanced pay structure is not always feasible in other countries — even in the U.S., pension funds might not be willing to offer the same level of compensation to executives.
  • The scale needs to be large — smaller funds might not be large enough to buy companies, invest in infrastructure, or manage the upfront costs of building internal teams like larger Canadian funds can.
  • Difficulties in diversifying into more volatile emerging markets — Canadian funds might do better investing in familiar markets; becoming more global entails a broader breadth of investment projects, as well as the legal considerations that accompany global factors.

For smaller pension funds, such as those in Southeast Asia, that wish to diversify assets into other areas, the Canadian pension fund model might not be an ideal framework to adopt. Canadian fund models often rely heavily on markets that they are familiar with, which can limit the diversity of assets that is crucial for expanding into other markets.     

Other Canadian Pension Fund News 

Shell Sells Irish Gas Field to Canada Pension Fund for $1.2 Billion
In other news, the Canada Pension Plan Investment Board, one of Canada’s biggest pension funds, will take control of a 45 percent interest owned by Shell PLC in Corrib. The transaction consists of a $1.23 billion sale of a controversial Irish gas field with a $350 million impairment charge. This decision may have effects on the fund’s Environmental, Social, and Governance (ESG) ratings. 

Legal Dispute with Saba Capital
Canada’s Public Sector Pension (PSP) investment board has resolved a legal dispute with Saba Capital regarding a $500 million redemption claim. PSP had initially accused Saba of self-dealing and mismarking illiquid assets in order to minimize the value of the redemption. PSP recently stated it had a bona fide “difference of opinion” regarding the redemption pricing. Both PSP and Saba have agreed to move on after the settlement. 

Canada’s pension funds continue to generate overall positive returns. While some of the features of these funds may not work efficiently in other fund settings, the approach appears to be fruitful for Canadian funds. New legal developments can have significant effects on large pension funds. If you have any questions or inquiries regarding the legal rights of pension funds and other institutional investors, contact us today at Kessler Topaz. 

We understand the challenges involved in monitoring diverse institutional portfolios. Our free monitoring service, Securities Tracker, helps funds promptly identify potential claims and marketplace events that can affect assets. Download our guide “How Kessler Topaz Approaches Portfolio Monitoring” to learn more.