While many of the investment strategies and resources at the disposal of the Maple 8 — Canada’s eight largest public pension plans that represent more than $2.1 trillion in assets under management — are out of reach for medium- and small-sized plan sponsors in the country, the path carved by the most sophisticated investment organizations is setting a template for their smaller counterparts.
A 2020 report by the Global Risk Institute found a three-pillar business model — comprising in-house asset management, redeployment of resources to investment teams for each asset class and the allocation of capital to assets that increase portfolio efficiency and hedge against liability risks — was the biggest factor contributing to the success of Canada’s largest pension funds and this model can be scaled for smaller plan sponsors to achieve outsized results.
The Maple 8’s respective AUM, according to each organization’s latest publicly available financial data:
• AIMCo: $160.6 billion (as at Dec. 31, 2023)
• BCI: $233.0 billion (as at March 31, 2023)
• Caisse: $434 billion (as at Dec. 31, 2023)
• CPPIB: $590.8 billion (as at Dec. 31, 2023)
• HOOPP: $112.6 billion (as at Dec. 31, 2023)
• OMERS: $128.6 billion (as at Dec. 31, 2023)
• Ontario Teachers’: $247.5 billion (as at Dec. 31, 2023)
• PSP Investments: $243.7 billion (as at March 31, 2023)
Read: 2022 GIC coverage: Canada’s Maple 8 pension funds outperforming peers on a global scale
A matter of resources
According to WTW’s Thinking Ahead Institute’s most recent global pension assets study, 17 of Canada’s largest pension funds accounted for 6.4 per cent of the total value of fund assets under management by the top 300 global pension funds included in the report.
The continued investment success of these funds can be traced back to their impressive analytical research capabilities, says Bob Baldwin, a pension consultant and co-chair of the C.D. Howe Institute’s pension policy council. “It’s pretty much impossible for the small [and] medium funds to replicate the degree of analytical expertise.”
The degree to which plan sponsors can access investment resources is one of the most significant factors impacting returns. Because of their size, the Maple 8 can more easily pursue increased specialization in several industries as well as direct co-investments, which tend to be too expensive for smaller funds.
“We can’t mimic what [the Maple 8 are] doing, because we don’t have the resources that they have — a lot of specialized, smart, well-compensated people who are doing very specialized things,” says Arijit Banik, treasurer at York University and who oversees the school’s endowment fund. “Whereas we have to rely on external consultants . . . and we have to rely on being generalists in what we do to move forward.”
Read: Canadian pension funds make top 10 list for largest annualized 10-year returns: report
The Maple 8 model up close
The Canadian Association of Alternative Strategies & Assets identified the following factors as hallmarks of the Maple 8:
• Extensive use of in-house management
• Use of managed account platforms for publicly traded assets
• No use of external consultants
• Autonomy from political influences that could impact return to plan members
• Extensive use of illiquid and alternative assets
• Ability to pay market compensation to all employees
Managing in-house investment solutions is a tall order for medium- and small-sized plan sponsors, says Jeannette Briggs, director of corporate finance at the Independent Electricity System Operator, noting the Maple 8’s internal investment solutions allow them to easily increase portfolio efficiency and hedge against liability risks.
“That doesn’t mean that you can’t learn from the big pension plans and, in particular, sort of [try and] emulate what they do in-house . . . with [external] investment teams.
Smaller investment organizations can work with their external money managers to create an investment structure that closely resembles the approach of the Maple 8, she adds.
“We’re never going to be on the cutting edge, but that’s OK. It really comes down to . . . whether you’re small, medium or large, you have to understand your fiduciary responsibilities.”
Broadening the investment model
While smaller plan sponsors can’t count on the same type of resources as their counterparts, they’re increasingly accessing the assets that have helped build long-term success for their larger peers.
With the expansion of open-ended funds that offer exposure to alternative assets, including real estate, infrastructure, private debt and private equity, smaller institutional investors can access assets that were typically only available to larger organizations, says Lewis Gascoigne, a principal with Eckler Ltd.’s investment consulting practice.
Read: When does active management make sense for large pension funds?
Over the past 10 years, these open-ended funds have become more common and instead of having capital call cycles requiring organizations to increase their funds, they allow for an evergreen structure, says Gascoigne, who works mainly with Canadian plan sponsors with assets ranging from $50 million to less than $10 billion. These funds can also be more inviting to smaller organizations due to lower minimum investment amounts.
There are now open-ended funds that pool the capital resources of smaller investment organizations, says Erwan Pirou, Aon’s chief investment officer for Canada. “We’ve seen a fair bit of demand for that . . . from the smaller [plan] base [that is] finding it difficult to go alone on this.”
Baldwin adds he’s in favour of the creation of more common investment pools among medium and small plans. “There is no reason why every pension plan has to have its own individual fund. I think they would be well served by scouting out the opportunities for creating common funds.”
The challenge with alternative assets
Typically, medium- and small-sized plan sponsors tend to prefer allocating funds to public equities and bond assets, Baldwin says.
Without the scale required to manage assets in-house, smaller investment organizations have limited options when it comes to investing in private asset classes, which tend to be more expensive to manage.
While equities can prove volatile, Banik says this asset class can help level the playing field between small- and medium-sized plans and the biggest pension funds in Canada.
Recent volatility pressures on public equities and bonds have led smaller plan sponsors to diversify, says Gascoigne, noting for many years, “smaller investment organizations have been trying to get access to asset classes that have been highly utilized by some of the larger plans.”
In 2021, the IESO conducted an asset liability management study of its defined benefit pension plan, seeking guidance on how to approach a new investment path. The study overwhelmingly recommended the plan sponsor pursue an active management style and diversify through infrastructure and real estate assets, says Briggs.
While alternative investments are appealing to sponsors of smaller plans, they’ve proven to be a pain point due to the investment minimums established by money managers overseeing these asset classes, says Pirou. “You might run into a regulatory issue. Many plans are not allowed to invest more than 10 per cent in a single strategy or that might damage your debt [and] your goals of diversification.”
Briggs adds it can be “scary” as a smaller plan to pursue a variety of assets “because you can’t get into everything.”
Read: Largest global pension funds’ combined assets decreased 12.9% in 2022: report
Co-investment opportunities increasing for smaller plans
Key takeaways
• The Maple 8 have more access to investment resources than Canada’s small- and medium-sized pension plans.
• Access to alternative asset open-ended funds can put smaller investment organizations on a path to long-term investment success.
• While smaller pension funds can’t mimic the exact approach of their larger counterparts, they can look for inspiration and adapt their investment strategies accordingly.
While co-investments are mostly restricted to only the largest pension investors, Gascoigne says an increasing number of smaller plan sponsors are copying this strategy through investment partnerships, enticed by the financial benefits of such deals.
“[It] comes [down] to having good . . . investment managers in place that are going to be able to give them opportunities for those deals.”
A 2023 report from McGill University, in collaboration with the Public Sector Pension Investment Board and the University Pension Plan, found smaller institutional investors can generate long-term value through appropriate partnerships, mid-market size deals and flexible approaches to governance, recruitment and liquidity management.
Read: Pension funds end Q4 2023 with positive results driven by equities, fixed income: report
It also noted smaller plan sponsors face their own unique challenges when it comes to pursuing upstream value creation in the private markets space and are more reliant on investment partners than the Maple 8, which typically compete for co-investment deals. “Because smaller funds have less capital and fewer diversification opportunities, higher conviction is needed for each investment,” said the report.
While investment organizations of all sizes face trade-offs in their strategies, it ultimately comes down to long-term asset allocation and strategic selection of investment partners, says Banik.
“We go through a lot of time and process to choose the right [money] managers and sometimes we get it right, sometimes we get it wrong. But we have a lot of patience in that regard.”
Bryan McGovern is an associate editor at Benefits Canada and the Canadian Investment Review.