“First of all, pension funds are more than money managers,” says O’Reilly. “They’re put together to make sure there are sufficient assets to pay the benefit for their members. It’s not just a matter of maximizing value; it’s a matter of making sure there are sufficient assets.” Further, a large pension fund charging itself 20 to 25 basis points is great for plan members, but the entrance of a client fund changes the calculation, he explains. “When you start to bring in other pension plans, what are they going to be charged? If they’re charged the same amount, does it amount to the beneficiaries of one plan subsidizing the beneficiaries of another plan? What about statements of investment policy procedures? What about securities law? Must these funds then comply with laws that govern traditional money managers?”
John Pierce, vice-president of corporate communications with OMERS, says fees will be established based on the product or service being offered. “The cost to third-party plans will be determined by the specific product offering and in a manner that ensures OMERS members do not incur the cost of providing third-party investment management services,” he explains. “In fact, there are certain economies of scale that can bring financial benefits to both parties in this type of investment arrangement.”
Arnold says that the notion of “bigger is better” as applied to money managers needs to be challenged, holding up the Liquor Control Board of Ontario (LCBO) as an example of how scale can be wasted. “The LCBO is one of the largest, if not the largest, single purchaser of alcohol in the world,” he continues. “Ontarians do not pay even close to the lowest amount of money for alcohol in the world. I can’t help but think that the notion of cost versus benefits is going to play out in the long term if government gets involved in one way or another.”
Neil Craig, a senior pension consultant with Stevenson & Hunt Insurance Brokers in London, Ont., agrees, pointing to the Caisse de dépôt et placement du Québec as a case in point. “Because of the size of those mandates, [the Caisse has] to invest in alternative asset classes,” he explains. “And they have to invest significant amounts of expertise in investing in asset classes that are typically more expensive to manage and also can be at higher risk.” OMERS and Teachers’ can afford to take more risk, Craig says, because they know that ultimately, the taxpayer will bail them out if necessary.
“I don’t think the government should ever be competing with the private sector in terms of providing services, and that’s exactly what would be happening in this kind of scenario. It’s another competitor being bankrolled by the taxpayer.”
Conflicting interests
Currently, it is unclear if Teachers’ will be pursuing a money management role, which is likely to please critics of the idea. “[A pension fund’s] reason for existence is to manage funds for the benefit of its members,” says Craig. “As soon as they step outside that and they start to manage other people’s pension plans, all of a sudden, there exists a potential conflict between what’s best for the business of selling investment services and what’s good for the plan membership. Do you charge these new-found members a fee or do they just come, put their money in and get the value and expertise of the fund? These are the types of questions that need to be addressed.”
For its part, OMERS maintains that its third-party management activities will be managed in strict compliance with all applicable legislation and good governance practices, that conflicts of interest will not be an issue and that procedures will be in place to manage any potential or perceived conflicts. However, to Jim Keohane, senior vice-president of investment management and chief investment officer of the Hospitals of Ontario Pension Plan, the conflict of interest in the superfunds idea is front and centre. “There’s a clear conflict. OMERS will be acting as principal for their own money and as an agent for clients,” he says. “I can see some organizations resisting giving their money to OMERS because of the potential conflict of interest. They’re legally obliged to treat all clients the same, but will they? If I were looking for them to run money for me, it’s certainly a question I would ask.”
Tilak De Silva, controller with the Toronto Cricket Skating and Curling Club, fits into this category. “I don’t like the idea,” he says. “There seems to be a conflict of interest. A pension fund is meant to manage funds for people to retire. Unless there is a very rigid internal control system, you’re going to have issues coming up.”
Damon Williams, president of Vancouver-based Phillips, Hager & North, says the entrance of OMERS into the money management industry is notable only because it is a public fund. While it has respectable manufacturing capability, Williams points out that OMERS is designed to focus on managing the portfolio of a single large client with one set of investment objectives. “The challenge it will face will be on the service or distribution side,” he explains. “It’s one thing to have the manufacturing capability to manage portfolios, but it’s another thing to take that capability and create investment solutions that are appropriate for a variety of different clients with widely divergent objectives.”
Overall, Williams feels that OMERS— and possibly Teachers’—will find their place without significant implications for the industry. “We have a couple of new, relatively large competitors.”
Jody White is associate editor of benefitscanada.com.
jody.white@rci.rogers.com
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© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the February 2010 edition of BENEFITS CANADA magazine.