Canadian institutional investors are allocating only three per cent of their funds to domestic equities, according to a new study from London-based think thank New Financial LLP.
The report, which analyzed 13 countries’ pension systems, found the U.S. had the highest allocation to domestic equities (44 per cent), while Norway had the lowest (0.5 per cent).
It described Canada’s public pension system as taking “a brutalist approach” when allocating assets to equities, a strategy that has become widespread among public pension plans over the past decade. The report also noted Canadian public pension plan sponsors are among the leading investors in alternative assets, allocating, on average, 22 per cent to private equity and 12 per cent to infrastructure.
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“Canada is currently grappling with the same political debate as in the U.K. about how much local pension funds invest in the local market,” the report said.
It suggested if U.K. institutional investors increased their allocations to domestic equities by between 50 per cent and 100 per cent, they would “still be comfortably within the norms of recent history in the U.K. and well within international norms.” The U.K. pension system currently allocates an average of four per cent to domestic stocks.
While the report’s authors took opposition to any mandate that ties investment target allocations for pension funds, they called on the U.K. government to consider creating incentives for pension funds to adjust their investment behaviour. “An effective incentive could be delivered through potential dividend tax credits on advance corporation tax that were abolished for pensions in 1997 and would change the after-tax return for U.K. pension investing in U.K. equities,” said the report.
Read: Mandating Canadian pension funds’ domestic investments could harm plan members: study