Mandating Canadian pension funds’ domestic investments could harm plan members: study

Read: More work to be done on feds’ plan to encourage domestic pension investments: lawyers

Earlier this year, more than 90 business leaders in Canada signed an open letter calling on the federal government to address the decline in domestic investments by pension funds. In its 2024 budget, the federal government said it was creating a working group, led by Former Bank of Canada governor Stephen Poloz, to identify priority investment opportunities in the country for the more than $3 trillion held by Canadian pension funds, including in digital and physical infrastructure, artificial intelligence, venture capital and real estate assets in public lands. In a recent interview with The Logic, Poloz said he wouldn’t pursue mandate reviews for investment organizations, noting, “it’s about carrots, not sticks.”

The GRI study recommended government initiatives should instead focus on reducing barriers to strategic asset classes, like domestic infrastructure, which it noted will open the doors to bigger investment capital from both Canadian and foreign institutional investors.

According to the report, the model of Canadian pension funds actively searching for and prioritizing investments in strategic asset classes is why they face a barrier to increasing domestic investments, since the Canadian government and public authorities own the majority of Canadian assets with high strategic value for investors.

It pointed to Toronto Pearson International Airport, the Port of Vancouver and Hydro Québec as highly desirable assets for Canadian pension funds that aren’t for sale and how their inaccessability is viewed by investment organizations as limitations in the domestic markets. By contrast, when similar assets are made available abroad, Canadian pension funds can be found bidding for them, noted the study.

Read: Where do Canadian institutional investors stand on calls for increased domestic investments?

“Withholding [these assets] and keeping them under government ownership will cost Canada investment capital from the Canadian pension funds since the funds will look abroad for these prized assets. It is also costly to mandate pension investment in the remaining domestic asset classes because they lack the strategic value that the pension funds are looking for.”

The study also suggested the federal government consider making domestic public infrastructure assets available to pension funds through privatization or long-term leases. However, barriers to scale, a lack of support from the Canadian population and a lack of economic viability make this solution difficult to implement.

The study also found that Canadian pension funds have a home bias in bond-like asset classes such as fixed income and real estate. However, a push toward global asset diversification has caused this home bias to decrease over the past decade.

Canadian pension funds have followed a trend of global diversification over the last decade, it said, with consistent decreases in the percentage of domestic investments within their portfolios. From 2013 to 2022, there was a decline in the domestic share of public equity markets from 33 per cent to 18 per cent, respectively. A similar decrease was represented in the domestic share in fixed income, which dropped from 96 per cent in 2013 to 88 per cent in 2022.

“The consequent good health of Canadian pension funds today can be directly attributed to the sophisticated global investment strategies that pension funds have pursued,” the report said.

Read: Feds seeking to boost domestic investments by Canadian institutional investors: budget