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Daniel Del Re
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24 août 2016
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Half a decade ago, the top brass of New York City's comptroller's office hopped on a plane to learn from a Canadian pension plan. Then mayor Michael Bloomberg and comptroller John Liu sent their deputies to study the model of their northern neighbours in an effort to develop a reform plan for the city's five separate pensions.
When it comes to investing retirees' funds, the Canadian model means building strong in-house teams and empowering them to make unorthodox decisions.
As a result, the Ontario Teachers' Pension Plan (OTPP) and the Caisse de dépôt et placement du Québec, which manages the savings of the province's public sector workers, as well as a handful of other Canadian public pension funds, now own an eclectic mix of assets.
That includes half of luxury retailer Neiman Marcus and a chunk of Stuyvesant Town in New York City; luxury retirement homes and dental service providers; toll roads in Chicago and airports in London as well as lotteries in Massachusetts and the UK.
This is a radical departure from the bonds and equities that still dominate US public pension portfolios. The Canadian plans hold over a fifth of their funds in real assets, such as infrastructure, and OTPP also uses leverage by borrowing sums from the money markets worth about 28 per cent of its entire portfolio. By contrast, the New York City Employee Retirement System has about 17 per cent invested in alternatives to stocks and bonds.
So far, the Canadian model is proving more successful. OTPP has made 8.2 per cent per year, net of fees, over the past decade. Nycers has generated 6.9 per cent a year over the same period — and this was before fees which in last fiscal year came to $183m paid to investment managers, per FT calculations based on accounts.
With the record low level of bond yields in developed economies making life harder for pension funds, the Canadian example is drawing more attention.
We noticed "a handful of pension funds who always beat us, in up as well as in down markets", explains John Liu, who oversaw New York's pension funds between 2010 and 2013. The one that stood out "consistently and by the greatest margin" was OTPP. "We didn't think it was just dumb luck. They had managed to modernise their decision-making process by doing three things: by streamlining, by professionalising, and by depoliticising."
The plan to emulate Canadian success in New York included creating a single board to manage the combined $120bn held in the five separate plans' funds in a move that would give the city more heft as an investor as well as reduce costs.
While the ambition ran into political roadblocks, some major global pension funds are following suit, including Norway's oil fund, the Danish pension group ATP, New Zealand's superannuation system and Singapore's sovereign wealth fund GIC. Even programmes within Texas and New Mexico are creeping in this direction.
It is not simply their asset mix that is helping the Canadian public retirement funds. Experts says governance is also critical. "They have been able to separate the management decisions of investing these plans make from political considerations," said Dana Muir, a professor at the University of Michigan's graduate business programme. "That would be difficult to accomplish in the US system."
That, in turn, has given the funds greater ability to experiment in the search for returns.
"Because we know we have to innovate, we also have to have a little bit of tolerance for failure," says Ron Mock, chief executive of OTTP. "Our very first private equity deal did not go very well, but yet we still had the support of the board, and management had the tenacity to learn and build."
The Canadian plans insist they do not want to add risk, but instead use their longer time horizon as an advantage over other investors, even if that means sacrificing the liquidity — or ability to sell easily — some of the assets they invest in.
Most are pushing further into real estate and infrastructure, and are seeking to develop expertise in operating the infrastructure assets, whether airports, renewable energy or roads.
"Being involved in the operation of assets is a source of additional value creation," says Michael Sabia, chief executive officer of the Caisse de dépôt et placement du Québec. Citing the fund's plan to construct and operate Montreal's rapid transit system as a proof of concept, he adds that "our intention is to export that approach to other countries and in particular into the US".
Everyone is facing the challenge of low returns on traditional assets, says Lim Chow Kiat, GIC's chief investment officer "A lot of funds have to pivot into private markets." The change will prove "quite challenging" for many.
Five years on, New York City has consolidated investment meetings for the five plans — down from 54 gatherings per year to six — but it has yet to fully grasp the nettle. "We are the financial capital of the world, and we have a clunker of pension plan," says Sal Albanese, a former member of the New York City Council.
Licensed from the Financial Times.